Letter of Credit Scam: Red Flags, Verification, and Penalties

A letter of credit scam is a fraud in which someone posing as a buyer or investor presents a forged or fictitious bank guarantee to trick a seller into shipping goods or paying upfront fees against a promise of payment that will never come. The document looks like a real letter of credit, may name a real bank, and often uses correct-sounding trade finance terms, but the issuing bank has no record of the transaction. By the time the seller tries to collect, the goods or fees are gone. The FBI’s Internet Crime Complaint Center logged over $155 million in reported advance fee fraud losses in 2024, and letter of credit fraud is a significant contributor to that figure.¹

How the Scam Works

In a legitimate transaction, a buyer’s bank issues a letter of credit promising to pay the seller once the seller presents documents proving the goods were shipped. The buyer’s bank sends this guarantee to the seller’s bank through a secure messaging network, and both banks verify everything before money changes hands. The whole system depends on banks acting as trusted intermediaries.

Scammers short-circuit that process. The fraudster poses as a buyer, hands the seller a document that looks like a bank-issued letter of credit, and convinces the seller to ship goods or pay upfront fees before the seller’s bank has independently confirmed anything. The document may reference a real bank, use convincing formatting, and include technical language. But the bank listed on it has no record of the transaction. By the time the seller contacts the supposed issuing bank for payment, the scammer has received the goods and vanished.

A closely related version skips the goods entirely. Instead of tricking a seller into shipping inventory, the scammer demands advance fees to “activate” or “process” the letter of credit. These charges get labeled as insurance premiums, commitment fees, or compliance deposits. Legitimate letters of credit never require the beneficiary to pay the issuing bank to activate the guarantee. Any request for upfront payment is the hallmark of an advance fee scheme.²

Red Flags on the Document

Spotting a fake letter of credit usually comes down to details a real bank would never get wrong.

Spelling and grammar errors. Trade finance departments issue these documents through standardized electronic messaging. Typos, awkward phrasing, or inconsistent formatting suggest the document was created outside a real banking environment.
Unverifiable bank details. The issuing bank’s name, address, or contact information doesn’t match any entry in official global banking directories. Scammers sometimes use the names of banks that no longer exist or that were never real.
Non-standard terminology. Real letters of credit follow a well-defined vocabulary established by international banking rules. Documents loaded with terms like “prime bank guarantee,” “blocked funds letter,” or “bank debenture instrument” are mimicking real language in ways no actual trade finance officer would.³
Impossible document requirements. The letter demands that the seller produce documents that don’t exist or prove things unrelated to the deal, making collection impossible by design.
Activation fees. Any instruction for the beneficiary to wire money to the issuing bank before the credit becomes operative is fraudulent. Real letters of credit are operative the moment the issuing bank transmits them.

One check most people skip is confirming that the purported issuing bank is a registered legal entity. The Global Legal Entity Identifier Foundation maintains a free, publicly searchable database at search.gleif.org where you can look up any financial institution’s Legal Entity Identifier, a standardized 20-character code tied to its registration and ownership structure.⁴ If the bank on your document doesn’t appear there, that’s a serious problem.

How to Verify a Letter of Credit

The most reliable way to confirm a letter of credit is genuine is to verify it through the SWIFT network, the secure messaging system banks use to communicate with each other. A legitimate irrevocable letter of credit arrives as a SWIFT MT700 message sent from the issuing bank to the advising bank.⁵ If you’re the seller, your bank should have received this message directly. If it didn’t, whatever document you’re holding did not come through legitimate channels.

Within the MT700 message, two fields matter most. Field 20 contains the documentary credit number assigned by the issuing bank, and Field 31C contains the date the bank considers the credit issued.⁵ Your bank can use these details, along with the sender’s identification code in the message header, to confirm directly with the issuing bank that the credit is authentic.

Never rely on contact information printed on the suspect document. Scammers routinely set up fake phone lines and email addresses that impersonate bank staff. Look up the bank’s trade finance department through an independent source, such as the bank’s official website or a published global banking directory, and call them yourself. Provide the full text of the document and any reference numbers, and ask them to confirm or deny the transaction.

Common Variations

Prime Bank Investment Schemes

The most widespread variation doesn’t involve a real trade deal at all. In a prime bank scheme, the fraudster promises access to an exclusive, secret market where the world’s top banks trade high-yield instruments. The pitch typically claims guaranteed monthly returns from 6% to over 100%, secured by letters of credit or bank guarantees.³ These markets do not exist.

The SEC has warned that these programs have “no connection whatsoever to the world’s leading financial institutions” and that the word “prime” is used solely to create an illusion of credibility.⁶ The Treasury Department’s Office of Inspector General puts it plainly: “There are no ‘secret’ markets in which banks trade securities. Representations to the contrary are fraudulent.”³

To sound legitimate, these schemes frequently reference the International Chamber of Commerce’s Uniform Customs and Practice for Documentary Credits (UCP 600), a real set of rules governing letters of credit in international trade. Fraudsters drop this reference into marketing materials to impress investors unfamiliar with trade finance. The ICC has warned that its rules are being misused this way.⁷

Standby Letter of Credit as Fake Collateral

Here the scammer presents a standby letter of credit as proof of a multimillion-dollar asset that will serve as collateral for a loan or credit line. The victim is told to pay commitment fees, insurance premiums, or processing charges to unlock the borrowing arrangement. The standby letter of credit is either entirely fabricated or issued by a bank that doesn’t exist. Once the fees are paid, the loan never materializes.

