“This paragraph is taken from The Gideon Group”
Medium Term Notes (MTNs), Standby Letters of Credit (SBLCs) and Bank Guarantees (BGs)
Part of the reasons such frauds have been successful is that Medium Term Notes, Bank Guarantees and Standby Letters of Credit are real financial instruments. A Medium Term Note is the general name given to a debt instrument that matures in the medium term, typically 5-10 years. Bank Guarantees, as they are known outside of the US, or their US counterpart, Standby Letters of Credit, are most often used in international commerce where a seller might be unsure about a buyer’s ability to pay for goods once received. One way of overcoming this impasse is to utilize a bank guarantee or standby letter of credit. (The real usage of an instrument, strictly for trading purposes only)
A SBLC or BG is simply a promise to pay on the part of the bank involved in the transaction. Trading partners often have greater confidence in a transaction if the payment is backed by a commercial bank rather than a trading partner with whom they might be unfamiliar. Banks are not in the business of losing depositors’ money, so in order for them to issue a SBLC or BG in the first place, they would underwrite the SBLC/BG similar to an unsecured loan–meaning obtaining an SBLC/BG is a difficult endeavor to begin with.
Moreover, banks will often charge 1%-8% of the face value of the instrument, meaning a $100 million SBLC could cost the bank’s client as much as $8 million to obtain, and is usually only valid for a period of one year. Which, of course, begs the question: if the borrower has sufficient standing with the bank to be approved for an SBLC/BG and sufficient funds to cover the cost of issuing it, why are they contacting us? The answer is, if this were a legitimate transaction, they wouldn’t be.
Over the years many people have approached us looking for SBLCs/BGs. Most are actually looking to LEASE an SBLC/BG and use the instrument as collateral for a loan or cash investment. This is somewhat akin to leasing a new car and then trying to use the car as collateral for a loan from another lender. No automobile, SBLC, BG or any other leased asset can be used as collateral in a legitimate financial transaction, which is why these transactions never work.
For those who think that they are able to use a lease instrument to cash out or leverage, is clearly daydreaming.