Maritime fraud

What is a fraud? An international trade transaction involves several parties: exporter, importer, shipowner, charterer, ship’s captain, officers and crew, insurer, banker, broker or agent, freight forwarder. Maritime fraud occurs when one of these parties unfairly takes the property or money of another. In some cases, several of these parties collude to defraud another. Banks and insurers are often victims of this type of fraud.

The sinking of an overinsured vessel carrying non-existent high-value cargo has occurred at regular intervals. During periods of economic and political turmoil and depression in the shipping business, there have been unusual loss incidents. In recent years, these and other factors have led to a significant escalation in the number of incidents that can be classified as ‘maritime fraud’.

Types of fraud

Maritime fraud comes in many forms and its methods are open to endless variations. Most of these crimes can be classified into four categories:

o Sinking of ships

o Documentary frauds

o Cargo theft

o Fraud related to the charter of vessels

Sinking of ships

Also known as ‘rust bucket’ scams, this involves the deliberate sinking of vessels in search of fraud against cargo and hull interests. With occasional exceptions, these crimes are committed by shipowners in a situation in which a ship is approaching or at the end of its economic life, taking into account the age of the ship, its condition and the prevailing cargo market. The offense may be directed at the insurers of hulls alone or against interests of both the hull and the cargo.

For example, a rogue shower may approach an exporter and offer to carry their next big shipment on their ship. The exporter must conclude the contract and the proposed buyer must open a letter of credit in their favor to pay them. Goods should not actually be supplied or shipped, but the ship owner agrees to provide bills of lading to prove that the goods have been loaded onto the ship. The bills of lading, along with other necessary documents, are presented to the bank that negotiates the letter of credit. The banker pays with documents and not with goods. After verifying that the cargo description corresponds to the requirements 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 already paid, but nonexistent cargo, leaves the port. Of course, it shouldn’t reach its destination, because if it did, the lost cargo would immediately lead to the discovery of the fraud. To avoid this eventually, the ship is deliberately sunk in a suitable location, in order to eliminate evidence of the nonexistent shipment beyond any prospect of further investigation.

The shipowner files an insurance claim with their hull insurers and also receives a portion of the proceeds from the exporter letter of credit, leaving the unfortunate buyer to file an insurance claim for loss or non-delivery of their cargo.

Documentary scams

This type of fraud involves the sale of goods or documentary credit conditions and some or all of the documents that the buyer specifies to be presented by the seller to the bank to receive payment are falsified. Bankers pay against documents. The falsified documents try to cover up the fact that the goods do not really exist or that they are not of the quality requested by the buyer. When the unfortunate buyer of the merchandise belatedly realizes that no merchandise is arriving, he begins to check, only to discover that the alleged carrier vessels do not exist or were loading at some other port at the relevant time.

The banks take care of the documents and not the goods covered by them. A bank that accepts under a letter of credit a set of documents that appear to be regular at first glance, is not liable to its principal if the documents turn out to be forged or contain false statements. Therefore, a confirming bank has the right to obtain reimbursement of such documents from the issuing bank and the issuing bank has the right to obtain payment from the buyer. Therefore, the loss is generally borne by the buyer.

It is precisely to discourage the activities of scammers related to export cargoes that GIC developed the vessel approval system. This has also been extended to full load import cargo. The vessels that scammers often use are:

-Boats with flag of convenience

-Boats over 15 or 20 years old

-Generally small ships from 7000 to 10000 GRT

-Boats that have changed name and owner a few months before the last trip.

Cargo theft

There are several variations in the modus operandi of cargo theft. In a typical example, the ship, having loaded a cargo, deviates from its route and places it in a port of convenience. These ports are Tripoli, Beitut, Almina, Jouneih, Ras Salaata, and others along the coasts of Greece, Lebanon, and Suria. Cargo can be unloaded and flooded at the dock or in a more sophisticated way. This act is usually accompanied by a change of name of the ship or a subsequent sinking to hide the evidence of the theft. The entire investigation process is difficult, as the moment the loss is known, the cargo disappears and the merchandise is unlikely to be recovered. The owners of these boats are “paper companies” created a few days before the operation.

Fraud related to the charter of ships

This is also known as charter party fraud. ”Establishing a charter company required a modest initial financial commitment and is generally subject to little regulation. In the depressed conditions of the shipping market, there is no demand for tonnage and owners they are anxious to avoid warehousing their vessels are tempted to charter them to unknown companies without demanding any substantial financial security for the performance of the charter contract.

