Not plain sailing – maritime risk

John Baker, anti-fraud expert at Moore Stephens discusses the risks of fraud when shipping goods by sea. Below is the full article which appeared in Fraud Intelligence.

As a global industry, shipping is accustomed to operating in parts of the world that have recognisable fraud, bribery and piracy risks and, in some cases, unstable government. The question for shipping companies is how to identify and mitigate such risks in today’s highly competitive market.

An international trade transaction involves multiple parties – buyers, sellers, shipowners, charterers, ships’ masters and crew, insurers, bankers, brokers and agents. According to the International Maritime Bureau, "Maritime fraud occurs if one of these parties succeeds, unjustly or illegally in obtaining money or goods from another party to whom, on the face of it, he has a specific trade, transport and financial obligation".

Put simply, fraud is an act of deception intended for personal gain or to cause a loss to another party. In addition to the parties identified above, one also has to consider the opportunity which exists for cargo handlers (loading and unloading), government officials, security staff, inspectors, surveyors, hold cleaners and others to commit fraud.

The supply chain can be very long, and the multitude of fraud types and areas open to bribery or corruption include, but are not limited to:

  • misrepresentation in Bills of Lading;

  • agency/sub-contractor fraud;

  • import/export port and border control;

  • licensing/permits;

  • insurance fraud (hull/cargo/P&I);

  • quality/quantity;

  • deviation fraud;

  • fuel bunkering/pumping/expansion.


In the majority of cases, documentation plays a key role in either the committing or controlling of fraud. Documents are often genuine but suffer subsequent fraudulent action by a third party in respect of goods, or are fraudulent from the outset in respect of inferior quality, non-existent goods or short supply. It can be difficult to check the provenance of any such documents, primarily signatures. It is especially important to be able to make as many checks as possible.

As much as information technology is used to perpetrate fraud, it is also an extremely useful means by which to corroborate hard-copy documents with emails, scans, telephone calls, or video-conferencing. It is worth taking a moment to consider how you check your documents and what extra controls and checks you could enforce to future-proof your current systems.

Bill of Lading fraud involves the forgery of Bills of Lading for non-existent goods, or differences in the quantity or quality of the goods. There can be fraud by the seller or buyer against the shipowner or the carrier.

The Bill of Lading is a document of title and has three main functions:

  • it acts as a receipt for the cargo from the carrier to notify the buyer that the cargo is being shipped;

  • it details the quality and quantity of cargo;

  • it records any defects in the marking or packaging of the cargo.


If the details do not match, the Bill is unclean, which results in a breach caused by either the seller or the carrier.

Piracy

As a result of the U.S. and other nations committing naval warships and aerial drones to the shipping lanes around the Gulf of Aden, maritime piracy has recently migrated to the Gulf of Guinea. But the threat posed to shipping remains a very real one.

There are numerous variations on the definition of piracy, the most generic being ‘an illegal act of violence or robbery on the high seas committed by private individuals for personal gain.’ A pirate is hostis humanis generis, an enemy to all of mankind; accordingly, any state can capture and try a pirate, usually under criminal law. This is confirmed in Article 100 of UNCLOS, which stipulates, ‘All states shall co-operate to the fullest possible extent in the repression of piracy on the high seas or in any other place outside the jurisdiction of any other state.’

It is claimed that the international law definition of piracy is far too narrow for commercial law. It is geared towards criminal international law by defining piracy in a manner which allows states to try those suspected of piracy in their jurisdiction.

The basis of piracy claims will be weighted very heavily on the carrier discharging the burden of proof; carriers must prove that none of their actions contributed in any way to the attack. If any contributing actions are found, then the carrier will be personally liable for any damage. This means that the owner of the cargo will have a chance to claim compensation if the carrier is at fault.

If the charter-party includes a deviation clause, and the deviation contributes to the piratical attack, then the carrier can still be exempt from liability. Conversely, BIMCO’s Piracy Clause for Consecutive Charter Parties permits owners to deviate if need be to protect the cargo, and any sums incurred will be shared equitably amongst the parties.

Bribery

After the enactment of the Bribery Act 2010 in the UK, a number of generally accepted practices within the shipping industry are now classified as bribes, irrespective of where they take place. Although the shipping industry is likely to be familiar with anti-corruption and bribery laws in different global jurisdictions, the Bribery Act 2010 is generally recognised as being more stringent in its requirements than legislation elsewhere, including, for example, the United States.

Interaction with industry and government officials is part of everyday life in shipping. The industry negotiates on a regular - indeed daily - basis with the likes of port and customs officials, for example, over costs, tariffs, licences, and a variety of other issues.

Companies and individuals engaged in the shipping industry traditionally use agents, or operate via subsidiary organisations or as part of joint-ventures. Their activities often spill over into the construction, storage and energy industries, and even into national and international defence projects.

