One 'Letter Of Credit' Shell Game Cons Multiple VARs

But even when you think you're safe, you may not be, as the president of Quastar Computer International, an Alpharetta, Ga.-based solution provider, learned the hard way.

Quastar lost in excess of $200,000 in a fraudulent deal at the end of 2009, as part of what DeLoach believes to be a larger scam that ultimately cost at least four other solution providers more than $1.5 million in losses across the country. Quastar is in the middle of a court case regarding the incident and asked at the bequest of its attorney that the alleged fraudsters' names not be used. An FBI official declined immediate comment.

But DeLoach was willing to share the details of what happened to his company in the hope of protecting other solution providers from a similar fate. Two other solution providers reported to have fallen victim to the same fraudsters declined to comment on their experiences.

"If there's one person that can avoid the pitfalls of letters of credit, it would be worth it," DeLoach said.

COMPLEX SCHEME

In fall 2009, Quastar was approached by a company in Canada about purchasing some computer equipment. The company wanted terms and filled out a credit application. But Quastar doesn't provide terms to customers outside the U.S. and dropped the matter. However, the Canadian company was persistent and several months later came back to Quastar with a purchase order for CPUs, memory, monitors, laptops and some other equipment it claimed was earmarked for a new ski community outside Montreal.

To secure the order, the buyer put up a letter of credit through an American bank, which Quastar was led to believe was legitimate, DeLoach said.

"Our bank received confirmation that a letter of credit was in place. I'd done a lot of pre-calling of all parties. I called the bank, the two finance companies that were involved. And we had contact with what we'd believed to be the end user," he said.

Finally, Quastar had all the paperwork in place and the order was ready to be shipped. The only outstanding issue was something called an "original shipping compliance document." DeLoach was told by the buyer and one of the finance companies involved that the document of compliance was merely meant to ensure that the items received by the buyer were the items he paid for. Once the items were received, the buyer would sign the compliance document and Quastar would get paid.

"It was a confirmation that the goods that were ordered were received and were what was asked for -- that we didn't ship the wrong CPU or something like that. It was [supposed to be] provided by one of the finance companies," DeLoach said. "We did all this documentation. We shipped the goods."

As it turns out, the finance company did not provide the original shipping compliance certificate, and the buyer and the financing parties then contended it was a financing condition determined at their own discretion (not a shipping condition) behind the letter of credit. As a result, the products were delivered but no money was ever actually in place to secure the deal because the buyer and their financiers refused to provide the compliance certificate to Quastar, knowing this would prevent the drawing on the letter of credit to pay for the equipment.

Almost immediately, DeLoach began to worry. He started asking around and soon found that several other solution providers had been hit by the same scam at almost exactly the same time.

"We went after the company in Canada to track down our goods. They had disappeared," DeLoach said.

Quastar called authorities and the FBI got involved. "We discovered there are fronts that seek to buy and have computer equipment shipped through Canada, such as the equipment shipped in this case, in order to avoid detection by U.S. authorities or the end users. It is possible this is such a situation," he said.

Quastar now believes it was the victim of what has been described as an "additional document required" letter of credit scheme. In this type of scam, a buyer of goods and its financiers offer a letter of credit to unsuspecting sellers claiming the letter of credit can be drawn once the goods are shipped and, after the shipment, fraudulently withhold a critical document required in the transaction from the seller.

Quastar has filed a civil suit against one of the out-of-state finance companies that -- upon investigation -- was found to have ties with the freight-forwarding company also used by the purported Canadian buyer.

"We found multiple companies and believe that they're all related," DeLoach said. "When we realized we got duped, it was embarrassing. It wasn't until almost a year afterward that we discovered there was another party and then another and then more. It exploded into truly a fraudulent enterprise and we believe a criminal enterprise as well."

Quastar had closed orders using letters of credit transactions in the past, so the use of legitimate letters of credit wasn't a unique situation, though by no means is it a regular business practice, DeLoach said. That's why his company had proceeded as cautiously as it could.

"We had taken extra steps and contacted all the parties involved, to make sure we had what we needed to get it done. You've got emails and other communications -- but the whole time it was vapor," DeLoach said.

ADVICE FOR OTHERS

Unlike other kinds of fraud in the channel, such as bustouts and stolen identities, the letter of credit scam is much harder to sniff out right away, DeLoach said.

"The one question I've asked myself a thousand times is this: Is there anything we could have picked up on that would have prevented me from pursuing this? Reasonable and cautious sellers could have and did get taken by the scheme. The bottom line is if anything gives you a slight tinge in your gut that says this is too good to be true, then maybe it is," he said.

DeLoach advises anyone who gets into a documentary letter of credit situation to not ship anything until every document is in their possession. Don't let anyone else control any document before you ship, he said.

"Then once you have all those documents, ship them to your bank so they can review them to make sure there are no exceptions. Then they ship to the funding bank that recognizes that everything is complete and transfers the money," DeLoach said. "The [original shipping compliance document], as it was explained to us [by the fraudsters], was a document that the finance company would provide once the goods were shipped. Later, we were told it has nothing to do with the goods being shipped. It was just a fraudulent shell game to get us to ship goods."

It was the first time Quastar had ever fallen victim to a scam, DeLoach said.

In the wake of the fraud, the company will never accept a letter of credit until it gets all the documents in advance and can control them, DeLoach said. He advises other VARs to verify all information provided by the credit applicant and to make sure it has money put up by the purchaser.

"How many people could generate a letter of credit for that much? We're talking $1.5 million in equipment [from all parties allegedly scammed]. Knowing what I know now, I ask in advance in letters of credit situations to have the funds put up by the end recipient."

PUBLISHED FEB. 4, 2013