Export finance scheme scam costs USDA US$10m

News | 24 March 2015

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Three individuals have been charged with conspiracy, fraud and money laundering offences relating to a multi-million dollar scheme to defraud banks participating in a USDA-backed export financing programme.

Deirdre M Daly, United States Attorney for the District of Connecticut announced on 20 February 2015 that a federal grand jury in New Haven had returned a 23-count indictment of Brett C Lillemoe, Pablo Calderon and Sarah Zirbes of Minneapolis, Minnesota. While this is simply an indictment and not evidence of guilt, there are lessons to be learned from the complexity of the alleged fraud and the vulnerability of an export finance scheme set up to support trade.

The fraud is being investigated by the Federal Bureau of Investigation, Internal Revenue Service—Criminal Investigation Division and US Department of Agriculture, Office of Inspector General.

According to the indictment, the defendants allegedly conspired to defraud US financial institutions that secured loans to Russian banks with altered documentation. The loans were backed by the US Department of Agriculture. When they went into default and were not repaid, the USDA lost more than US$10m.

USDA export credit support

Through its Export Credit Guarantee Program (GSM-102), USDA provides credit guarantees to encourage financing of US agricultural products. These guarantees are extended by US financial institutions in the US to approved foreign banks, including banks in Russia.

As part of the scheme, the Commodity Credit Corporation (CCC), an agency of the USDA, enters into payment guarantees (credit guarantees).  

These are are designed to encourage exports to buyers in foreign countries—mainly developing countries. The programme operates in cases where credit is necessary to increase or maintain US exports to a foreign market and where US financial institutions might be otherwise unwilling to provide financing without the guarantee. In providing the credit guarantee facility, the CCC seeks to expand market opportunities for US agricultural exporters and assist long-term market development for US agricultural commodities.

In connection with the GSM-102 program, a foreign importer that has contracted to buy US agricultural products can apply for a letter of credit (LC) from a foreign bank that has been approved by the USDA’s Foreign Agricultural Service (FAS). The foreign bank then issues an LC in favour of the US exporter. The US exporter then, consistent with the requirements of the GSM-102 programme, presents proper shipping documents to an approved US financial institution, including a copy of an original bill of lading, certificate of origin, and evidence of export. That FI then provides funds to the US exporter which, in exchange, assigns the rights to the proceeds payable under the LC from the foreign bank to US FI in the same dollar-denominated amount, less any fees. If the foreign bank defaults on its payments to the US FI, the FI can submit a claim to the USDA FAS under the guarantee for up to 98% of the payment amount owed at the time of the default.

The allegations

The indictment alleges that between September 2007 and January 2012, Lillemoe, Calderon and Zerbes, among others, came up with a scheme to defraud various US FIs, including Deutsche Bank AG, and Colorado-based CoBank ACB, by presenting false and altered shipping documentation to secure funding on loans guaranteed by the GSM-102 programme.

They are also charged with establishing multiple entities with separate names for the purpose of obtaining a greater share of the allocation of guarantees from the GSM-102 programme, and used multiple bank accounts in the names of the various entities in order to further create the appearance that the entities were operating as separate and unrelated entities. The defendants managed to get their hands on bills of lading and other shipping documents for shipments of agricultural products that they did not physically ship and for which they did not participate in the physical movement of the products in any capacity.

It is also alleged that Lillemoe entered into agreements with foreign banks, including International Industrial Bank (IIB) in Russia, to provide them capital that would be made available to them from a US FI through the use of the GSM-102 programme. Lillemoe then, said, the indictment, subsequently obtained LCs from the foreign banks. Copies of certain shipping documents, including bills of lading marked “Copy non-negotiable,” were allegedly altered by whiting out portions of the documents, stamping the word “original” on the documents, and adding shading on certain sections of the bills of lading. The defendants also, says the indictment, prepared and executed documents termed “commercial invoices” purporting to represent sales of agricultural commodities between entities that they controlled, as well as between entities that they controlled and other entities.

The defendants then allegedly used these fraudulent documents to obtain large amounts of capital from US banks in connection with the GSM-102 programme, and provided the funds to the foreign banks in exchange for a percentage fee for themselves and their various entities. Although the foreign banks were obliged to repay the funds to the US FIs by virtue of the LCs issued to the US FIs, in a number of instances, the foreign banks failed to do so. Nevertheless, the defendants and their various entities retained millions of dollars of fees they had collected in connection with the GSM-102 transactions.

All three defendants have pleaded not guilty and were freed on bond. If found guilty they face considerable prison sentences.  

A full statement can be found on the FBI website here

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