Understanding Maritime-Trade-Fraud Shifting Patterns

4 March 2017

By Bachir El Nakib, Senior Consultant, Compliance Alert (LLC)

International commercial transactions require efficient risk management. Where transport of goods reaches over frontiers and delivery and payment are separated in time and space both seller and buyer have to face certain risks. Businesses in international trade face a growing threat from crime. Fraud is deceit for financial profit and has cost the UK economy more than £38 billion in the past year (source: UK National Fraud Authority - annual fraud indicators January 2011).

Currently the main threat to international traders is fraud from organised crime, including theft of your goods or your business identity, cross-border crime and road-freight crime. Other risks include infringement of intellectual property or employee fraud. The rise in online trading has created new forms of criminal activity, such as new ways of laundering money. Businesses in the EU can rely on shared laws and commercial procedures to protect them. This action-based guide explains the key risks involved, how to reduce them, and what to do if your business is targeted.

The seller faces the risk of change in the buyer’s financial status after shipment of goods has taken place, which may lead to delay in receiving the purchase price or to non-payment. On the other hand, effecting payment to the seller upon shipment without being able to find out whether the goods are as per contract carries significant risk for the buyer. In order to eliminate or at least to minimise the risk of non-delivery and non-payment, as well as the difficulties arising from the conflicting legislations, currency and culture, merchants have created different methods and various instruments to finance international trade.

One of the most widely used methods of payment is the letter of credit. It has been developed to reconcile the various economic interests of the parties. By agreeing to payment by a letter of credit the seller and the buyer invite a third trustworthy party – usually a bank - into their relationship. Upon the buyer’s request the bank opens a letter of credit in favour of the seller. By issuing the letter of credit the bank undertakes a primary and independent obligation to effect payment to the seller provided that complying documents specified in the letter of credit are tendered. The transaction may involve the service of other banks, acting as agents of the issuing bank, or simply advising the letter of credit to the seller or undertaking a separate obligation to pay to the seller.

Have you ever faced food problems, salary issues, ship arrests, engine breakdowns, coercion by senior officers and abandonment by ship owners on a merchant ship?

An investigation says that the oil company asked a company for US$631,905 in cash in order to allow them to continue giving services to Pemex employees.

Mexico's General Attorney officials arrested three people on Tuesday on charges of extortion. Among the detainees is a Pemex official. The arrest comes after the Ministry of Public Administration launched an investigation into alleged extortion practices by Pemex officials against the Super Pereyra company that offers lodging and food services to offshore Pemex workers.

According to the investigation, the state-run oil giant asked the company for 10 million Mexican pesos in cash (US$ 631,905) and two vans to allow them to continue giving food and lodging services to offshore Pemex workers in the southern state of Campeche. Meanwhile, Pemex said Tuesday in an official statement that it has also begun an investigation after the applicant company filed a lawsuit against one of its officials.

The document adds that Pemex is collaborating with the investigation by providing all the information requested by authorities in order to reach “the ultimate consequences” in this case.

Pemex makes several auctions among service providers from different branches in order to meet its operational needs. According to recent reports, more than 100 contracts signed by Pemex between 2003 and 2012, worth US$11.7 billion, have had serious issues, according to the Federal Comptroller’s Office of the lower house of the Mexican Congress. Reuters reported early this year that the allegations ranged from overcharging for shoddy work to outright fraud.

Last year. President Enrique Peña Nieto pushed through a sweeping energy reform bill that opens the sector to foreign investors. The bill has been rejected by many sectors of society on allegations that it will bring, among other things, more cases of corruption.

Well these are just a few of the many problems faced by many seafarers on ships worldwide. The main reason behind these problems is greed, which is a worldwide phenomenon. Corrupt Masters, Chief engineers, Chief officers, ship superintendents, acting alone or in collusion with other shore based entities can make life hell for their crew. If the corruption is led by shore managers, then it’s high time you quit the company and report to authorities against such maritime frauds.

Types of bill of lading

Below are the descriptions of types of bill of lading:-

1. Straight bill of lading reveals that the goods are consigned to a specified person and it is not negotiable free from existing equities. It means any endorsee acquires no better rights than those held by the endorser. This type of bill is also known as a non-negotiable bill of lading; and from the banker’s point of view this type of bill of lading is not safe.

2. Order bill of lading is the bill uses express words to make the bill negotiable. This means that delivery is to be made to the further order of the consignee using words such as “delivery to A Ltd. or to order or assigns

3. Bearer bill of lading is a bill states that delivery shall be made to whosoever holds the bill. Such bill may be created explicitly or it is an order bill that fails to nominate the consignee whether in its original form or through an endorsement in blank. A bearer bill can be negotiated by physical delivery.