Performance Bond Advance Fee Schemes

Some fraudsters skip the letter of credit label entirely and use the same playbook. They pose as brokers or firms offering to help investors recover previous losses or complete a lucrative transaction. The catch: the investor must first post an “insurance bond” or “performance bond” as a security deposit.² The promised transaction never closes, and the deposit disappears.

What to Do If You’ve Been Targeted

Speed is everything once you suspect a letter of credit is fake. The faster you act, the better your chances of stopping a shipment or freezing funds before they vanish.

Contact the real issuing bank first. Look up its trade finance or fraud department independently and ask them to confirm whether the document is genuine. Get their response in writing if possible. That confirmation becomes the foundation for everything that follows.

Notify your own bank immediately. If you’ve already initiated a wire transfer or have a shipment pending, your bank can attempt to halt the transaction. Federal banking regulations require banks to file a Suspicious Activity Report when they identify potentially fraudulent activity, and your alert triggers that process.⁸

File a complaint with the FBI’s Internet Crime Complaint Center at ic3.gov. The IC3 collects reports of internet-enabled financial crime and operates a Recovery Asset Team that works to freeze stolen funds.⁹ Include every document, email, and transaction record you have.

Contact your nearest U.S. Secret Service field office. Most offices operate a Cyber Fraud Task Force focused on complex financial crimes carried out electronically.¹⁰ This is especially relevant when the scheme involves international wire transfers or forged bank instruments.

If goods are already in transit when you discover the fraud, you may still be able to stop them. Under the Uniform Commercial Code, a seller can order a carrier to halt delivery when the buyer has failed to make a required payment or has repudiated the contract. For large shipments traveling by truck, rail, or air, the seller must notify the carrier in time for it to reasonably prevent delivery.¹¹ That right disappears once the buyer physically receives the goods or a negotiable shipping document has been handed over, so timing is critical.

Tax Treatment of the Loss

If your business lost money or inventory to a letter of credit scam, you may be able to deduct the loss on your federal tax return. The IRS treats fraud as a form of theft, defined as the illegal taking of property with intent to deprive the owner of it. Businesses can deduct theft losses related to trade or income-producing activity.¹²

The deduction equals your adjusted basis in the lost property (generally what you paid for it, adjusted for depreciation or improvements) minus any insurance reimbursement or salvage value. Report the loss on Section B of IRS Form 4684. One timing rule matters: you generally claim the theft loss in the tax year you discover the property was stolen, not the year the theft actually occurred. If you have a reasonable chance of recovering the loss through insurance or legal action, you must wait until you can determine with reasonable certainty whether reimbursement is coming before taking the deduction.¹²

Federal Penalties for the Fraudster

Letter of credit fraud can trigger several overlapping federal charges, and prosecutors typically stack them.

Bank fraud under 18 U.S.C. § 1344. Anyone who knowingly executes a scheme to defraud a financial institution faces up to 30 years in prison and a fine of up to $1,000,000.¹³
Wire fraud under 18 U.S.C. § 1343. Because these scams almost always involve electronic communications, wire fraud charges are common. The baseline penalty is up to 20 years in prison. When the fraud affects a financial institution, the maximum rises to 30 years and a $1,000,000 fine.¹⁴
Mail fraud under 18 U.S.C. § 1341. If any part of the scheme involved mailing documents, mail fraud applies with the same penalty structure as wire fraud: up to 20 years normally, up to 30 years and $1,000,000 when a financial institution is affected.¹⁵

For fraud that affects a financial institution, Congress extended the statute of limitations to ten years from the date the offense was committed.¹⁶ That window matters because these schemes often take years to unravel.

1
Internet Crime Complaint Center. 2025 IC3 Annual Report
2
Investor.gov. Advance Fee Fraud
3
Office of Inspector General. Prime Bank Investment Fraud
4
Global Legal Entity Identifier Foundation (GLEIF). The Legal Entity Identifier
5
SWIFT. Category 7 – Documentary Credits and Guarantees Message Reference Guide
6
SEC. Warning to All Investors About Bogus Prime Bank and High Yield Investment Programs
7
TreasuryDirect. Prime Bank Instrument Fraud
8
eCFR. 12 CFR 21.11 – Suspicious Activity Report
9
Internet Crime Complaint Center. Internet Crime Complaint Center
10
U.S. Secret Service. Field Offices
11
Legal Information Institute. UCC 2-705 – Sellers Stoppage of Delivery in Transit or Otherwise
12
Internal Revenue Service. Topic No. 515 – Casualty, Disaster, and Theft Losses
13
Office of the Law Revision Counsel. 18 USC 1344 – Bank Fraud
14
Office of the Law Revision Counsel. 18 USC 1343 – Wire Fraud
15
Office of the Law Revision Counsel. 18 US Code 1341 – Frauds and Swindles
16
Office of the Law Revision Counsel. 18 USC 3293 – Financial Institution Offenses