ASouthAfrican firmapplied for a revolvingletterof 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?