Vesttoo: A new report claims a significant amount of fake letters of credit. The question is how? –

A new report from Israeli tech media group Calcalist claims that the audit of insurtech Vesttoo revealed a problem with letters of credit (LOCs) that total a large amount of collateral held for transactions facilitated by the company.

The latest story on the development of the situation suggests that the audit undertaken by Vesttoo is still ongoing. But the information from the Calcalist publisher appears to come from a higher level source or the insurtech board, which has visibility into the process and what has been uncovered so far.

As we reported yesterday, initial claims suggested that a reasonably large amount of collateral could be affected, either by being fraudulent or by having false signatures, letters of credit (LOCs) being considered the most likely behind, given that Vesttoo used LOCs for some of its operations.

Vesttoo’s statement on the matter said the “inconsistencies” uncovered by its initial audit on the matter were “in the guarantees provided by the banks”, with the LCs being linked to certain specific transactions.

Since then, the Insurance Insider team has reported that some of the warranty issues were related to certain IP transactions that Vesttoo facilitated, which we have also confirmed through our sources.

Calcalist says the allegedly falsified lines of credit total around $4 billion and came from a major Chinese bank, Vesttoo was known to work with at least one bank in the country, the China Construction Bank.

$4 billion seems like a very high figure given the still relatively early stage that Vesttoo was in and the fact that LOCs were not the only form of collateral used by its transactions, we understand.

Calcalist also says a full review of all letters of credit has been undertaken, although Vesttoo said the audit was still ongoing and therefore could not comment.

Stating his suspicions, Calcalist notes that allegedly forged letters of credit for guarantees in transactions facilitated by Vesttoo may have involved the cooperation of employees of a Chinese bank (no evidence provided).

They also specify that Vesttoo “also suspects that some of its executives were aware of the possibility of carrying out these transactions via the platform with fake LOCs” (again no proof has been provided, just via the publisher’s source ).

However, it is important to add here that the Israeli newspaper Globes also reported the story this morning and said that Vesttoo employees are currently not under suspicion, although Globes gives no source for this information.

The questions that remain are how this was possible in the first place, given all the necessary checks and balances of KYC and securities laws. The second main question being who knew what was going on.

Cedents and brokers tend to monitor collateral, with insurance and reinsurance best practices often seeing counterparty security committees in action, whose job it is to assess the integrity of the counterparty, collateral and capital on the balance sheet, transactions and markets offering protection.

There are also other entities in the chain of these types of collateralized reinsurance transactions, which could possibly have been assumed to be aware of a possible collateral deficiency.

The answer seems to be that either somewhere, something broke in the chains of compliance in this case. Or that a fraudulent act was committed and somehow escaped checks and balances, in which case it could become a criminal matter.

Along with the how, the next set of questions is about the ramifications, as a guarantee that has no value will undoubtedly have ripple effects in the market, for fronting transactions and cedants involved.

We need to be clear that there is still a lack of clarity as to what precisely happened or went wrong here, so we are simply reporting the statements of the editor who announced the original news, which is based on their sources.

Yesterday, Vesttoo said it was working closely with clients and customers, to ensure transparency on the matter and to find alternative solutions if necessary.

We approached Vesttoo for comment this morning, but the company declined, saying a statement would be made today.

It is hoped that a statement will be released later that can bring more clarity to the market.

Read our story from yesterday morning for Vesttoo’s initial statement on this.

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