Maritime Frauds

What is a fraud? An international commercial transaction involves several parties: exporter, importer, owner, charterer, ship’s master, officers and crew, insurer, banker, broker or agent, carrier. Maritime fraud occurs when one of these parties wrongfully takes property or money from another. In some cases, several of these parties collude to defraud another. Banks and insurers are often victims of such fraud.

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

types of fraud

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

or sunk ships

o Document fraud

o Cargo theft

o Fraud related to the chartering of vessels

shipwreck

Also known as ‘rust bucket’ frauds, this involves the deliberate sinking of vessels in an attempt to fraud against cargo and hull interests. Except for specific exceptions, these crimes are committed by shipowners in a situation in which a vessel is approaching or reaching the end of its economic life, taking into account the age of the vessel, its condition and the current freight market. The crime may be directed against the insurers of the hull alone or against the interests of both the hull and the cargo.

For example, a rogue shower may approach an exporter and offer to transport their next large shipment on their ship. The exporter must enter into the contract and the proposed buyer open a letter of credit in his favor to pay them. No goods will actually be supplied or shipped, but the shipowner agrees to provide bills of lading to prove that the goods have been loaded on the ship. The bills of lading, along with any other required documents, are presented to the bank that negotiates the letter of credit. The banker pays against documents and not against assets. After ensuring that the cargo description corresponds to the requirements stipulated in the L/C, the bank, in the normal course of events, releases the funds according to the terms of the L/C.

The ship, without it already paid for, but non-existent cargo, leaves the port. Of course, she shouldn’t make it to her destination, because if she did, the lost cargo would immediately lead to the discovery of the fraud. To eventually prevent this, the ship is deliberately scuttled in a suitable location, so as to remove evidence of the non-existent shipment beyond any prospect of further investigation.

The shipowner files an insurance claim with his hull insurers and also receives a portion of the proceeds from the exporter’s letter of credit, leaving the unlucky buyer to pursue an insurance claim for the loss/nondelivery of his burden.

documentary fraud

This type of fraud involves the purchase and sale of goods or documentary credit terms and some or all of the documents specified by the buyer to be presented by the seller to the bank to receive payment are forged. Bankers pay against documents. Forged documents attempt to disguise the fact that the goods do not actually exist or are not of the quality requested by the buyer. When the unfortunate buyer of the goods belatedly realizes that no goods are arriving, he starts checking, only to discover that the supposed shipping vessels either do not exist or were loading at some other port at the relevant time.

Banks deal with documents and not with the goods covered by them. A bank that accepts under a letter of credit a set of documents that appear to be regular to its face is not liable to its principal if the documents turn out to be forged or contain false statements. Therefore, a confirming bank is entitled to obtain reimbursement for such documents from the issuing bank and the issuing bank is entitled to obtain payment for such documents from the buyer. So the loss is usually borne by the buyer.

It is precisely to discourage the activities of fraudsters in relation to export cargoes that GIC developed the ship approval system. This has been extended to full load import cargo as well. The ships that fraudsters usually use are:

-Vessels with flag of convenience

-Boats over 15 or 20 years old

-Usually small ships from 7,000 to 10,000 GRT

– Vessels that have changed names and owners a few months before the last trip.

cargo thefts

There are several variations on the modus operandi of cargo thefts. In a typical example, the ship, having loaded a cargo, deviates from its route and puts it in a port of convenience. Such ports are Tripoli, Beitut, Almina, Jouneih, Ras Salaata and others along the coasts of Greece, Lebanon and Suria. The load can be unloaded and screed 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 investigative process is difficult, as once the loss is known, the cargo is gone and the goods are unlikely to be recovered. The owners of these ships are “paper companies” created a few days before the operation.

Fraud related to the chartering of vessels

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

Fraudulent chartering can turn this situation to your advantage. Having chartered a ship from an unsuspecting owner, the charteree searches for cargo, knowing that in a depressed economy, shippers will be willing to cut corners in the hope of reducing transportation costs and thus saving on freight so that their products may have a more attractive price. The charterer offers low freight rates on the prepaid basis. You can afford it, as you have no intention of completing the trip.

Shortly after the ship leaves the port, the charteree disappears. She may have paid her first month’s rent, or she may not have paid any rent charges because of him. Meanwhile, the ship owner may find himself with substantial bills to pay from port authorities along with the ship’s route, as well as crew wages and ship provisioning. Worse yet, the ship owner may discover that his ship, having failed to deliver cargo to consignees, has been detained, leading to a protracted and costly legal dispute.

To get their goods to their destination, shippers may agree to pay a freight surcharge or agree to divert and sell the goods to cover costs and then re-establish the export process. Sometimes, when such a compromise cannot be reached, the shipowner will instruct the captain to divert his ship and sell the cargo where he can, and this becomes as much a criminal as the charterer.

Precautionary Measures for the Prevention of Fraud

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

Exporters and Importers

The controls and precautions that can be implemented by buyers and sellers are:

o Care should be taken when dealing with unknown people for the first time. Careful investigations should be made as to their position and integrity before entering into a binding agreement.

o The shipment must be by well-established shipping lines. In India, GIC approved boats should be preferred.

o Cargo owners should be careful:

– If the freight rate is too attractive – If the shipowner owns a single vessel9’singleton’) – If the ship 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 guarantee for the seller. If the seller has any doubt about the authenticity of the documentary credit, he must immediately consult his bank before parting with the merchandise.

o As far as the buyer is concerned, he must ensure that he receives the documents that he has stipulated in his documentary credit request.

o As far as the buyer is concerned, he must ensure that he receives the documents that he has stipulated in his documentary credit request. Therefore, the buyer must carefully consider what documents he needs. For example, a separate “loading certificate” would significantly increase your protection, as would detailed instructions on which shipping company or forwarding agent to use. 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 vessel, the buyer may arrange for a “vessel report” from an independent third party.

o National or conference lines 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 dependent and known freight forwarders must be contracted, who are also members of a national association.

o Buyers and sellers should try to identify if the vessel they are transporting is chartered and who the owners and MPs are and if the chartering is done only through reputable agents or institutions.

Banks

Banks must take the following precautions against maritime fraud.

o The bankers should get us the Lloyd’s shipping ratio. The important points to verify regarding the transport 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 checks are considered difficult for a bank due to the volume of work involved, then perhaps a ‘super service’ should be considered at additional cost to clients with the actual checks performed by third party agents or brokers hired at an annual fee. o Methods to improve documentary credit operations through the application of modern business methods and information technology should be examined.

insurers

Insurers must take the following precautions against maritime fraud.

o When the name of the ship carrying the goods is not known at the time the insurance is made, the insurance is subject to the Classification Clause of the Institute and the requirement that the ship carrying the goods conform to the provisions of the clause. o The insured is obliged to declare to the insurers the name of the carrier as soon as he knows it. When carrier vessels meet the requirements of the ratings clause, a standard rate premium is charged. Otherwise, an additional premium is attracted for overage, under tonnage, non-classification and FOC registration of a vessel. o In India, the exporter is encouraged to use “GIC approved” vessels to transport the export cargo. This system also applies to import cargo when the carrier vessel brings a full load of import cargo to India, as well as imports by vessels from Singapore, Malaysia and the Far East (excluding Japan, mainland China).