4. Surrender bill of lading works under a term ‘import documentary credit’, the bank releases the documents on receipt from the negotiating bank but the importer does not pay the bank until the maturity of the draft under the relative credit. This direct liability is called Surrender Bill of Lading. (SBL)

5. A clean bill of lading is one which states that the cargo has been loaded on board the ship in apparent good order and condition. Such a bill of lading will not bear a clause or notation which expressively declares a defective condition of goods and/or the packaging. The opposite term is a soiled bill of lading. It reflects that the goods were received by the carrier in anything but good condition.

A Bill of Lading is a receipt for the goods carried on ship, or when technically put, is an evidence of contract between the shipper and the carrier. It is a documented title for the goods, signifying that the holder of the Bill of Lading is the legal owner of the goods it states. These days even on ships loading oil in bulk, the ship’s masters are required to sign the Bill of Lading ( B/L). Generally, there are separate departments looking after the cargo documentation and the authorization for cargo contracts.

However, the Master of the ship is still required to endorse the cargo carried on board for all legal proceedings. As a general rule, the Master has the authority by law to sign the Bill of Lading on behalf of the Ship Owner. Sometimes the legal jargon mentioned on the Bill of lading can be unclear and confusing. It is therefore, essential that the Master of the ship who is the owner’s representative should thoroughly go through and if required be advised systematically before signing the bill of lading.

Following are the points that must be considered before signing the bill of lading:

The Shipper’s Identity

The shipper is at a contract with the carrier which means that any information provided by the shipper if untrue could make the carrier liable. The shipper has to indemnify the carrier and may also have to back freight in this respect.

Therefore it is essential that the name, identity and addresses are clearly mentioned on the Bill of Lading.

Port and Date of Loading

The date of loading should coincide with the date as stated in the Mates’ receipt. This provides an indication of the origin of goods and is at times crucial to determine the customs duty structure or permissibility of the goods into a country.

Port of Discharge

Unless the charter party for a port to be nominated after the vessel sails to avoid deviation charges, the ship must precede with all dispatch to the port of discharge as said. The master must ensure that this falls within the charter party limits.

Condition of the Goods

Confirm that the goods have indeed actually or physically been shipped on board the ship. Check accordingly that an accurate description of the goods is present on the Bill of lading, whether any short-loading or dead-freights are correctly mentioned. Ensure that all of the conditions must be in lieu with the Mates’ receipt and the Bill may have a clause to reflect the actual condition of the goods.

Quantity and Description of Cargo Loaded

Prior to endorsing the Bill of lading, the master should ensure that the quantity and description of the goods is true to its correct value of that loaded on board. This can be done by counter-checking the Mates’ receipt along with the other cargo documents.

Freight

Ensure that the Bill of Lading is not marked “Freight Paid” or “Freight Prepaid”, as in certain cases, if not true. The master must confirm and verify the factual position of the freight with the ship owner or shipper.

It is also recommended to get a written confirmation from either of the two.

Conflicting terms

No clause of the Bill of Lading should ever conflict with that of the charter party terms. If the Bill has to be claused as per the charter party terms then such references must be clear and unambiguous

Finally, check to see whether the number of original Bill of ladings are in the set provided as stated.

Almost a decade ago, a Ship captain was sailing on an oil tanker, a young chief officer who had joined my vessel, asked me if the ship was ever going to load in Iraq. When I asked him why he was so curious about Iraq, he innocently replied that since after completion of loading no survey was carried out in the Iraqi port and the Bill of Lading was prepared based on figures provided by the ship. The ship would be loaded with crude oil almost 99% full and B/L figures provided by the ship would be 98% or less of the total cargo. The 1 % or more of this cargo would then be sold to small barges off the coast of a maritime nation in the Arabian sea arranged by the installation. The loot would then be equally divided among all on board and ashore. When I informed him that nothing of this sort can happen on board my ship, he was very disappointed and after a few weeks left the ship.

Maritime frauds can occur anywhere; be it a vessel, a shipping company office or a trading company transporting goods by sea. The list can go on. It necessarily has to involve two or more parties, out of which one or more must have unjustly or illegally succeeded in obtaining goods or services from another party. Since they can happen anywhere, it is important that seafarer is extra careful and do not get directly or indirectly involved in activities or get himself coerced by senior officers in wrong doings that can cost them dearly, both financially as well as to their reputation.

