Publications
Claims Review: Issue 10
| Title | Contents | |
|---|---|---|
| FRAUD FROM OUTSIDE | Intro to theme of Claims Review | |
| 1 | Bogus Chief Engineer | |
| 2 | Fraud by NVOC | |
| 3 | Freight paid to wrong party | |
| 4 | Forged bank telexes | |
| 5 | Bogus Crew | |
| 6 | Indemnities which were not | |
| 7 | Counterfeit Batteries | |
| FRAUD FROM WITHIN | ||
| 1 | Fraudulent release of electrical goods | |
| 2 | Smuggling by Member's employee | |
| 3 | Theft of freight | |
| LOSS PREVENTION | ||
| FIVE WAYS TO FEND OFF FRAUD | ||
| 1 | Staff | |
| 2 | Awareness | |
| 3 | Check unusual requests | |
| 4 | Office procedures | |
| 5 | Documentation |
CLAIMS REVIEW - ISSUE 10
FRAUD
Fraud is not just someone else's problem. All Members of ITIC should be aware that they are exposed to claims for fraud. The transport industry is especially vulnerable to fraudulent activity. It is an international business, cargo can be of high value, large sums are involved with chartering ships, and the industry is still dependant on documents such as bills of lading, charter parties and survey reports. In this edition of the claims review, ITIC recounts the experience of its Members as the victims of fraud, both from outside sources and, unfortunately, from within, and when employees have colluded with outside sources. The claims review ends with some simple suggestions as to how transport industry professionals can try to limit their exposure to fraud, from whatever direction it may come.
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Fraud from Outside
Bogus Chief Officer
The chief engineer of a ship was airlifted to a hospital in the Arabian Gulf suffering from appendicitis. The ship manager had to replace him before the ship could sail. A chief engineer with impeccable references and qualifications was sent to the manager by a local crew agent and immediately flown to the ship. Two weeks later routine checks revealed that his references and certificates were forgeries. This caused the ship to be delayed for two days. The manager had to pay the cost of this delay, together with the costs of positioning a replacement chief engineer. The situation where an uncertified chief engineer was in charge of the engine room was commercially an extremely dangerous one. If an accident had occurred, the owner would have been in breach of the terms of his insurances, and the insurers could have refused to settle claims. The owner would then have had nowhere to look for reimbursement of his losses, except to the manager.
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Fraud by NVOC
A ship agent in the Middle East released 31 containers against receipt of NVOC bills of lading after receiving a telex from the loadport agent informing him that freight had been collected and the Line's bills of lading were in the loadport agent's hands. Cargo is released in this way between agents every day. However, in this case the telex was a forgery which originated from the NVOC. The loadport agent was still holding the Line's Òfreight prepaidÓ bills of lading and was waiting for the forwarder to pay the freight. Freight of US$35,000 was unpaid, the NVOC disappeared, and the Line collected the unpaid freight from the discharge port agent.[Top]
Freight paid to wrong party
For a number of months a ship broker made hire payments under a time charter directly to the owner, although the broker had previously dealt with the ship's manager. When the broker received an instruction from the manager to pay hire to a different account, he therefore complied with this request. Shortly afterwards the broker received another message directly from the owner demanding that the hire be paid to him. When the broker informed the owner that the hire had been remitted in accordance with the manager's instructions, the owner replied that the ship was no longer managed by the same manager, who had no authority to alter the payment instructions. The broker had therefore become a party to the manager's fraud and faced a claim from the owner for reimbursement of the freight that had been wrongly remitted.
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Forged bank telexes
A ship agent who threatened to detain a ship because the owner had not remitted disbursements, allowed the ship to sail when he received a telex confirmation from a well known UK bank that the disbursements had been remitted. The bank telex was subsequently found to be a forgery. The same owner did the same thing to another ship agent at the next port.
