4 Cargo Frauds to Watch Out For

Published Jan 30, 2014 6:49 PM by The Maritime Executive

During the recent years, the shipping industry and maritime commerce has seen a sharp increase in the number and variety of fraud cases. Maritime insurer Skuld says cases they have seen can involve the sale of cargoes that do not exist, fraudulent misrepresentations on cargo documents, the attempt to illegally claim on Letters of Credit, fake Letters of Indemnity, as well theft of cargo and / or cheating over quantity and quality. Skuld outlines four scenarios to be alert for.

Case Scenario 1: Forged Bills of Lading with the intention of stealing the cargo

The fraudsters create a fake set of Bills of Lading that looks sufficiently genuine against which they seek to take delivery of the cargo in advance of the genuine receiver. This fraud may have received some “insider” assistance, as the fraudsters will need key information – if not a copy of the genuine bill – in order to ensure they can achieve delivery at the discharge port. The shipowner and genuine receiver (or unpaid shipper) are then left to fight it out as to whose insurers will have to cover the loss, or worse who will have to take the direct hit (as some loss scenarios may not be covered by standard insurance).

Lesson Learned: 
Ensuring that there is always a clear chain of custody for any set of original Bills is very important. Local shipping agents, if they want to avoid being held liable, will also have to ensure that they conduct proper checks against documents presented to ensure their genuine nature. If in doubt, a phone call can help to clear up many issues and concerns. If, however, serious concerns persist (such as clear errors or inconsistencies on documents) then calling a “halt” to operations will be a prudent step to take.

Case Scenario 2: Fake cargo sale – a parallel transaction

The fraudsters will seek to create genuine looking Bills of Lading or other cargo documents, copying corporate styles and logos, and going as far as including genuine ship and shipment details. The Fraudsters appear to be well informed about the particular type of cargo being shipped.

In one particular case, the fraudsters knew of the exact trading pattern of a member’s vessel and were able to give credible details of her route and alleged cargo, so as to make the transaction appear legitimate. They offered to sell a cargo that allegedly was on board, but the vessel was in fact trading a different cargo altogether that had been sold already to genuine buyers from genuine sellers. The fraudsters seek to gain by seeking a buyer for their alleged cargo and then either obtaining payment direct or by way of a Letter of Credit opened in their favor as part of the transaction.

In some cases involving the container industry, the fraudsters go so far as to create fake websites, and give fake tracking numbers, to give the appearance of a genuine shipment that can be tracked “live”.

Lesson Learned: 

Fraudsters can take significant steps to create a legitimate appearance for their scheme. Cursory or brief checks may be insufficient to detect the underlying scam. Unless dealing with known and proven counterparties (who confirm the deal back) extra caution should be taken to ensure a particular proposed offer is in fact genuine. One particular Red Flag to this type of fraud is that the offered cargo may be at a significant discount to prevailing market prices, and aiming at trapping a Buyer with a deal that is “too good to pass on”.

Case Scenario 3: a sub-charterer or freight forwarder issues / re-issues Bills of Lading with cargo miss-descriptions

The master of the vessel has the responsibility and right to issue Bills of Lading for the cargo laden on his ship. In practice this is often delegated / contracted out to charterers and their shipping agents on the basis that any bills issued must conform with mate’s receipts issued during the loading operation.

It is important to ensure that bills do accurately reflect the cargo laden, because a knowing miss-declaration, for instance claiming that a cargo of cars is “new” while they are fitted with old engines, is a fraud. The third party buyer of the cargo expects new cars, not refurbished vehicles, and he is paying the price for new cars. 

Once the true nature of the cargo is discovered the buyer will usually be able to take action for his loss against the Vessel, and there will be no defense where clean Bills were issued for unclean cargo. This can create problems for ship-owners where the Bills are issued, or perhaps re-issued, by a party several steps removed in the contractual chain, and these Bills contain clearly inaccurate information. The owner may not even know that this event has occurred, until confronted with a cargo claim at the discharge port.

Typically the fraud will involve:
1. a deliberate over statement as to quantity laden
2. a knowing miss-description of the cargo laden
3. the post or ante dating of the Bill of Lading

This is done in order to ensure documents pass as “clean” through the banking system, obtain more sale proceeds, and put the transaction into sale and Letter of Credit “windows”. In all cases, however, misinformation is used to obtain financial benefit, or greater financial benefit, than should have been due had accurate information been provided.

Lesson learned: 
Delegating an important right / obligation such as issuing cargo documents should only be done to trusted counterparties and in line with clear indemnities and counter-obligations to protect the owner. If a cargo is laden that clearly is not “new” or “clean” then extra care has to be taken that any cargo document issued very precisely describes the exact nature of the cargo.

Case Scenario 4: the “Trojan” container

The containerization of global trade has given incredible benefits to shipping and the world economy, yet has also given rise to numerous opportunities for fraud.

The “Trojan” container is the one that is alleged to contain a certain specific cargo, yet upon discharge it turns out that the contents are quite different. The types of incidents the association has seen include:

1. Cargo of plastic shipped for recycling contained a small amount of used diapers
2. Cargo of rolls of textiles contained smuggled cigarettes
3. A 40 foot box contained 21 illegal immigrants + 2 people smugglers from Fujian consigned to Los Angeles
4. Various methods to hide drugs
5. Waste and rubbish, or other redundant material to give the impression of [x] tons weight, but the real goods were never shipped (but were paid for)

These are just a few examples, but often the carrier is at risk of fines, criminal charges, rejection of the cargo, detention, disposal and extra carriage costs.

Lesson Learned: 

The volume of containerization as well as the need for fast processing leaves little time to ensure that cargo manifests are checked rigorously and even then physical contents are not routinely checked against the manifest by the vessel (that would be a logistical and practical impossibility in the trade).

A great degree of reliance is therefore placed on Freight Forwarders to ensure that both contents and weight are properly declared. In case of concern, it is better to isolate a box and have it inspected, even leaving it behind, rather than risk a vessel with thousands of boxes on board being detained for alleged immigration, customs and other legal infringements at the discharge port.