DEALS TOO SWEET TO BE TRUE
It looked like a great deal. Last fall, Guria, a private company based in the Republic of Georgia, was trying to buy a large quantity of sugar on behalf of the Georgian government. The sugar was to be distributed at subsidized prices in the former Soviet state. Although Guria had little experience in international trade, it arranged to buy 2,900 metric tons of sugar at about $265 a ton--far below market prices.
A little too great a deal, it turned out. According to an affidavit filed by the U.S. Secret Service, which is investigating the sugar trade, Guria allegedly hired William G. Moore, a Federal Way (Wash.) businessman to handle the deal. The Secret Service alleges that Moore convinced Guria to relax the terms under which he could collect on a letter of credit issued by a bank. Letters of credit, which are used extensively in international trade, guarantee that the seller will receive the purchase price. Typically, banks will pay the seller if they are assured the goods have been shipped. Under the terms of Moore's letter of credit, the Secret Service contends, he was able to withdraw $768,500 in late November, before the sugar was to be delivered. It never arrived.
Rob J. Crichton, an attorney for Moore, declined to comment. Moore has not been charged in connection with the sugar deal. "The loss is taken by the Georgians," contends Guria's New York-based attorney Jay H. Schafrann. "And they can ill afford it."
Unfortunately, such tales of sugar deals gone bad are sweeping the globe. The Commercial Crime Bureau of the International Chamber of Commerce, a fraud watchdog group based in Britain, put out a report earlier this year warning that sugar frauds are proliferating. Already the scam may have bilked banks and investors out of $500 million, according to an estimate by the Institute of International Banking Law and Practice Inc., based in Gaithersburg, Md. "There has to be an international effort," says S Lin Kuo, assistant director of the CCB. "It is beyond any one nation's ability to investigate."
Scams involving the sale of nonexistent commodities are hardly new. Similar frauds involving products ranging from crude oil to cigarettes have sprung up over the past decade. But sugar now appears to be the favored bait. The reason is simple: Tight supplies worldwide have driven up costs sharply, making below-market deals especially enticing. Booming consumer economies in countries such as China and India have increased demand for sugar there. At the same time, production has dropped in countries like Cuba and Russia. The result: World raw sugar prices have increased 60% since 1992.
Sugar scamsters are also benefiting from the breakdown of the former Soviet Union and the emergence of the private markets in China and elsewhere. While purchases of commodities like sugar were once controlled exclusively by seasoned government officials, deals are now handled by often inexperienced entrepreneurs.
FORGED DOCUMENTS. Although buyers typically take the hit when a scam is successful, bankers issuing letters of credit have been hoodwinked. In 1990, National Westminster Bank PLC paid out $1.8 million on a letter of credit to Italian businessman Carlo Caresana. British law enforcement officials say Caresana used forged documents to show the bank that 5,000 metric tons of sugar were en route to a buyer in Saudi Arabia. But before National Westminster could collect the money from the state bank of Czechoslovakia that had issued the letter of credit, the Saudis discovered the shipment of sugar didn't exist. The Czechoslovakian bank refused payment. Caresana was convicted in the scam last August in a British court and is appealing the verdict. National Westminster declines to comment.
Banks are becoming increasingly cautious about financing sugar deals. Says Vincent M. Maulella, a vice-president with Chemical Bank: "A number of banks have said they won't be involved in transactions other than with experienced sugar traders."
The ICC and bankers are working on ways to get the word out on these frauds. But there is some concern that by publicizing the problem, the campaign may simply tip off con artists about how to sweeten their pitch. Derek G. Moon, secretary of the Refined Sugar Assn., says pitches are becoming more sophisticated. "That is what we were frightened of." But for bankers and regulators who have watched scam artists make a killing, going public with their warnings may be the only answer.
Anatomy Of A Swindle
An intermediary promises an inexperienced buyer that he can arrange for the purchase of a large quantity of sugar at up to 40% below current market prices.
The buyer agrees to put up a bank-issued letter of credit to guarantee that the seller or intermediary can collect the funds. The seller can get the money when he presents certain documents, usually a certificate that proves the sugar has been shipped.
The scamster presents false or forged documentation to collect the sugar payment. But when the ship arrives, there is no cargo of sugar for the buyer.
DATA: COMMERCIAL CRIME BUREAU OF THE INTERNATIONAL CHAMBER OF COMMERCEBy Amy Barrett in Washington with bureau reports