Different type of Maritime Frauds

One of the most prominent incidents which reverberated in the Maritime industry was the case of the vessel MT SALEM.

One of the most prominent incidents which reverberated in the Maritime industry was the case of the vessel MT SALEM. She sailed from Piraeus on 30th November 1979 bound for Mina Al Ahmadi, Kuwait to load approximately 194,000 MT of light crude for subsequent discharge at Genoa. The vessel along with her cargo was insured with Lloyds of London. She departed Mina Al Ahmadi on 10th December and headed south along the eastern coast of Africa. Her intended voyage was to round the Cape and head north towards her final discharge port.

On 27th of December, under a different name Lemashe, she entered the port of Durban and discharged approximately 170,000 to 180,000 Mt of her cargo. She took sufficient ballast so as to maintain her loaded draft on departing Durban on 2nd January 1980. On 17th January 1980 she was found in a condition of distress off the coast of Senegal once again under the name of Salem. A British tanker by the name of British Trident rescued the crew of the sinking vessel Salem.

Few days after sailing from Mina Al Ahmadi, the charterers had sold the cargo to Shell Group for USD 56 million, a practice which is quite common. What amazed the world and as reported by the rescuing vessel British Trident was that the crew had not only taken all their belongings in suitcases but also had duty free goods along with sandwiches giving indications of a pre-planned exercise. More striking was that a vessel which had an ostensible cargo of nearly 200,000 MT along with bunkers and had gone down as an aftermath of series of explosions and there was barely any trace of oil left on the surface.

On sinking of MT Salem, the Lloyds of London received an insurance claim of nearly USD 54 million. On investigations they found that the cargo had also been sold to a South African company Sasol in Durban for USD 43 million.

Fraud in commerce is as ancient as commerce itself, with examples going back to the Roman world and even before.

The International Maritime Bureau defined maritime fraud as: “An international trade transaction which 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.”

Shipping is a global business, involving many players and different jurisdictions in any single shipment of cargo. A simple and single shipment could involve a bunch of problems associated with pitfalls where the unscrupulous seek to take advantage of those are not prepared. As the players are very often based in multiple jurisdictions, and out of necessity deal with each other at arm’s length and / or through Brokers and Financial Institutions, there is practically NIL opportunity for physical checks.
 
TYPES OF FRAUDS

Fraud reveals itself in different shades and colours. Owing to its international nature, in the Maritime Industry, it is like an umbrella term including different types of frauds. It stretches beyond the legal definitions. The following is an overview of the kinds of fraud that may be experienced, but it is far from being an exhaustive list.

  • DOCUMENTARY FRAUDS
  • BLACKMAIL FRAUDS
  • BUNKERING FRAUDS
  • CYBER FRAUD
  • FAKE JOB OR MLC FRAUDS
  • BARRATRY
  • DOCUMENTARY FRAUDS

These may be further subdivided under Charter Party Frauds, Bills of Ladings frauds & Marine Insurance frauds.

CHARTER PARTY FRAUDS

The inherent International nature of shipping makes it complex. Majority of times the stakeholders are in different parts of the world and have never even met each other. A shipowner may be located for instance in Singapore with the ship registered in Panama and chartered by a person based in Switzerland with the charter party governed by the Laws of England whilst the cargo is carried from Brazil to China. Matters become even more complicated when the charter party permits sub-chartering of the ship and this introduces a sub-charter who might be located in South Africa. Such complications are a perfect recipe for a fraud. In one of the recent incidents a vessel was under a time charter and as per permissions under the charter party was further sub chartered for a voyage. Under the sub charter, it was the charterer who appeared as despondent owner. On collection of freight the charterer immediately disappeared and failed to pay the charter hire to the shipowner. Helpless shipowner whose Master had signed the Bill of Ladings was burdened with discharge of the cargo without having any right of lien on the cargo.

In yet another possible scenario, a shipowner would load cargo, issue Bill of Lading collect freight and then declare himself insolvent. Owner of the cargo is left with disturbed cargo delivery schedules and at times is compelled to approach courts. Courts might in turn auction the vessel and the cargo to a new owner who has no liability of delivering the cargo.

In order to ensure reasonable security against such frauds, it is always advisable to check the antecedents of the opposite party. Also Law firms must be approached / consulted to check upon the backgrounds of contracting partners.
 
