Prepare to face ever-increasing fraud risk

“During the recent years, the shipping industry and maritime commerce has seen a sharp increase in not only the number of fraud cases, but also the variety of fraud. Fraudsters are becoming more and more ingenious in their design and execution of schemes, including the use of modern technology, such as computer hacking, but sometimes tried and tested ‘old school’ methods, such as document fraud, work just as well.”

Skuld believes maritime fraud is becoming more common for a number of reasons. Firstly, criminals are increasingly turning to new methods such as computer hacking. Secondly, ports are adopting new technologies that can enable new types of fraud, for example automated operations. And thirdly, with shipowners under extreme pressure to secure new business, there is not always the same emphasis on due diligence as there was in the past.

As reliance on IT and electronic trading platforms intensifies there are ever-increasing openings for fraudsters to take advantage of shipping systems. In a bid to reduce exposure to fraud, Skuld has compiled a list of potential frauds with details of how to avoid being caught out. With bunkers one of the most costly items of operational expenditure today, this is an area that attracts fraudulent activities. Here, quality and quantity are the key areas to watch.

In one case study, Skuld gives the example of a chief engineer on board a tanker that was sentenced to a fine and imprisonment after being found guilty of colluding with a bunker supplier to steal over 100 tons of fuel oil which was sold on to another vessel. The chief engineer had been seduced with a bribe, which was a small percentage of the value of the fuel, from the supplier. The fraud was detected as the concerned authorities were aware of the general risk and had been monitoring possible suspicious activity which ultimately led to the conspirators being caught.

“Careful voyage monitoring as well as on and off hire surveys, and bunker supply surveys are important in mitigating this risk. Ensuring rigorous staff training and company mandated codes of conduct are also important in this regard,” says Skuld.

Goods gamble

Cargo and documentary frauds can come in many different forms, including 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.Here, the insurer gives the example of a fake cargo sale where the fraudsters knew of the exact trading pattern of a ship and were able to give credible details of her route and alleged cargo, so as to make a 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 favour as part of the transaction.”

Chartering frauds, meanwhile, usually involve unknown or numerous intermediaries and an “overly trusting approach” to representations made by or on behalf of first time counterparties.

Port related frauds could see fraudsters seeking to use a ship’s call to a port as an opportunity to obtain payment for services and goods that were never provided. One example here could see a fraudster present themselves as a local shipping agency that undertook work on behalf of the ship and the Master. Armed with fake invoices – often with the faked signature of the vessel’s Master – they will try to obtain payment for typically modest sums for routine types of supplies and services after the ship has left. Billing departments in shipping companies should be alert to this sort of fraud and carefully check any alleged service or provision of stores against the record of the operation department for the ship’s call at a particular port.

Old and new

Blackmail frauds are another area of concern. While not a new crime, modern technology has made it extremely simple to perpetrate, yet difficult to track down the guilty parties. Cyber fraud, on the other hand, is a newer form that is a rapidly developing area of risk.

“The key to successful fraud is having enough convincing information and knowledge to make the target believe that a transaction is genuine. Information theft is therefore a key element in fraud, and cyber-attacks can facilitate the wholesale theft of vast amounts of confidential information.”

Some recent examples of cyber fraud include a well reported attempt by drug traffickers to exploit – with IT – the automation of container terminals to facilitate their criminal activities; the risk of vessel AIS data being corrupted or altered to facilitate fraud related to a vessel’s movement or trade, or to hide her after a successful hijacking; intercepting and monitoring of communications to and from shipping agents to exploit information and perpetrate a whole range of frauds and other crimes from cargo related matters to smuggling activities; and a recent attempt by hackers to divert freight and other payments to a shipping company by circulating genuine looking invoices seeking to channel third party payments to new banking details.

“Every company, big or small, needs to monitor its IT risk profile and ensure that it takes necessary steps to protect itself from cyber attacks, especially those opportunistic attacks that seek to exploit unprotected systems,” says Skuld.

Fake job frauds and information phishing have also been more prevalent of late and companies should ensure that proper procedures are in place to validate and verify that the information being supplied is correct.

Whichever type of fraud is detected, the insurer advises that “a proactive and focused approach will help to avoid a problem turning into a crisis”. Companies should respond fast if fraud is suspected and form a response team consisting of senior staff. Evidence should be secured and there should be a clear communication plan in place. It may even prove fruitful to retain outside expertise on fraud.

However, companies should avoid making any announcements or communication to third parties before the facts are fully ascertained and a response plan is developed. Additionally, internal or external discussions should not be started before it is clear who can be trusted. And perhaps it should go without saying, but comments to the media or social media should not be made.

Red flags checklist

Counterparty Issues

• Identities of unknown or new brokers and principals could not be verified independently
• Supposedly separate entities share postal addresses and/or there are other contact detail inconsistencies
• Counterparty or intermediary’s activities are being undertaken away from the place/jurisdiction where their registered address places them
• Excessive pressure or aggressive behaviour in pushing for a deal combined with a willingness to overlook or waive “discrepancies”
• Avoidance to questions requiring clear answers

Documentary Issues

• The proposed trade and the proposed shipping and finance documents are inconsistent
• Incomplete cargo documents or information thereon is inconsistent with the usual terms of the trade
• Documents with alterations outside of normal trade practice
• Post- or ante-dated cargo documents
• Documents contain errors or otherwise have suspect validity

Transaction Issues

• The proposed transaction is highly undervalued or provides for an unusual profit margin
• The trade is unusual in terms of its nature or geography
• Payment is to be made/received in cash
• Numerous intermediaries are involved, more than usual in any event
• Requests for unexplained payments
• Overly complex transaction(s)
• Routing of funds via third parties or countries
• Unexplained changes to transaction details

Click here to download Skuld’s Loss Prevention Article on Fraud in the Maritime Industry