The economic outlook in many parts of the world continues to be uncertain in this environment. The risks of defaults and frauds increase when these events take place. The chances of recovery are usually very few and they are expensive. The changing pattern of fraud in today’s environment, including the use of the Internet to give the fraudulent transaction creditability. An international trade transaction involves several parties-exporter, importer, ship-owner, charterer, ship's master, officers and crew, insurer, banker, broker or agent, freight forwarder.

Some of these maritime frauds are visible and can be easily detected, whereas others may remain hidden for a long time in the absence of evidence. For example, the easily visible ones on board are: –

Master and / or Chief steward manipulating stores and victualling invoices by signing for unreceived goods and sharing the loot with the supplier.
Senior deck officer(s) and / or ship’s crew selling ship stores or cargo.
Senior ship engineer(s) selling bunkers by signing for more and receiving less on their ships and manipulating the shortage through cargo residues(diesel) on oil tankers.
Senior ship engineers agreeing to accept substandard machinery spares.
Senior deck officers manipulating B/L figures
Ship superintendents acting alone or in liaison with senior deck officers inflating invoices with stores / spares and/or repair work not carried out in repair yards.
Cargo surveyors in liaison with senior deck officers, manipulating daily outturn figs to boost their ratings. This is most common on bulk carriers.
Agents, stevedores, suppliers, manipulating invoices in liaison with senior officers on board.
Ship manning agents manipulating salaries of the ship crew.
Ship manning agents supplying uncertified crew on board for less salary, by using fake certificates, CDC etc.
Senior officers on board manipulating Oil record book figures to hide deficiency in ship machinery and pumping residues overboard through portable hoses.
Senior deck officers manipulating cargo figures on oil tankers and pumping residues(diesel) to bunker tanks in liaison with ship owner, managers.
Ship’s crew and/or Master illegally carrying stowaways intentionally.
Ship’s crew and/or Master carrying contraband on board.
Insurance frauds committed by ship owners/Managers by manipulating ship records in liaison with ship officers and Master, which may include death on board shown as suicide.

Maritime fraud occurs when one of these parties unjustly takes another's goods or money. In some cases, several of these parties act in collusion to defraud another. Banks and insurers are often the victims of such frauds. An international trade transaction involves several parties – buyer, seller, ship-owner, charterer, sip’s master or crew, insurer, banker, broker or agent. Maritime fraud occurs when one of the parties involved in an international trade transaction like the buyer, seller, ship-owner, charterer, ship's master or crew, insurer, banker, broker or agent illegally secures money or goods from another party to whom, on the face of it, he has undertaken specific trade, transport and financial obligations.

Developing Elements

The elements of the different types of maritime fraud are mentioned below.
Offering goods in stringent demand and not readily available

Offering goods at unduly low prices especially from a country or a seller who is not a normal source of supply.
Calling for payment conditions out of line with those customers normally expect.
Requiring advance payment through an intermediary offering the goods without disclosing name of suppliers.
Involving use of names that resemble but are not those of well-known houses.
Pressurising for fast acceptances of offer and speedy issuance of documentary credit.
Requiring payment by documentary credit issued in favour of party other than named.
Requiring Charter Party Bills of Lading to be accepted when contrary to nature of transaction or type of goods.
Offering for sale and insurance of non-existent cargo.

A. Issuance of False certificates by corrupt port officials for short landing of cargo.
B. Issuance of Bills of loading without actual loading of cargo.
C. Exportation of rubbish by consignors.
D. Illegal manipulation of valves at oil terminals.
E. Oil used as bunker.

Types

Frauds are broadly classified into Documentary, Shipping and Charter party frauds.

Documentary: Some or all of the documents specified by the buyer for presentation by the seller to the bank to receive payments are forged.
Shipping: It includes scuttling, deviation, cargo theft, arson or so called accidental fires in which vessel or cargo isdisposed of with the connivance of her owners.
Charter Party: It occurs when one or two contracting parties default, leaving the others to clear the mess. These contracting parties for a Time or Voyage charter are ship-owner, charterer and cargo owner. Such frauds were not uncommon in the past but the problems escalated following oil boom, excess tonnage, congested ports, inexperienced developing countries in international trade and disturbed political or social conditions in various countries.
Theft of cargo by crew.

Problems

Detection becomes difficult since all parties are not co-operative and the investigation is expensive. Jurisdiction for prosecution is also another impediment.