BILLS OF LADINGS FRAUDS

As recent as 2018, in a shipment of sheepskins, the carrier issued original Bills of Ladings for the cargo loaded on his ship. The freight forwarder in turn also issued “House Bills” which had the appearance of original by mentioning “To the order…” on the House Bill and stamping “Original” on them. By issuing house bills the shipper infact introduced two sets of “Document of Title” in the market for the same goods. Additionally, the shippers lifted credit against the House Bills issued by the Freight Forwarders. When the shipper defaulted in his payments the finance company was left to claim against the house bills but by then it was too late as the cargo had already been discharged against the original Bills of ladings (Australian Capital Financial Management v Freight Solutions (Vic) Pty Ltd).

Another practice which is prevalent in the world is creating fake Bills of Ladings. English courts were recently faced with a case where the cargo was delivered against a fraudulent bill of ladings. In Motis Exports Ltd. v Dampskibsselskabet AF 1912 Aktieselskab and Aktieselskabet Dampskipsselskabet Svendborg the facts of the case were that the plaintiffs had shipped different consignments on Maersk Line ships from China/Hongkong to Cotonou/Abidjan. Goods were carried under Maersk Line Bills of Ladings which consigned the goods by a remark “To Order” and additionally contained a clause:

"5. CARRIER’S RESPONSIBILITY
….
3. Carriage to and from Countries other than the USA
….
(b) where the carriage called for commences at the port of loading and/or finishes at the port of discharge, the Carrier shall have no liability whatsoever for any loss or damage to the goods while in its actual or constructive possession before loading or after discharge over ship’s rail or if applicable, on the ship’s ramp, however caused."
 
Purporting to be acting on behalf of the notifying party, certain parties approached carriers’ agents and presented fake Bills of Ladings. Carriers agents fooled by the fake bills of ladings issued delivery orders for the goods to be released.

The plaintiffs in their plaint claimed wrongful delivery whereas the defendant stated that as per the clause in Bill of Ladings they are not liable for the goods once they cross the ships rail.

Faced with this situation courts ruled that the carrier, in this case, cannot hide under the clause, as the paramount duty of the carrier is to deliver the goods to the right consignee. The Court held further that only if the Bill of Lading had a term implying defence from delivery against fraudulent Bill of Ladings could the owner escape liability.
 
All the players including Carriers, exporters, importers involved in international trade are attempting to solve this problem of fraud or unauthorised amendment of bills of lading by introducing digital platforms. A system called Bills of Ladings Electronic Registration Organisation (BOLERO) has been introduced. It facilitates use of E-Bills as part of a Blockchain and is available for viewing to everyone in the chain thus eliminating possible frauds in paper bills of ladings.
 
MARINE INSURANCE FRAUDS
  
Termed infamously as the “MOST SPECTACULAR FRAUD” was the case of the vessel BRILLANTE VIRTUOSO. This ship was carrying fuel oil cargo from Ukraine to China and was drifting on 5th July 2011 off the coast of Yemen to embark a security team prior transiting the Gulf of Aden in the times when the Somali piracy was at its peak. A small boat with seven persons carrying Kalashnikovs approached the vessel and the Captain thinking that they were the security team permitted them to board. On boarding they turned upon the Master and crew, and apparently hijacked the vessel.

The Master was taken to the bridge and the chief engineer to the engine control room. Rest of the crew were rounded up in the day room. While the VDR audio recording provided evidence that the armed men told the Master to sail towards Somalia, in fact the ship headed towards Djibouti.

Couple of hours later the engine stopped and a fire broke out in the engine room. It was claimed that the fire had started because of detonation of an explosive device used by the pirates.The pirates subsequently were believed to have fled the ship while the Master along with his crew had abandoned the vessel. Master and crew were rescued by a passing vessel. Salvors known as Poseidon promptly arrived on the scene which in fact drew a remark from the Judge that “their response was rather impressively rapid”.The vessel which was extensively damaged had to be scrapped later.

Vessel’s owner, Suez Fortune Investments Limited, and mortgagee bank, Piraeus Bank AE, brought a claim on the ship’s war risks policy for a constructive total loss. The insured value was $55m plus $22m for disbursements and increased value, making a total claim of $77m.

After a series of claims and counterclaims between owners and insurance companies and a rather prolonged trial the court declared that the whole incident was pre-planned in order to claim a large insurance. Owners claim was rejected and incident turned out to be one of the most prominent examples of Maritime Fraud.

