The Overpriced Fasteners
Your trade finance team reviews a $2.4 million letter of credit for a customer, Northline Imports Ltd. The customer imports 'industrial fasteners' from a new supplier in a free trade zone. The invoice unit price is $18.40 per unit, while the customer's previous three shipments from an established supplier were $11.10 to $11.80. Shipping documents show 130,000 units, but the bill of lading says gross weight 18,000 kg and the packing list says 18,000 kg. The goods are listed as 'steel bolts' but the HS code on the invoice is for 'parts of machinery.' The supplier was incorporated 4 months ago and its registered address is a virtual office. Payment is to be made to a bank in a different country from the supplier. The customer's owner is impatient and says the shipment must be paid today or he loses the contract.
1. Identify the trade-based money laundering red flags and decide whether to process the letter of credit.
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Red flags:
- Price anomaly: $18.40 per unit versus $11.10–$11.80 from an established supplier - roughly 55–65% overpricing, which can be used to move value.
- Quantity/weight inconsistency: 130,000 steel bolts at 18,000 kg implies 138 grams per bolt, which is implausible for industrial fasteners; the documents do not reconcile.
- HS code mismatch: 'steel bolts' classified as 'parts of machinery' can attract different duties and evade controls.
- New supplier incorporated four months ago at a virtual office in a free trade zone.
- Third-country payment: supplier in one jurisdiction, payment to a bank in another.
- Urgency: 'pay today or lose the contract' is a classic pressure tactic.
Decision: Do not process the LC on the current documents. The discrepancies are material and unresolved.
2. What checks should be performed before any payment, and what records must be kept?
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Checks:
- Verify the invoice price against market data, previous shipments, and independent price indices; obtain a written explanation for the premium.
- Reconcile quantity, weight, packaging, and HS code across invoice, packing list, bill of lading, and customs declaration.
- Screen the supplier, its directors, the vessel, and the free-trade-zone address against sanctions and adverse media.
- Identify the ultimate beneficiary of the third-country payment account and confirm it matches the supplier.
- Consider a site visit or trade reference; obtain end-user information for the goods.
Records:
- Keep the discrepancy log, the customer's explanations, screening results, and the decision rationale.
- If the LC is amended, retain both versions and document why the amendment resolves the issue.
Reasoning: Trade documents are self-reported. The bank's control is to test consistency across independent documents, not to accept the invoice at face value.
3. Should a SAR/STR be filed, and what should happen to the relationship?
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SAR/STR:
- File. The combination of overpricing, HS misclassification, a new virtual-office supplier, third-country payment, and urgency meets the suspicion threshold. The bank does not need to prove the goods are fictitious.
- Describe the discrepancy precisely: unit price, weight per unit, HS code, parties, and the pressure to pay.
- Do not tell the customer a report has been filed.
Relationship:
- Place the customer on enhanced monitoring and suspend new trade facilities pending review.
- If the customer cannot explain the pricing and payment route, consider exit after the SAR is filed, with a neutral commercial rationale.
- If the documents are corrected and independently verified, document why the bank is satisfied and continue with heightened monitoring.
Reasoning: Filing and exiting are separate. The SAR protects the bank and the financial system; the relationship decision protects the bank's risk appetite. Document both independently.