All these activities carry a comparatively high risk of exposure to fraudulent practices under the Bribery Act 2010. They can all involve undocumented payments of some kind which, however much a part of everyday life they have become in the industry, are liable to fresh interpretation under the Act.

The Serious Fraud Office has marked shipping as a high-risk industry for bribes, and the Bribery Act gives no statutory defences (unlike the FCPA), save for that of having ‘adequate procedures’ in place. Failure to prevent bribery can be attributed to a corporate entity, whether or not incorporated in the UK, which carries on business or part of a business in the UK, even if the act of bribery was committed outside the UK, and even if the UK-based part of the business was not in any way involved in the bribery.

The Bribery Act 2010 does not provide a definition of adequate procedures which might qualify for exemption from prosecution. Thus shipping businesses must ensure that their procedures are risk-based and proportionate, demonstrating a standard of proof based upon the balance of probabilities.

Why does it happen?

Apart from the obvious risks that manifest themselves through the complexity of the transactions and the multiple parties involved, there are many other factors ranging from the distance from the goods, other parties, unclear contracts, lack of due diligence, not enough checking, too much trust, not enough prevention, deterrence, detection or sharing of intelligence, through to not having or making available enough time and money to secure the process. Add the differing cultures and the indifference of some of the people in the chain and combine the size of the prize against the level of risk, and this mix makes the maritime sector a honeypot for fraudsters.

If only it was just fraud. Theft by buyers, sellers and anyone in between; people-trafficking; drug and weapon smuggling; piracy; transport of counterfeit goods; terrorism and sabotage; all these risks, and more, abound on the seas.

What can you do (now…)?

To ensure that your organisation is robust against fraud, piracy and bribery threats, you can take some simple steps including:

  • undertaking due diligence. Knowing who you do business with up and down the supply chain is vitally important; even more so as it is one of the ‘adequate procedures’ that needs to be in place to mitigate a UK Bribery Act s.7 offence of ‘failing to prevent bribery’;

  • sharing best practice, codes of conduct and imposing your standards on your suppliers, contractors, agents. Ensuring consistency throughout your chain gives assurance as to the quality of the service you receive. It is worth getting your contractors and suppliers to agree to adhere to your anti-bribery policy and make your whistleblowing procedures available to them;

  • ensuring robust security of buildings, compounds and cargo;

  • checking information technology is up-to-date with the latest threats and security solutions;

  • providing training to your staff. Equipping your staff with the knowledge of what to look out for and how to report suspicions, plus the appreciation of how important controls are as the foundation of a robust anti-fraud, anti-piracy and anti-bribery culture;

  • safeguarding staff members in whistleblowing procedural policies;

  • being vigilant in checking documents. Simply checking the provenance of documentation through the use of known contacts can be a useful tool for determining validity;

  • monitoring transactions through the various stages to look for unusual patterns or anomalies. Under the Bribery Act’s ‘adequate procedure’ requirement, looking for the unusual and exception reporting is vital;

  • creating reward and bonus structures which do not encourage bribery;

  • understanding the liability clauses of Bills of Lading and charter party contracts.


Ask yourself these ten questions:

  1. When did you last undertake a fraud and bribery risk assessment (strategic and operational)?

  2. Do you need assistance in undertaking investigations (criminal, civil, disciplinary, regulatory) or require training in techniques?

  3. Is your counter-fraud, piracy and bribery strategy properly designed, up-to-date, and working. How often are your key controls evaluated for relevance and effectiveness?

  4. How effective are your whistleblowing arrangements?

  5. Has your organisation recently undergone any major changes in personnel, structures or systems? If so, have the fraud risks and controls been revised?

  6. What is your anti-fraud, anti-piracy, and anti-bribery culture like? What is the quality of the fraud awareness training provided to your staff?

  7. Would your staff know what to look for and how to respond to suspicions of fraud, piracy and bribery?

  8. How effective are your pre-employment and due diligence screening systems?

  9. How does your organisation respond to allegations of fraud and bribery? Could this be improved?

  10. Does your organisation capture intelligence and does it have a systematic means of learning from past fraud incidents (whether or not they occurred in your organisation)?


If you have got your policies in order, then remember to:

  • contract with well-established shipping companies and other reliable transportation companies;

  • insist on chartering only through brokers when chartered vessels are used;

  • scrutinise terms and conditions and general terms of business, focusing on which party bears the cost of insurance;

  • insist on independent trans-shipment inspectors.


As Capt. Jack Sparrow (of ‘Pirates of the Caribbean’ fame) said, “It’s not the problem that’s the problem, it’s your attitude to the problem that’s the problem…” Changing the mindset of your organisation - and that of those with whom you do business - as to how fraud, bribery and piracy are tackled is a key step in being able to
reduce losses.

This article appeared in Fraud Intelligence, 3 June 2014.


Contacts

John Baker

Related links

Fraud & bribery
Shipping