Precautionary Measures

The following precautionary measures are suggested:

Dealing only with reputed companies.
Awareness to traders by Embassy commercial sections and Chambers of Commerce of the risks in trade and transport transactions and the necessity to check before advancing the names of potential suppliers, buyers or transport companies.
Regarding the mode of payment from the seller 's point of view a documentary credit confirmed by a bank acceptable to him will be the safest provided he will be paid on presenting documents on time conforming to the terms and conditions of the documentary credit.
Proper understanding of shipment terms.
Inspection and approval of goods and vessels by authoritative organisations.

Freight Forwarders

Freight Forwarders are intermediaries who know the conditions of local transport markets. They have continuing contacts with the ship owners or charterers and their port agents. They act as the 'Shipper's antenna' in solving specific transport problems and provide information about shipping services.

Banks

Banks encounter two types of fraud:

Presentation of genuine documents but with subsequent fraudulent action by a third party in respect of the goods.
Presentation of fraudulent documents in respect of inferior goods or non existent goods.

Vessel Owners and Charterers

Vessel owners and charterers may adopt the following steps in avoiding frauds.

Owners should take timely advice from charterers before agreeing to a charter.
The charterers’ financial status has to be checked by the owner.
Care should be taken to ensure that bills of lading are signed by authorized persons.
When a bill of lading is issued, Masters should ensure that cargo is only released against the original duly endorsed.
Masters should be encouraged to radio their position through certain periods of the voyage.

Insurers

Insurers protect the buyer or seller of goods under contracts of international trade. They have taken steps to prevent maritime fraud.

Maritime fraud occurs when one of these parties succeeds, unjustly and illegally, in obtaining money or goods from another party to whom, on the face of it, he has undertaken specific trade, transport, and financial obligations. In some cases, several parties act on collusion to defraud another. Although banks and insurer find themselves involved in instances of fraud, sometimes as victims, knowing that in some examples of suspected fraud there may not “technically” be any illegal action involved. It may happen or appear as one of the parties have “defrauded” another party by confusing and misrepresenting the fatcs.

Despite the fact that documentary letters of credit (LC) are meant to facilitate the process of international trade, their specific characteristics may increase the risk of fraud while being used as the method of payment in the process of international transaction. Many factors like exclusive use of documents, geographical distance, absence of efficient prosecution, the diversity of legal system at the global level and restricted application of fraud rule can be considered as reasons for LC fraud. While billions of dollars are lost annually due to fraud in the course of LC operations, such vulnerability can result in reducing the global popularity of documentary letters of credit as the main method of payment used in international trade.

Shipping, trading houses and banks are continuing to be targeted as victims of major fraud operations, a meeting of the International Maritime Industries Forum has been warned. Criminals are using new tricks based on abuses of technology, “All documents in the trade finance bundle can be forged, and forged with ease, ” although the vast majority of trade transactions are genuine, vulnerability will be exploited by those trying to manipulate the system. Crooks ‘piggybacked’ on genuine trades, preparing documents based on information gleaned about legitimate operations.

Fraud affects everyone in the shipping and trade chain. When it does happen, the victims can face very severe consequences which can cause some companies to go down completely, causing a problem for all their creditors and trading partners.”

One of the most serious and costly scams is gaining access to trade finance by means of false shipping documents including bills of lading. The trade finance system is wide open to manipulation, it enables the transfer of large amounts of money from one part of the world to another, relying on a documentary trail. In the resulting shipment of goods, it is often difficult to know what is inside a particular container, and that is one of the big weaknesses of the system. Sometimes goods were wrongly described in order to save a few thousand dollars in freight, but the consequences of that for the ship-owner and the vessel could be immense. Cargoes were given innocuous names, and the ship-owner had no idea what was going on board. E.G. there are unscrupulous people who believe that using shipping containers is a great way to get rid of waste which would be very expensive to process in any major economy. In one instance, containers were sent to Brazil with contents described in general terms as waste, but what they really contained was untreated hospital waste. The ship-owner was fined a substantial sum, and had to pay for the containers to be taken back to the port of origin in Europe to be disposed of safely there.

With counterfeiting being rife, there was a growing feeling among major brand owners that the transport chain is part of the problem. This had resulted in discussions in various quarters about the responsibilities of the ship-owner, which could result in “another burden for the poor ship-owner to meet, ” . One of the biggest cases involved losses of some $400m over the supposed trading of metal ingots, with 30 to 40 buyers and sellers, and 20 non-vessel owning common carriers with bills of lading issued over many years. Lead and tin ingots were fraudulently described in terms of increasing metal value. The CCS acted for a good number of banks which had been innocently financing spurious cargo.

