What is a fraud? 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. 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.
The sinking of an over-insured vessel carrying a high valued non-existent cargo has been encountered at regular intervals. During periods of economic and political upheaval and depression in the shipping business, there have been incidents of unusual losses. In the last few years, these and other factors have led to a significant escalation in the number of incidents that can be termed as ‘maritime frauds’.
Types of Fraud
Maritime fraud has many guises and it methods are open to infinite variations. Majority of these crimes can be classified into four categories as under:
o Scuttling of ships
o Documentary frauds
o Cargo Thefts
o Fraud related to the chartering of vessels
Scuttling of Ships
Also known as ‘rust bucket’ frauds, this involves deliberate sinking of vessels in pursuance of fraud against both cargo and hull interests. With occasional exceptions, these crimes are committed by ship-owners in a situation where a vessel is approaching or has the end of its economic life, taking into account the age of the vessel, its condition and the prevailing freight market. The crime can be aimed at hull insurers alone or against both hull and cargo interests.
For example, a dishonest shower may approach am exporter and offer to carry his next large cargo shipment on his vessel. The exporter is to arrange the contract and the proposed buyer to open a letter of credit in his favor to pay for them. No goods are actually to be supplied or shipped, but the ship-owner agrees to supply bills of lading to show that the goods have been loaded on the vessel. The bills of lading together with such other documents as are required are presented to the bank negotiating the letter of credit. The banker pays against documents and not against goods. After ascertaining that the cargo description corresponds to the requirements as stipulated in the L/C, the bank, in the normal course of events, releases the funds under the terms of the L/C.
The ship, without it is by now paid for, but non-existent cargo, leaves port. It should not of course reach its destination, because should it do so, the missing cargo would lead immediately to the discovery of the fraud. To avoid this eventually, the ship is deliberately scuttled in a suitable location, so as to remove the evidence of the non-existent shipment beyond any prospect of subsequent investigation.
The ship-owner enters an insurance claim on his hull underwriters and he also receives a share of the proceeds from the letter of credit from exporter, leaving the hapless buyer to pursue an insurance claim for loss/non-delivery of his cargo.
This type of fraud involves the sale and purchase of goods o documentary credit terms and some or all of the documents specified by the buyer to be presented by the seller to the bank in order to receive payment, are forged. Bankers pay against documents. The forged documents attempt to cover up the fact that the goods actually do not exist or that they are not of the quality ordered by the buyer. When the unfortunate purchaser of the goods belatedly realizes that no goods are arriving, he starts checking, only to find that the alleged carrying vessels either does not exist or was loading at some other port at the relevant time.
Banks deal with documents and not in the goods covered by them. A bank which accepts under a letter of credit a set of documents which appear to be regular on their face, is not liable to its principal if the documents turn out to be forged or to contain false statements. Thus a confirming bank is entitled to obtain reimbursement against such documents from the issuing bank and the issuing bank is entitled to obtain payment against them from the buyer. Thus the loss is usually borne by the buyer.
It is precisely to discourage the activities of fraudsters relating to export cargoes that GIC evolved the ship approval system. This has been extended to full load import cargo also. The vessels usually employed by fraudsters are:
-Vessels flying a flag of convenience
-Vessels over 15 or 20 years of age
-Usually small sized ships of 7000 to 10000 GRT
-Vessels having changed their names and owners a few months before the last voyage.
There are several variations in the modus operandi of cargo thefts. In a typical example, the vessel, having loaded a cargo, deviates from its route and puts it into a port of convenience. Such ports are Tripoli, Beitut, Almina, Jouneih, Ras Salaata and others along the coasts of Greece, Lebanon and Suria. The cargo may be discharges and sole on the quayside or in a more sophisticated manner. Such an act is often accompanied by c a changed of the vessel’s name or a subsequent scuttling in order to hide the evidence of theft. The whole process of investigation is proved difficult as by the time the loss is known the cargo disappears and the actual recovery of goods is unlikely. The owners of these ships are “paper companies” set up a few days prior to the operation.
Fraud related to Chartering of vessels
This is also known as Charter-part fraud”. Establishing a chartering company required a modest initial financial commitment and is usually subject to little regulation. In depressed conditions of shipping market, there is no have demand on tonnage and owners anxious to avoid laying up their vessels are tempted to charter them to unknown companies without demanding any substantial financial guarantee for the performance of the charter contract.
