Some practical advice to maritime interest at increasing risk of being defrauded
In recent years, the shipping industry and wider 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 ingenious in their design and execution of schemes, including the use of technology, such as computer hacking, but sometimes tried and tested "old school" methods, such as document fraud, work just as well.
The International Maritime Bureau defines maritime fraud thus:
"An international trade transaction involves several parties - buyer, seller, shipowner, charterer, ship's master or crew, insurer, banker, broker or agent. Maritime fraud occurs when 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 undertaken specific trade, transport and financial obligations."
Maritime fraud is becoming more common for three reasons. First, criminals are increasingly turning to new methods such as computer hacking. Second, ports are adopting new technologies that in a worst-case scenario can enable new types of fraud (such as automatised container operations). Finally, as shipowners are under pressure to win new business, many have disregarded due diligence when dealing with new and unknown business partners.
As the greater reliance both on IT and electronic trading platforms increases, so does the need to stay ahead of the game played by the fraudsters. There is a cost of course to greater security, both in terms of investing in better technology and processes, but also in potential business opportunities. To achieve the right commercial balance it requires experience and skill, as well as knowledge of what scams and schemes are out there.
Being prepared
Given that shipping is a global business, with many players and jurisdictions involved in any single shipment of cargo, even on a simple A to B voyage, there are myriad potential pitfalls where the unscrupulous seek to take advantage of the unprepared. As parties are often based in multiple jurisdictions, and necessarily deal with each other at arm's length and/or through brokers and financial institutions, there may be little or no opportunity to make physical checks. Everything comes down to reliance on documents, most importantly the bill of lading, as a key facilitator to fast trade with a low transaction cost. That is also the inherent weakness: the trust in a key document that can be adulterated and issued in multiple originals, which is the root of many of the frauds being perpetrated today. It may be minor cheating on an invoice or a multi-million dollar scam, but being prepared is the key to avoiding both.
Loss prevention
The key to preventing becoming a victim of fraud is vigilance. Being alive to the risks, taking due care to prepare and then ensuring diligent follow up, will mitigate against the worst and helps to ensure that business reputations and profits are protected. The following are a number of general guidelines for preparing an organisation and its employees from a big picture point of view, as well as giving guidance on specific transactional red flags which should cause a company to pause for further investigation and clarication before proceeding with a transaction. There is also advice on what to do when a fraudulent activity is suspected to have taken place or may still be live and ongoing.
The big picture
First and foremost is the need to educate the entire company about the risk of fraud. This must be an initiative that comes with clear support and guidance from senior management. Well-prepared companies are at much lower risk of being victims of fraud, and are able effectively to protect both their reputation and profits. External complacency is the fraudster's greatest ally when looking for a new target to make a play on, but given the results from Kroll's most recent Global Fraud Report, as well as recent industry news, the risk of insiders being involved must be treated with equal seriousness.
The cost of being a victim may include direct financial loss, reputational loss, lost business opportunities, and/or investment of time and resources. Persistent and enduring vigilance are required, because the fraudsters will seek to come up with ever new methods and plays to achieve their criminal designs.
Steps to take to prevent fraud include:
- Educate the company from top to bottom about the risks, the company's policy and expectations
- Ensure there is visible and unequivocal management support for a pro-active stance
- Have a clear set of internal mandatory rules and guidelines for staff to follow, that should cover:
− how staff should assess, monitor and handle the risk of fraud as part of their duties
− a clear code of conduct for staff to follow to avoid the company being at risk of straying into possible grey zones
− safe custody of sensitive information
− staff engaging in transactional or accounting activities need further specic training - A designated company officer should:
− monitor the education process
− check staff compliance with the guidelines
− identify areas of potential risk and develop appropriate strategies and guidelines to address these
− conduct internal audits to ward against an insider fraud - Have clear guidelines as to what is considered to be suspicious and ensure simple and quick reporting procedures
- Put an anonymous reporting mechanism in place so that employees, suppliers and customers can - if they wish - make a report in confidence
- Have a clear procedure on how to deal with a suspected fraud situation
- Determine in advance what possible resources may be needed in case a fraud situation arises
- Have clear guidelines on how to dispose of old and/or cancelled documentation: sensitive documents should never just be thrown away, but may need to be shredded or destroyed
- Digital copies of documents and/or digital databases need to be kept secure
- A strong IT policy is needed to cover:
− internal communication
− external communication
− custody of digital records and databases
− on-line security policies - Ensure suppliers and vendors are thoroughly checked and confirmed. These checks should be repeated periodically
- Conduct due diligence for every new counterparty
- Employ robust third party screening both for internal audits and counterparty checks
- Have an unequivocal company culture, driven from the top, against fraud, corruption, bribery and any other illegal activities
Red flags (checklists)
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 of 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
What to do if fraud is suspected
This can prove to be a worrying experience as suddenly the risk emerges of a significant financial and/or reputational loss. A proactive and focused approach will help to avoid a problem turning into a crisis.
Do:
- Respond fast
- Form a response team consisting of senior staff
- Consider retaining outside expertise, especially if a significant or high value situation is at hand
- Ensure discretion and confidentiality
- Deploy the company's procedure for an investigation
- Secure evidence
- Have a clear communication plan
- Retain legal counsel if appropriate
- Rut a clear plan in to effect, which has a defined goal
Do not:
- Lose, tamper with or destroy evidence
- Make any announcements or communicate with third parties before ascertaining facts and developing a response plan
- Start internal or external discussions before it is clear who can be trusted
- Comment in the media, including social media
- Jump to conclusions. Instead focus on known and verified facts without withholding information
Maritime fraud will always be a threat and, as with all marine perils, the unprepared and the unvigilant will be hardest hit. There is no failsafe guarantee of protection from fraud, but a close partnership with a first-class insurer combined with realistic adoption of some of the actions discussed here, will undoubtedly reduce the risk. Losses from fraud are not often covered by insurance, so protection and prevention are essential.
Article previously published in Maritime Risk International, April 2014