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Case of the empty crates

Finding a solution to letter-of-credit fraud

In the early to mid-2000s, Libyan authorities started to notice a strange phenomenon at the country’s ports all along its Mediterranean coast. Ships were delivering containers that were either empty or filled with rotten goods or heavy substances like sand. This was certainly odd and concerning for a nation that desperately needed to import a whole range of basic goods from medicine to food during an ongoing and bloody civil war. But the country’s financial regulator — the Libyan Audit Bureau (LAB) — had few doubts about who the culprits were and why this was happening.

In its 2015 annual report, LAB accused a string of companies and banks of fraudulently using financial instruments called documentary credits, better known as letters of credit, to effectively rob the central bank of vital hard currency reserves and deprive Libyans of essential goods. The scam allowed fraudsters to transfer millions of dollars overseas and profit from arbitraging the disparities in local exchange rates. (See “Libyan Audit Bureau General Annual Report 2015 – English Version.”)

The then-widening gap between the official and black-market exchange rates for the Libyan currency — the dinar — had opened an opportunity for bad actors and armed groups. Whoever could obtain U.S. dollars from the central bank at the stronger official rate, usually around 1.4 dinars against the U.S. dollar, and sell them at a parallel rate — as weak as 10 to the dollar — could enjoy a windfall in local currency. (See “Libya’s Monetary Crisis,” by Jalel Harchaoui, Lawfare, Jan. 10, 2018, and “Conflict Economies in the Middle East and North Africa,” by Tim Eaton, Christine Cheng, Renad Mansour, Peter Salisbury, Jihad Yazigi and Lina Khatib, Chatham House, June 2019.)

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