There are mainly three types of maritime fraud in practice,

charter party fraud,
shipping fraud, and
documentary fraud.

In all, although other laws also being introduced, the thesis emphasizes on English law and then compares it with Chinese law.

Further, for the purpose of the research, the thesis will study relating cases and laws under both jurisdictions. In addition, as the authoritative principle in the field of L/Cs, UCP from ICC is also one part of the thesis. in the majority of international trade transactions, certain commercial documents such has bills of lading are treated as if they were goods themselves. documentary fraud occurs when one or more parties to the transaction are deprived of the goods and or the purchase price.

A brief overview of documentary fraud

In international trade practice, Shipping has been a basic transportation way over hundreds of years. And in the process of such long historical period, the traditional transaction has transformed into a document-based transaction, and due to which, currently . documents are usually served as a major vehicle by maritime fraudster. In practice, such fraud involving documentation may occur directly between fraudsters and victims. unlike the fraud mentioned hereinabove involving a theft, other types of documentary fraud, involves deception instead.

Multiple original bills of lading

There is an international tradition that usually there would be more than one original B/Ls will be issued. The historical root behind this tradition may be because there was a high risk of a document being lost in ancient time and therefore if more than one of B/Ls were issued, there would be a good chance that at least one B/L would reach the expected recipient. Thus, it’s clearly that such B/System gives way for a fraud.

Advanced bills of lading

Because of the letter of credit shipment period and the settlement are due to expire for some reason failed to ship the goods, but has been under the control of the carrier, or have begun shipping, letters of guarantee issued by the shipper to require the carrier advances of the bill of lading.

Discrepancies

In spite of being on board, the real quantity and condition of the goods may be different form what specified on the B/Ls. Therefore, in view of words cited above, for the original seller and the buyer, such descriptions could be the prima facie evidence between them. But, if the a B/L is lately transferred to the third party, then such descriptions may become an absolute proof instead and that third party could base his claim on this description on B/L against the carrier.

Letters of indemnity

When it comes to the letters of indemnity, it is always a controversial issue in maritime practice, where it has been widely used in marine transportation for settlement of contradictions between security and rapidity. However, the letter of indemnity has long been overshadowed under the high possibility of inducing a maritime fraud since its origin.

Nullity of the documents there are quite of reasons which may induce a nullity. It could be caused by only mistake, or fraud. And, in this thesis, the focus is on the nullity caused by a fraud. where some of those fraud are also always related to L/Cs. therefore, the introductions of such expression could provide a brief view of how at the very first beginning a documentary fraud happens and then we have the later discussion of this thesis, documentary fraud under L/Cs. Letters of credit

Overview of letters of credit Generally, the most typical characteristics and merits of L/Cs is bank credit. By means of dividing from the underlying contract, payment is independent on records specified in written documents. those facial evidences on the paper without consideration of the real facts. Although the facial-confirming system provides a more convenient and rapid payment system for the international transaction, the potential defects existing in this system trigger the occurrence of fraud.

Autonomy principle and fraud exception in spite of the documentary credits seem very secure for both of the parties50, the voice of opposite still exists, as there is always an open door for fraud under autonomy principle mainly because of such facial censorship. in the long term development of international practice, there is an exception established gradually, which is called “fraud exception”.

Fraud exception

As the remarkable case in the field of documentary fraud under L/C, although no application of fraud exception in this case, the City Merchants somehow officially put fraud exception on table at the first time. In the case, the trial court, relying on the principle of ex turpi causa non oritur actio, concluded that “only fraud by the beneficiary could invoke the fraud rule and thus Justice Mocatta therefore did not apply the fraud exception in the case at hand because a third party had perpetrated the fraud.

Comments on documentary credits fraud The unique character and considerable effect on international method of international payment has made the documentary credit as irreplaceable.

The autonomy principle, which has served as basis of documentary credit, seems to be unshakable currently notwithstanding the pressure and criticisms form the outside. Another point worthy mentioned is that, supposing that a bank receives this “hot potato”, examining the documents substantially, a longer time shall be taken compared with the paper-based censorship, and accordingly the requirement for a quick payment set in the rules must be influenced negatively, which could further possibly bar the wills for employment of documentary credits. Although it’s not easy, there is always a way could try, like that the thesis later describes in the conclusion, the “super service” from the banks may be a reasonable solution.

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Understanding Maritime-Trade-Fraud Shifting Patterns