Though not a fraud , another very famous case, quoted even today was that of The Star Sea. In this case a number of vessels were covered under one time insurance policy. The vessel caught fire and was declared a constructive total loss. The first defence of the insurers was that the vessel was unseaworthy. When this defence failed, the insurers used a second line by claiming a breach of the utmost good faith. But that too did not work.

In the House of Lords, it was held:

The duty of utmost good faith does not continue or even if it does, after court proceedings have been started, the duty is superseded by the court’s procedural rules. The House of Lords said that if there are documents pre-existing the loss which are relevant and were suppressed or deliberately destroyed, then the judge would strike out a claim for failure to produce relevant documents. The duty of the utmost good faith does not end but it is superseded by the court’s procedural rules.

Marine Insurance, just like any other, is a contract and hence must be very carefully drafted with minutest legal details.

BUNKERING FRAUDS

Industry is fraught with several bunkering frauds. They can be in various forms like Manipulating the Fuel Density & Weight Relationship / Manipulating the Fuel Temperature & Volume Relationship / The Cappuccino Bunkers / Fuel Delivered with High Water Content / Mixing Slops into Bunkers / Tampering with Gauging Equipment. Industry has been constantly attempting to combat these frauds as bunkers constitute a major chunk of shipowner’s expenses. Various P & I clubs have repeatedly alerted their members against three most probable bunker frauds namely

A) quantity consumption by the vessel
B) quality of deliveries
C) quantity of deliveries

Clubs through various circulars also advise their members that a probable way out of this problem is to hire third party bunker surveyors and also to constantly exhort their ships crew to be more alert during bunkering operations.

CYBER FRAUDS

Like any other industry shipping has had its fair share of cyber frauds. Given the increased digitalisation in shipping, the industry has now started taking this threat seriously. Has It started also embarked on training its personnel both ashore and on ship. It has now been made part of the ships ISM manuals with contents drawn from guidelines given by IMO and various other International shipping bodies.

Some of the well-known shipping cyber frauds was attack on Maersk offices by the “Non Petya” ransomware which caused a loss of nearly 300 million dollars to the company.

A general belief in shipping circles is that cyber attacks and subsequent losses are more of financial nature. This is incorrect as in one of the very recent cases , an oil tanker ‘ A ’ arrived in Singapore on 26 June 2020 and reported her position to VTIS East at 1400 hrs. But, the VTIS failed to locate the ship on AIS. They served a notice to Master not to sail without the AIS repair. Owners immediately arranged a technician who boarded the vessel at anchorage. He checked and confirmed with the VTIS that all are in order. However, the AIS failure re-occurred on 28th June during departure and a flag state dispensation had to be taken . 
 
A new AIS was installed on arrival at next call Singapore on 4th July. The technician verified with VTIS, and AIS was found satisfactory. On 5th July, the berthing Pilot reported the same issue again, and the vessel’s sailing was postponed to facilitate service engineer’s boarding at anchorage. 
 
Owners again arranged service engineers to check the AIS. This time the attending technicians found that three other vessels were using “A’s” MMSI number. This caused interference and intermittent failure of AIS transmission from “A”.  Owners informed the MPA Singapore about this on 5th July. It was also reported to IFC Singapore, IMB Kuala Lumpur, Singapore Marine Police and Intertanko. 

Later the P & I club of the owners of “A” informed that one of the ship which was using the same MMSI number was involved in illegal drug trafficking. This was not only causing navigational risks in busy traffic areas, but also the reputation of the Owners and Managers of “A” for the misleading identity.

Hence Cyber frauds are as serious to shipping industry as to any other industry.

Some Examples of Cyber risks / frauds and their consequences to the shipping industry are

a) Duplicate Bill of Ladings
b) Changing Cargo Manifests: by doing so remotely, cyber criminals are able to hide substances in containers or disguise them as something else. Cyber-attacks on the port of Antwerp are prime examples of this.

Consequence of the above can not only result in financial loss to the organisation but also loss of reputation.
 
Some other frauds which the industry faces are “Fake Jobs fraud”, “Barratry”, “Blackmail frauds” etc. In conclusion, given the international exposure and a constant threat of both financial and reputational loss, it is advisable for any shipping company to be always legally prepared. A good legal advise in time is better than an expensive advice later.