Unprecedented Scale of Financial Crime: Libyan Central Bank’s Letter of Credit System Under Scrutiny
Date: 25 February 2021
Overview
A recent study by Global Witness, an anti-corruption campaign group, raises concerns about a significant disconnect between approved letters of credit (LC) and actual imports in Libya’s central bank system. The study highlights the potential for large-scale fraud, which could be impacting Libyan public finances gravely.
Key Findings
- Nearly US$2.5 billion processed through Libyan national LC system between April and July 2020
- A mismatch between approved LCs and actual imports, suggesting ongoing financial crime
Concerns Raised by Global Witness
The UN Comtrade data on Libyan trade has shown money leaving Libya much faster than the corresponding goods had historically entered, indicating the LC system was being abused. For instance, transactions for meat exceeded the entire annual value of meat exports to Libya between 2016 and 2018.
Operating Mechanism of LC System
Libya’s LC system operates as a mechanism that allows importers to request their banks to issue these documents, effectively bypassing their inability to buy dollars, euros or pounds on the open market. Once the central bank exchanges Libyan dinars for foreign currency, the funds are transferred to the seller’s correspondent bank when the goods arrive.
Significant Discrepancies
Colin Tinto, a senior advisor at Global Witness and the report’s lead investigator, notes that there have been instances of importers claiming money for legitimate goods but diverting the funds for illicit activities. He also acknowledges some legitimate reasons behind the observed surge in demand but is skeptical given the wider economic context in Libya.
Implications of LC Fraud
The report accuses the LC system of ongoing financial crime on a large scale, draining Libyan state funds. Potential motivations include trade-based money laundering and generating funding for armed groups.
Well-placed Sources’ Perspective
According to some well-placed sources, LC fraud is rampant in Libya. One source was offered a deal to import sugar from Brazil for US$400 per ton, but the LC was set up to record an import price of US$800 per ton, with the difference going to the architects of the deal. Another source, a former central bank employee, claimed that meat and livestock imports were regularly manipulated through falsified invoices and shell companies.
Quantifying Extent of Discrepancies
For the thirteen weeks studied, meat imports through the LC system averaged US$15 million per week – five times the average weekly value of meat imports between 2016 and 2018. Weekly LC-based imports of tea, rice, corn, sugar, and tuna were all significantly higher than official average import figures from the same period.
Government’s Import Figures
The government’s import figures reveal an average monthly import total of US$250 million for food and agricultural products. Yet, transactions processed through the LC system totaled more than US$500 million monthly during the studied period.
International Banks’ Exposure
Global Witness also raises concerns about international banks’ potential exposure to illicit fund flows through their involvement in Libya’s LC system. Bank ABC, which acts as the “key intermediary for LCs” supporting Libyan imports, was named in the report.
Suspension of LC System
The LC system was suspended on September 30, 2020, following the National Oil Corporation withholding oil sale funds from the central bank and accusing it of a lack of transparency. Libya is currently in a state of tentative ceasefire and preparations for elections later in the year.
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