Legal update: Conditional MT 103? No Siree!24Feb2015
“Until that moment I hadn’t paid much attention to what he’d been eating. Now I saw he’d ordered the best thing in the house, this gorgeous, frothy confection of an earlier age. Who ever dreamed up the deviled egg? Who knew that a simple egg could be made so complicated, and yet so appealing? I reached over and took one. Something for nothing. It never loses its charm.”
Michael Lewis, “The Big Short”, Penguin Books Ltd, 2010
The Nigerian advance fee fraud has made its way into popular culture. By now almost anybody who has an email address must have received at least one wildly improbable email purporting to be from some third-world general, banker or lawyer, promising the recipient a share in the proceeds of an illicit transfer of vast sums of money. Yet despite the ubiquity of the scam emails, a stupid and greedy minority continue to fall for them. The greedy few soon find that there are some minor obstacles on the path to riches, such as central bank staff or lawyers who must supposedly be paid off with what seem to be relatively trifling amounts. Advance fees are paid, and followed by requests for more advance fees. Yet the big pay-off never arrives. Eventually the marks realize that they have been scammed, often after having poured tens or even hundreds of thousands of US dollars into a black hole.
Since the 2008 financial crisis we have seen an upsurge in financial frauds that target corporate entities rather than individuals. These frauds are slightly more sophisticated than the typical Nigerian advance-fee fraud email, and often revolve around taking advantage of most people’s ignorance of the arcane world of inter-bank payment systems (in contrast to the typical low-level advance-fee fraud scammer, who usually seeks payment by Western Union or other similar payment methods). However the common point between these more sophisticated frauds and the Nigerian advance-fee fraud is that they both rely on extracting advance payment by a victim for a perceived financial advantage that never materializes.
The basic model of this type of fraud seems to have its roots in the world of international trade, and began with some unscrupulous traders relying on a misconception regarding a type of SWIFT message known as the MT 103.1 The MT 103 is actually a simple form of SWIFT message, used by banks to perform what would in more simple terms be known as a wire transfer or a telegraphic transfer. Given that the MT 103 is a vanilla form of SWIFT message, it is only possible to include very basic terms as to the transfer. These terms can cover such basic things as the beneficiary’s bank undertaking to inform the beneficiary of the transfer within a set time. To the extent that such terms are enforceable, their enforceability is based on a SWIFT master agreement between the relevant banks.
The scammers operate by hoodwinking people into believing that there is such a thing as a “conditional” MT 103, under which the beneficiary’s bank will not release the funds to the beneficiary until the beneficiary presents certain documentation, or the sender has provided a further confirmation that the funds may be released. It therefore appears to the victim that the MT 103 offers a level of protection similar to payment by means of a letter of credit, or to the beneficiary bank acting as an escrow agent. In reality the MT 103 is simply not designed for such transactions, and any such “conditions” inserted on the MT 103 form are likely to be simply ignored by the beneficiary’s bank. Therefore in the most basic variant of the MT 103 scam, a trader will ask for payment for shipment of goods or commodities to be made by means of a “conditional” MT 103 and then withdraw the funds from the beneficiary bank without ever sending the shipment.
Recently scammers appear to have progressed the fraud by combining elements of the advance-fee fraud with the MT 103 scam and attempting to embezzle relatively large sums of money. One variant of this more-sophisticated scam involves the fraudsters passing themselves off as an obscure merchant bank or financial adviser and promising that they can procure the issuance by a reputable international bank (which just happens to be located in a different jurisdiction from the victim) of a bank guarantee that is required by the victim. In some more-sophisticated cases the scammers will attempt to manufacture the need for the bank guarantee itself, for instance by suggesting to a non-bank lender to consider the possibility of replacing a cumbersome patchwork of security granted by the borrower with a single bank guarantee. The fraudsters will try to stretch out the negotiations for the transaction, and always come up with an excuse not to give the victim the contact details of anybody at the bank who will supposedly issue the guarantee (eg: the bank is “backed up” with other guarantee transactions and is not yet able to turn to working on this guarantee).
Eventually the scammers will demand that in order for the transaction to progress further, the victim will have to transfer a hefty commission (in examples of this fraud that we have seen, the commission demanded can run to several million US dollars) by “conditional” MT 103, with the supposed “condition” for the release of the funds being the verification of the bank guarantee to be issued. By this point the victims may have invested much time and money into negotiating and documenting the transaction, and as a result will be psychologically unwilling to accept that the transaction is a fraud (much like a victim in a simpler Nigerian advance-fee scam). As we have seen, there is no such thing as a “conditional” MT 103 and the fraudsters are likely to immediately withdraw the money and disappear, or at best provide a fraudulent bank guarantee document and disappear with the money while the hapless victim is working out that the document provided is a fake.
There are many types of SWIFT message, and the MT 103 fraud discussed in this article is just one example of the way fraudsters are taking advantage of ignorance of bank payment systems and gullible parties’ need for credit in the post-Lehman world. Therefore anybody entering into a financial transaction with a new and untrusted counterparty should protect themselves by obtaining information from their own bank about the exact mechanics of any payment method suggested by the counterparty and, most importantly, always asking themselves what is the true commercial likelihood of the transaction really being as described by the counterparty.
1.SWIFT is the Society for Worldwide Interbank Financial Telecommunication, which operates a financial messaging network commonly used to send payment orders among member banks. ‘MT’ stands for ‘Message Type’ – the SWIFT network uses a range of Message Types numbered from MT 100 to MT 999 to effect different types of payment orders.