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Wholesale Banking

Bank guarantee fraud and how to avoid them

Fraudsters use a fake bank guarantee to create the illusion that safety is in place. This will persuade you to make the deal thinking the risk is covered.

What is a bank guarantee?

A bank guarantee is a guarantee given by the bank on behalf of the applicant to cover a payment obligation to a third party. The applicant pays their bank to acquire such a guarantee.

To put it simply, a bank guarantee is a way to ensure promises are kept and payments are made in various situations. Examples are building projects, buying, and selling across borders, borrowing money, and lots of other situations where a safety net is needed to ensure things will go smoothly.

Read more about all types of bank guarantees.

How does bank guarantee fraud work

You are a manufacturer of a beautiful product, and customers all over the world want to buy it. A potential customer contacts you and places a very large order. You do not know them and they are on the other side of the world, you are hesitant to make the deal.

The fake guarantee: That is why the fraudsters create a counterfeit document that appears to be an official bank guarantee. It includes the name, logo, and signature of a reputable bank everybody knows, making it look legitimate. They will pay 10% upfront and the bank guarantee is the assurance that if they cannot pay the remaining 90%, you will get it from the bank.

Hook and reel it in: With this risk covered, your doubts are gone, and you make the deal. You ship the goods to the other side of the world. After two weeks, you receive confirmation from the shipping company that the goods have been delivered. You expect the payment anytime now.

Disappearance act: After a day or two, you start getting nervous and you try to contact your customer. They do not respond to your emails or telephone calls. You start to feel nervous, so you contact the reputable bank. You almost collapse when you find out this reputable bank has never heard of the people you mention. You realise that the bank guarantee is fake, and the promised funds were never real. You realise you just lost a huge amount of goods.  

Avoiding the scam

To avoid such scams, you should always verify bank guarantees because of their complexity. You can verfify bank guarantees via your own bank. They have specialists who can help you determine if the deal is legitimate or not. So, contact your own bank and ask for advice. 

Be cautious when asked to pay upfront fees for financial services. Legitimate financial institutions typically do not require substantial upfront fees to process transactions.

And conduct your own research. What can you find about the organisations trying to make a deal with you? Check for reviews, references, and licenses to operate.

Finally, stay informed about common scams to recognise red flags and protect you and your company from fraud.

Read more about fraud prevention on Banking Safely