Libyan Central Bank’s Letter of Credit System Under Scrutiny Amid Allegations of Widespread Financial Fraud

February 25, 2021

Global Witness Report Raises Concerns over Libya’s Letter of Credit (LC) System

The London-based anti-corruption campaign group, Global Witness, has released a report claiming that Libya’s central bank’s LC system has been exploited for significant financial fraud. The study asserts that transaction volumes through Libya’s national LC system were far higher than actual imports, potentially indicating ongoing financial crime.

Discrepancies Between LC Volumes and Actual Trade Flows

From April to July 2020, approximately US$2.5 billion worth of LCs were facilitated through the system. Previously, this system had been the only means to import certain food, medicine, and other goods. However, UN Comtrade data suggests that the money was leaving Libya faster than relevant goods had historically entered the country.

• LC approvals were halted from January to March 2020, leading to a surge in demand and higher transaction volumes.
• This explanation is unlikely due to the economic instability caused by the civil war and the Covid-19 pandemic.

Instead, Global Witness suggests that ongoing financial crime might be at play. Trade-based money laundering and funding for armed groups are potential motivations for misusing the LC system, the report states. Well-placed sources describe LC fraud as rampant in Libya.

Impacts on International Banks and Potential Risks

A potential concern for international banks is their potential unwitting exposure to illicit funds if they are involved in Libya’s LC system. Global Witness identifies Bank ABC as the key intermediary for LCs and a potential risk.

• Banks are required to perform due diligence on their partner banks, but they do not require checks on the companies paying and receiving funds.
• This is a significant blind spot.

Response from Bank ABC and the Central Bank of Libya

Bank ABC insists that it takes its anti-financial crime obligations seriously, complying with regulatory requirements and international best practices. The Central Bank of Libya also responded, denying the allegations and disputing Global Witness’ evidence.

Current Status of the LC System

The LC system was suspended at the end of September 2020, following the National Oil Corporation’s decision to withhold funds from the central bank due to transparency concerns. Libya currently has a tentative ceasefire in place and elections are scheduled for later in the year.

Editor’s Note

The Libyan government has not responded to the allegations made in the Global Witness report.