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Bogus crew
An Irish ship agent was asked by a crewing agent to look after the transfer of 8 crew from Dublin to London, where they would join a ship. This unusual request aroused the agent's suspicions and he contacted ITIC. Investigations by the Club revealed that the ship involved had been scrapped five months previously. Furthermore the Club had evidence that the Canadian Immigration authorities had issued a warning circular naming the crewing agent concerned as the culprit in using the same fraudulent crew scam to get illegal immigrants into Canada. The Irish ship agent was both prudent and fortunate; other agents have been left to maintain and repatriate as many as 20 illegal immigrants who have arrived in their country as "crew"for a non existent ship.
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Indemnities which were not
An African ship agent released four containers without production of original bills of lading in exchange for four letters of indemnity apparently counter-signed by a local bank. Subsequent checks with the bank in question revealed that the bank stamp and signature were forged. The ship owner paid the value of the cargo of US$150,000 to the shipper and claimed reimbursement from the agent.
On several occasions in India, ship agents have accepted letters of indemnity, which appeared to be counter-signed by a bank, from consignees in exchange for delivering cargo without bills of lading. When the shipper subsequently asked for copies of the letters of indemnity, it emerged that the banks had not counter-signed them, but had rather signed under the statement "we verify that this is the true signature of the consignee". In one case the value of the cargo was in excess of US$2,000,000.
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Counterfeit batteries
>A UK ship agent inadvertently delivered a container of brand name batteries without taking the original bill of lading in exchange. After two weeks of constant pressure from the ship agent to provide the original bill of lading, the receiver returned the container of batteries to the port, claiming that the batteries were fakes. On the other hand, the shipper in the Far East claimed that he had shipped the genuine article and that the receiver had substituted fakes during the two weeks he had had the container in his custody. Although the Club and its Member suspected that the shipper was lying, this was impossible to prove and the Line and its agent faced a claim from the shipper of US$200,000. There was also a very real danger that the court would give the shipper the benefit of the doubt. However, ITIC's local correspondent obtained evidence that the shipper had recently imported an identical consignment of batteries from a factory in China well known for counterfeiting brand name batteries. Armed with this evidence the claim was settled for the more reasonable amount of US$30,000.
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Fraudulent bills of lading
A Scandinavian ship broker was requested by a ship owner to issue bills of lading for a cargo of new steel coils of Turkish origin which were loaded in Turkey in November 1987. The cargo was in fact rusted straight bars of Bulgarian origin, loaded in Burgas in December 1987. The Italian receivers sued the owner, charterer and the ship broker for US$500,000. The charterer (who was also the seller) subsequently disappeared and the owners went bankrupt. Although there was no evidence of collusion by the ship broker, and he was eventually exonerated, he was left as the sole defendant in a case which took ten years to resolve and cost US$75,000 to defend.
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Forged valuations
A ship broker received a telephone call from his usual contact at a Far Eastern bank, expressing surprise at the high level of values the ship broker had placed on two ships. The broker asked for a copy of the valuations, which appeared to be on the broker's headed paper, but were in fact forgeries. The ship broker had a fully documented system for the issuance of valuations and was able to prove that the documents in question had not originated from his office.
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...and finally
A sale and purchase broker had acted for the Scandinavian sellers of a small cruise ship. An Australian company had signed a Memorandum of Agreement but had failed to pay the deposit or take any other steps to complete the purchase. The MOA was accordingly terminated, and the broker was instructed to find another buyer. Nothing was heard from, or of, the original buyer for several months until it came to the broker's attention that he was advertising tickets for cruises on the ship in a number of newspapers. Enquiries also revealed that travel agents had been sent brochures of these cruises. The broker realised that the cruises could never take place and the Club reported the matter to the Australian police and other authorities. These steps clearly prevented members of the public paying for cruises that would never have taken place.
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Fraud from Within
Members may come under pressure to collude in a fraud, particularly by issuing bills of lading which contain incorrect information, often to comply with the terms of a Letter of Credit. We mean the deliberate misdating, or issuance of "clean" bills of lading for cargo which is known to be damaged, or bills of lading marked "shipped on board" before the goods are loaded, or even issuance in the knowledge that the ship has sailed without the goods. This edition of the Claims Review does not contain examples of such claims for the simple reason that the Club cannot insure the liabilities arising from such actions.
