Title: “Libyan Central Bank’s Letter of Credit System Under Scrutiny for Alleged Large-Scale Bank Fraud”
Date: 25 February 2021
The Libyan central bank’s Letter of Credit (LC) system, which facilitated US$2.5 billion worth of transactions between April and July 2020, is under investigation for potential large-scale bank fraud by the anti-corruption campaign group, Global Witness.
Investigation of LC System
The Libyan national LC system, the only way to import specific food, medicine, and goods during the given period, reported transactions that far exceeded actual imports based on UN Comtrade data (as of 25 February 2021). This situation has raised concerns of ongoing financial crime at an alarming cost to the Libyan public finances.
Questionable LC Transactions
Global Witness, in a detailed report published in February, drew attention to one instance where LC approvals for meat exceeded the entire annual value of meat exports to Libya—for the years 2016, 2017, and 2018.
- Discrepancies between LC volumes and actual trade flows
- Potential importer fraud
- Falsified invoices and shell companies
Potential Explanations
Possible factors contributing to the surge in LC transactions include pent-up demand resulting from a halt in LC approvals earlier in the year and the economic impact of the Covid-19 pandemic. However, these explanations are unlikely due to the civil war escalation since 2019, leading to widespread economic hardship.
Other Possible Motivations
Global Witness also explores the possibility of trade-based money laundering and funding of armed groups as potential motivations for misusing the LC system.
- Offering a lower import price to Libya
- Recording higher prices through the LC
- Use of shell companies to boost LC values
Damaging Effects & Risk to International Banks
Beyond damaging Libyan state finances, fraudulent LC transactions pose risks to international banks inadvertently mediating such transactions.
Role of Bank ABC
Bank ABC, based in London, plays a critical role as the key intermediary for LCs supporting Libyan imports.
- Potential exposure to illicit funds
- UK’s legal framework for anti-money laundering
Central Bank of Libya’s Response
The Central Bank of Libya (CBL) was unable to comment, but released a statement denying the allegations and disputing Global Witness’ evidence.
“The Central Bank of Libya is committed to combating fraud, depriving terrorists of funding, and supporting the people of Libya in rebuilding their country.” - CBL Statement, 25 February 2021
Impact & Conclusion
The LC system was suspended in late September 2020, following the National Oil Corporation’s refusal to provide funds for oil sales to the central bank due to transparency concerns. Libya is currently under a tentative ceasefire and is scheduled to hold elections later in the year.
Further investigations are needed to determine the extent and impact of this potentially extensive financial fraud on the Libyan government and its citizens, as well as the international banks involved.