Fraudulent chartering can turn this situation to your advantage. Having chartered a vessel from an unsuspecting owner, the charterer scrutinizes the cargo, knowing that in a depressed economy, shippers will be willing to cut corners in hopes of reducing transportation costs and thus saving on freight so that their goods can have a more attractive price. the charterer offers low freight rates with prepayment. You can afford to do that, as you have no intention of completing the journey.

Shortly after, after the ship leaves the port, the chartered disappears. You may have paid your first month’s rent or failed to pay the rent that you owe. In the meantime, the owner of the ship may find himself with substantial bills to pay from the port authorities along with the ship’s route, as well as the salaries of the ship’s crew and provisioning. Worse still, the ship owner may find that his ship, having failed to deliver cargo to shipments, has been arrested and this leads to a lengthy and costly legal dispute.

In order for your goods to reach their destination, carriers may agree to pay a freight surcharge or accept a diversion and sale of the goods to cover costs and then declare the export process again. Sometimes when such a compromise cannot be reached, the ship owner directs the captain to divert his ship and sell the cargo where he can, and this becomes as criminal as the charterer.

Precautionary measures for fraud prevention

There are certain basic precautions against maritime fraud that business interests, such as exporters and importers, banks and insurance companies, must be aware of and must be able to implement.

Exporters and importers

The controls and precautions that purchases and sellers can implement are:

o Care should be taken when dealing with unfamiliar parties for the first time. Careful research on your reputation and integrity should be done before entering into a binding agreement.

o The shipment must be made through well established shipping lines. In India, GIC approved vessels should be preferred.

o Cargo owners should be careful:

– If the freight rate is too attractive – If the owner of the boat owns only one boat (9 ‘singleton’) – If the boat is more than 15 years old. – If the boat has passed through several owners.

o Payment by irrevocable documentary credit, confirmed by a bank in the seller’s country, provides the best safeguard to the seller. If the seller has any doubts about the authenticity of the documentary credit, he should immediately consult his bank before saying goodbye to the merchandise.

o As far as the buyer is concerned, you must ensure that you receive the documents that you have stipulated in your letter of credit application.

o As far as the buyer is concerned, you must ensure that you receive the documents that you have stipulated in your letter of credit application. Therefore, the buyer should carefully consider what documents he needs. For example, a separate “freight certificate” would significantly increase your protection, as would detailed instructions on which shipping line or freight forwarder to use. The cargo inspection should be carried out as close as possible to the time of loading on board.

o In order to ensure that the cargo in question is in fact loaded onto the specified carrier, the buyer may order a “ship report” from an independent third party.

o National or conference line bills of lading must be used and marked “freight prepaid” with the freight amount clearly indicated on the bill of lading.

o The services of trusted and well-known freight forwarders, who are also members of a national association, should be hired.

o Buyers and sellers should try to identify if the transport vessel is on charter and who the charterers and owners are, and if the charter is done only through accredited agents or institutions.

Banks

Banks should take the following precautions against maritime fraud.

o Bankers should give us Lloyd’s Shipping Index. Important points to check regarding the carrier vessel are the ownership, age, size, and most importantly, the position of the vessel at the time the bill of lading was dated. o If such controls are deemed difficult for a bank due to the volume of work involved, then perhaps a ‘super-service’ should be considered at an additional cost to clients, and the actual controls will be carried out by external agents or retained brokers. in an annual fee. o Methods to improve letter-credit operations through the application of modern, computer-based business methods should be explored.

Insurers

Insurers should take the following precautions against maritime fraud.

o When the name of the transporting vessel is not known at the time the insurance is contracted, the insurance is subject to the Classification Clause of the Institute and the requirement that the vessel transporting the goods complies with the provisions of the clause . o The insured must declare to the insurers the name of the transporting vessel as soon as it is known. When transport vessels meet the requirements of the classification clause, a standard rate premium is charged. Otherwise, an additional premium is obtained for over-age, insufficient tonnage, non-classification and FOC registration of a vessel. o In India, the exporter is encouraged to use “GIC approved” vessels to transport export cargo. This system also applies to import cargo when the carrier is carrying a full load of import cargo to India, as well as imports on ships from Singapore, Malaysia, and the Far East (excluding Japan and mainland China).