The Club does, however, insure liabilities resulting from fraud by Member's employees for the employees' own benefit, and has paid US$5 million over the past five years. The following are examples of such frauds:
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Fraudulent release of electrical goods
Three containers of electrical goods worth US$380,000 were shipped from the Far East to South Africa, and from there by rail to another African country. The agent at the discharge port released all three containers to the same consignee, who failed to produce any of the original bills of lading. The same import clerk in the agent's office had released all three containers. The police were notified as the import clerk and the receiver had both disappeared. It subsequently emerged that when the import clerk, who was an experienced employee, had been taken on the ship agent had not obtained any references. A check with his previous employer would have revealed a history of dishonesty.
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Smuggling by Member's employee
An employee of 20 years standing used the customs bond of a Belgian ship agent to smuggle consignments of T-shirts of Chinese origin into the European Union. The T-shirts, which had arrived in Belgium from China, were incorrectly declared as having left the EU on ships belonging to the agent's principals. The employee also used his employer's customs bond in connection with cigarettes which had arrived from outside the EU, were transported from Belgium to Spain and on which the duty had allegedly been paid in Spain. The Spanish customs stamps were found to be forgeries. The fraud was discovered by the Belgian customs and both the ship agent and his employee have been held liable for customs duty and fines amounting to over US$1,000,000.[Top]
Theft of freight
During a routine external audit, a South American ship agent discovered that part of the freights collected from shippers on behalf of a principal had not been deposited in the agent's bank account. Subsequent investigations revealed that, over a period of seven months, freight cheques totalling US$180,000 had been deposited in the personal account of one of the ship agent's employees. In addition another employee, who had a good knowledge of the agent's systems, controls and computer system, had colluded in bypassing these controls to conceal the discrepancies. The theft was reported to the police, and criminal proceedings were commenced against the two men. Unfortunately they fled from justice before the criminal trial and have still not been traced. The agent recovered the stolen freights, less his own commission, from the Club.
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Loss Prevention
Fraud, and particularly documentary fraud, is becoming increasingly sophisticated and even with the best systems in the world may not be detected. However, most of ITIC's Members are agents (in one form or another) whose duty is to act with the skill and care which can be expected of someone in their position. If the agent fails to detect a sophisticated fraud, this would not mean that he is automatically liable for the consequences, provided that he can evidence that he has acted with reasonable skill and care. If, however, the agent has failed to take the basic steps which any prudent company could be expected to take, then he would probably be found to have been negligent and thus liable for any losses caused to others.
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FIVE WAYS TO FEND OFF FRAUD
Staff
- give staff proper training.
- give staff adequate remuneration.
- provide sufficient staff - overworked staff are less observant.
- check references for new staff.
- check that qualifications are genuine.
Awareness
- make sure your staff are aware of the potential financial consequences of their failing to spot fraud.
Check unusual requests
- if an unusual request is received (eg for releasing cargo, or remitting freight) check back with the party authorised to make the request or the alleged originator to make sure it is genuine.
- if you are dealing with someone you do not know, make checks and proceed with caution.
Office procedures
- establish systems and controls and enforce them.
- change employees' job/function from time to time - beware of staff who do not take their holiday entitlement fearing that irregularities in behaviour may be revealed.
- institute random checks of files - it may discourage the fraudster from operating.
- supervise staff.
Documentation
- any important document or communication can, and has been previously, forged, faked or altered. Scrutinise each document carefully for small discrepancies which may reveal that it is a forgery.
- check bank signatures (eg. on letters of indemnity) - the high value of cargo, in comparison with the low price of a forged rubber stamp, makes a check with the issuing bank a must when asked to release cargo without original bills of lading.
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Permission to reproduce or distribute this document can be obtained from Charlotte Kirk, ITIC, tel: (0)20 7204 2928, email: ITIC@thomasmiller.com