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The Libyan central bank’s letter of credit (LC) system may have been exploited for “fraud on a large scale”, researchers believe, after finding LC-based transaction volumes were far higher than actual imports.

Over 13 weeks between April and July 2020, Libya’s national LC system – at that time, the only way to import certain food, medicine and other goods – facilitated transactions totalling nearly US$2.5bn, according to a study by anti-corruption campaign group Global Witness.

But when compared to UN Comtrade data on Libyan trade, Global Witness points out money “was exiting Libya far faster than the relevant goods had historically come in, likely pointing to ongoing financial crime, at significant cost to Libyan public finances”.

“In one notable example, the value of approved LCs for meat over the 13 weeks exceeded the entire annual value of meat exports to Libya for the entire duration of each of 2016, 2017 and 2018,” the organisation says in a detailed report published in February.

The LC system effectively works as a mechanism to free up central bank foreign currency reserves, as importers are forbidden from buying dollars on the open market.

An importer asks its bank to issue an LC, and if approved, the central bank exchanges the importer’s Libyan dinars for dollars, euros or pounds. Those funds are then transferred to a correspondent bank overseas and released to the seller once the goods arrive.

Colin Tinto, a senior advisor at Global Witness and the report’s lead investigator, says the mismatch between LC volumes and actual trade flows “suggests importers are claiming money for legitimate goods but spending it on something else”.

“This has been a chronic problem in Libya since at least 2015, and the new data and our source information suggest it’s continuing,” he tells GTR.

There are potentially legitimate explanations considered by Global Witness. LC approvals were temporarily halted from January to March 2020, for example, which could have created a “bubble of pent-up demand” at a time when trade flows were already being impacted by the Covid-19 pandemic.

But according to the report, that theory is unlikely – not least because an escalation of civil war since 2019 has caused widespread economic hardship across Libya, making any rise in demand unlikely.

“The more sinister explanation… is ongoing financial crime, on a large scale and at the expense of Libyan state funds,” the report says. It says trade-based money laundering and generating funding for armed groups are two potential motivations for misusing the LC system.

The report also cites well-placed sources who describe LC fraud as “rampant” in the country.

One prospective trader, who is not named, told Global Witness they were offered a deal to source sugar from Brazil at US$250 per ton and import it to Libya for US$400 per ton.

The revolving LC, however, would record the import price as US$800 per ton, with the difference in pricing siphoned off to provide “a 100% kickback to the architects of the deal, paid for by the Libyan state”.

A second source, also unnamed but identified as a former central bank employee, added that meat and livestock imports were “routinely manipulated” through the use of falsified invoices and shell companies.

For the 13 weeks studied, Global Witness says the value of meat imports through the LC system averaged US$15mn per week – more than five times the average weekly value of meat imports from 2016 to 2018.

The weekly value of LC-based imports of tea, rice, corn, sugar and tuna were all at least double the official average import figures from that period.

The report’s findings also align with US Department of Agriculture data. Government figures show that Libya’s imports of food and agricultural products total around US$250mn per month on average, yet for the period studied by Global Witness, transactions through the LC system totalled more than US$500mn per month.

 

Banks at risk

For Global Witness, the potential impact of LC-based fraud goes beyond an abuse of Libyan public funds.

It points out that a lack of comprehensive data around the LCs themselves, coupled with the use of correspondent banking networks, means international banks could inadvertently be exposed to illicit fund flows if involved in Libya’s LC system.

The report gives the example of Bank ABC’s European operations, based in London.

It describes the bank as “the key intermediary for LCs” supporting Libyan imports, but says the UK’s legal framework for anti-money laundering only demands banks carry out due diligence on the partner bank – not the companies actually paying and receiving funds.

Bank ABC says it also checks company registration, shipping routes and bills of lading, but Global Witness says identifying fraudulent LCs using those methods “would be challenging, to say the least”.

The report also expresses concern that Bank ABC is “indirectly owned” by the Central Bank of Libya (CBL) and chaired by central bank governor Saddek Elkaber, a situation Global Witness describes as “as a striking conflict of interest”.

Bank ABC is not accused of any wrongdoing, and says it “takes its anti-financial crime obligations very seriously and takes care to comply with applicable regulatory requirements and international best practice”.

The CBL has also responded to the report, saying it “rejects the allegations made in their entirety and disputes that Global Witness has sufficient evidence to make those allegations”.

“The Central Bank of Libya is at the forefront of efforts to combat fraud, deprive terrorists of funding, and support the people of Libya in rebuilding their country,” it says.

The LC system was suspended at the end of September, after the National Oil Corporation stopped making funds from oil sales available to the central bank, accusing it of a lack of transparency.

Libya currently has a tentative ceasefire in place and elections are scheduled for later in the year.

 

Update: Bank ABC response*

A spokesperson for ABC International Bank says: “The Global Witness report published on Friday, February 19, 2021 reflects a fundamental misunderstanding of Bank ABC’s business and how it operates as well as the global letter of credit and financial system.

“Trade finance practitioners will immediately acknowledge that the risks referred to would be applicable for all letters of credit irrespective of the financial institutions, jurisdictions and underlying parties involved and the suggestions made are misaligned with the established international practices of transactional due diligence (in line with the Wolfsberg and JMLSG Guidance) and applicable legal and regulatory obligations.

“As Global Witness itself confirms, there is no suggestion that we have acted unlawfully or broken any applicable regulations in any way.

“We have a proven track record of successfully serving the flow of trade between Europe and the Arab world for more than 30 years, and we take pride in our open and transparent approach to stakeholder engagement and our culture of compliance.

“Our risk management framework is robust and is continually reviewed and enhanced. We are regulated and supervised by the Financial Conduct Authority and the Prudential Regulation Authority in the UK, and we take our legal and regulatory obligations very seriously, including, but not limited to, anti-money laundering and financial crime processes and policies.”

*Updated on February 25, 2021.