The fraudulent chartered can turn this situation to his advantage. Having chartered a vessel from an unsuspecting owner, the chartered canvasses for cargo, knowing that in a depressed economy, shippers will be willing to cut corners in the hope of reducing transport costs and thus saving on freight so that their goods can be more attractively priced the charterer offers low freight rates on pre-paid basis. He can afford to do that, as he has no intention of completing the voyage.
Soon, after the vessel sails from the port, the chartered disappears. He may have paid his first month’s hire or he might not have paid any hire charges as are due from him. Meanwhile the ship-owner may find himself with substantial bills to meet from port authorities along with the ship’s route as well as for crew’s wages and for provisioning the ship. Worse, the ship owner may find that his ship, not having delivered the cargo to the consignees, has been arrested and this leads to protracted and expensive legal wrangle.
In order to get their goods to destination, shippers may agree to pay a freight surcharges or they will agree to a diversion and a sale of the goods to cover costs and then state the export process all over again. Sometimes, when no such compromise can be reached, the ship owner will instruct the master to divert his ship and sell the cargo wherever he can, and this become as much of a criminal as the charterer.
Precautionary Measures for Fraud Prevention
There are certain basic precautions against maritime fraud that commercial interests, like exporter and importers, banks and insurance companies, should be aware of and should be able to implement.
Exporters and Importers
The checks and precautions that buys and sellers can implement are:
o Care should be exercised when dealing for the first time with unknown parties. Careful inquiries should be made as to their standing and integrity before entering into a binding agreement.
o Shipment should be by well-established shipping lines. In India, vessels approved by GIC should be preferred.
o The cargo owners should be wary:
- – If the freight rate is too attractive
– If the ship owner owns one vessel only9’singleton’)
– If the vessel is over 15 years of age.
– If the vessel has passed through various owners.
o Payment by irrevocable documentary credit, confirmed by a bank in seller’s country, provides the best safeguard to the seller. Should the seller have any doubt about the authenticity of the documentary credit, he should immediately consult his bank before parting with the goods.
o As far as the buyer is concerned, he should ensure that he receives the documents he has stipulated in his documentary credit application.
o As far as the buyer is concerned, he should ensure that he receives the documents he has stipulated in his documentary credit application. Therefore, the buyer must consider carefully which documents he requires. For example, an independent “loading certificate” would add significantly to his protection as would detailed instructions on which shipping line or forwarding agent is to be used. The inspection of cargo should be as close to the time of loading on board as possible.
o In order to ensure that the subject cargo is in fact loaded on the specified carrying vessel, the buyer may stipulate for a “report on the vessel” from an independent third party.
o Conference or national lines bills of lading should be used and marked “freight prepaid” with the amount of freight clearly stated in the bill of lading.
o Services of dependable and well-known forwarding agents, who are also members of a national association, should be engaged.
o Buyers and sellers should attempt to identify whether the carrying vessel is on charter and who the chatterers and owners are and whether chartering is done only through agents or reputable institutions.
Banks should take following precautions against maritime fraud.
- o Bankers should make us of Lloyd’s shipping index. Important points to check with regard to the carrying vessel are ownership, age, size and importantly the position of the vessel at the time the bill of lading was dated.
o If such checks are considered difficult for a bank because of the volume of work involved, then perhaps a ‘super-service’ at additional cost to the customers should be considered with the actual checks being carried out by outside agent or brokers retained at an annual fee.
o Methods should be examined of improving documentary credit operations by the application of computerized and modern business methods.
Insurers should take the following precautions against maritime fraud.
- o Where the name of the carrying vessel is not known at the point when insurance is effected, the insurance is made subject to the Institute Classification Clause and the requirement that the vessel carrying the goods conforms to the provisions of the clause.
o The assured is required to declare to the insurers the name of the carrying vessel as soon as it is known. When the carrying vessels comply with the requirements of the classifications clause, standard rate premium is charged. Otherwise, extra premium is attracted for over-age, under-tonnage, non-classification and FOC registration of a vessel.
o In India, the exporter is encouraged to use vessels “approved by GIC” to carry the export cargo. This system also applies to import cargo when the carrying vessel is bringing a full load of import cargo to India as also to imports on vessels from Singapore, Malaysia and Far East (excluding Japan, Mainland China).