A South African firm applied for a revolving letter of credit in favor of a German exporter at a…

A South African firm applied for a revolving letter of credit in favor of a German exporter at a branch of Barclays Bank in Johannesburg. The letter of credit was issued covering shipments of pharmaceuticals and was confirmed by Deutsche Bank in Germany. Shipments proceeded with no problem, growing larger and more frequent. Barclays increased the amount of the letter of credit on several occasions to accommodate the growing business. To Barclays’ knowledge, their account party had always taken possession of the goods and sold them quickly for a profit. Barclays was pleased with their customer’s history and increased their financing. In the last shipment, the largest of all, Deutsche Bank honored the seller’s sight draft for the full amount of the letter of credit and presented the documents to Barclays. While Barclays was inspecting the documents, it learned that the South African buyer had ceased business. In the meantime, Deutsche Bank discovered that the seller has ceased business also. On inspection by Barclays, the cargo containers were found to contain only worthless junk. Investigative reports placed both buyer and seller in Brazil. What happened? What are the rights and liabilities of the advising and confirming bank? How do banks handle problems like this?

 

 

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