Bills of Lading and Trade Finance Fraud

IMIF BUFFET LUNCHEON

Date: Wednesday 7th May 2014

Venue: The Baltic Exchange, 38 St Mary Axe, London EC3

Host: Yannis Calogeras, UK Marine Chief Executive, Bureau Veritas UK & Ireland

Speaker: Pottengal Mukundan, Director, ICC-Commercial Crime Services

Subject: “Bills of lading and trade finance fraud”

Report by James Brewer

7th-may-2014-bills-of-lading-and-trade-finance-fraudSmuggling, fraud, trading in illegal arms, money laundering, capital flight, counterfeiting, sanctions busting, carrying illicit drugs… unwitting involvement in one or more of this long list of dangers threatens punishment for the innocent shipowner.

These are among the cases handled by the London-based Commercial Crime Services section of the International Chamber of Commerce, which is headquartered in Paris.

Despite supposedly greater due diligence in key parts of the trade chain, the rewards have become ever more tempting for large-scale swindlers, who employ many tricks based on falsified bills of lading.

“There is no document which cannot be forged with ease – such is the technology available,” Mr  Mukundan, director of the ICC division, told the IMIF gathering on May 7. Fraud affects everyone in the shipping and trade chain, he stressed.

“When it does happen,” said Mr Mukundan, “the victims can face very severe consequences which can cause some companies to go down completely, causing a problem for all their creditors and trading partners.”

The IMB works with banks, buyers, sellers and shipping companies on specific cases, and on detecting the patterns and long-term trends in commercial crime.

One of the most serious and costly breaches of trade norms is gaining access to trade finance by means of false shipping documents.

The trade finance system is wide open to manipulation, Mr Mukundan told the meeting, and enables the transfer of large amounts of money from one part of the world to another with reliance on a documentary trail. In the resulting shipment of goods, it is often difficult to know what is inside a particular container, and that is one of the big weaknesses of the system. No-one knows what is inside except the people who have stuffed the box in a warehouse far from the port and from the prying eyes of conscientious officials.

Sometimes goods for shipment were mis-described by the shipper in order to save a few thousand dollars in freight, but the consequences of that for the shipowner and the vessel could be immense. Cargoes were given innocuous names, and the shipowner had no idea what was going on board.

One problem of note was the disposal of contaminated waste, and there were unscrupulous people who believe that deploying shipping containers are a great way to get rid of such waste which would be very expensive to process in any major economy.

Mr Mukundan detailed an instance where 89 containers were sent to Brazil with contents described in general terms as waste. What they really contained was untreated hospital waste –Customs was furious, and fined the shipowner a substantial sum, on top of which he had to pay for the containers to be taken back to the port of origin in Europe to be disposed of safely there.

Used tyres – a messy cargo – had been sent to China and other destinations. Port authorities and the shipping company had been left to deal with it because the cargo owner and the consignee had long disappeared before the shipment was opened.

With counterfeiting rife, there is a growing feeling among major brand owners that the transport chain is part of the problem, resulting in discussions in various quarters about the responsibilities of the shipowner, which may potentially result in  “another burden for the poor shipowner to meet,” said Mr Mukundan.

He devoted a considerable part of his presentation to illustrating how genuine-looking bills of lading using respectable names in the maritime industry were used by fraudsters to give credibility to their schemes, and to describing how bills of lading are monitored.

People have been spoofing websites of carriers to the extent that a buyer is confident that the payment they are making is for goods heading towards their port.

Superficial checks will not identify that a document aimed at securing trade finance is false. Even obvious give-aways could be missed: in one example, the name of the carrier was spelled wrongly, but people checking the document did not pick that up.

In another fraudulent bill, container numbers were listed that were false – none of those containers existed. Even more outrageously, some crooks would add a few zeroes so that the alleged value of the shipment increased vastly.  Under this ‘multiplier effect,’ one cargo was said to be worth $675,000 when the actual value was 100 times less – at $6,000.

Mr Mukundan’s department was called on to make checks in relation to what was said to be a cargo of urea. The carrying vessel turned out to be a tug – it is obviously not possible for such a vessel  to carry this type of cargo. Strict verification is the way responsible banks deal with the risks. Someone else based a fraud on a supposed cargo of 149,000 tonnes of coal – but the cargo was described as being loaded in a container.

Metal scrap in this context is a high risk commodity at the moment. Chinese buyers agreed the purchase price for a consignment of brass scrap and waited for it to arrive. When they went to the receiver’s warehouse what they got was “brass slag, useless for their purpose.”

The losses can fall entirely on the buyer, and in a complex case a big international oil company was the victim. For many smaller traders caught by such a scam, their profits could be wiped out for the next two or three years and could place the company in deep financial difficulty.

Often, the victims look to the cargo insurance policy to recover such losses. Under the policy  terms however, if the  goods do not exist the policy does not come into effect. Therefore in such cases the buyer has no recourse to compensation. The fraudulent seller would normally have long disappeared.

Mr Mukundan talked of a fraudster whose modus operandi was to trick businesses out of relatively small sums of $100,000 to $120,000. Firms that were victims had to weigh up whether it made economic sense for them to pay for investigators and lawyers to prepare a case to present to the courts, and usually reasoned: is it really worth our while to spend say $60,000 to $80,000 in recovery proceedings without a guarantee of success? The crook was right: most of his victims simply gave up. He enjoyed the proceeds of low margin, high volume crime: millions of dollars a year, from a large number of frauds, without being pursued. Eventually he was arrested in London after one of his victims followed him to a hotel and informed the police. He was found guilty and sentenced to four years in prison, although released after one year. On his return to East Africa he resumed operations with a vengeance and still operates today.

One of the most spectacular cases of recent times involved a company based in Sharjah, with the business purporting to be the import of ingots into Jebel Ali. There were 30 to 40 buyers and sellers, 20 non-vessel owning common carriers who were issuing bills of lading. Lead and tin ingots were being traded around the world, mis-described in terms of increasing metal value. The business went on for many years before it was detected. Those behind it had found a way to convert the trade finance system into a money-making scam. When the fraud eventually emerged the losses faced  were around  $400m. The CCS acted for all the banks which had been innocently financing spurious cargo.

In a separate series of recent steel frauds, criminals were getting money once from the bank and once from the owner of the cargo.

Fraudsters had  ‘piggybacked’ on genuine trades, taking information about a legitimate trade and from that, preparing documents to match what they learned.

Mr Mukundan warned also about loans provided by non-banking institutions,  dressed up as trade finance transactions. Some of these dodgy deals were described, among other terms as ”structured trade letters of credit”. There were echoes in these transactions, he said, of “the collateralised debt obligations and other debt instruments of 2007-08 which led to the financial crash, transactions which have no intrinsic value.” Banks and others were now more aware of this.

Mr Mukundan reiterated: “All documents in the trade finance bundle can be forged, and forged with ease. Whilst the vast majority of trade transactions were genuine, this vulnerability will be exploited by those trying to manipulate the system.”

During question period, Mr Mukundan said that the greatest quality of successful fraudsters was their ability to persuade their victims that the deal was genuine.

Asked about the pressure on the shipping industry to switch to electronic bills of lading, Mr Mukundan said: “It is not the system which commits frauds, it is people, and that will not change with electronic systems. The nature of the fraud will change. It could well have far greater consequences than the paper frauds we see today.”

He referred to the trend for banks to outsource some work to centres where people checking the documents were not familiar with the client’s business and might therefore fail to exercise the intuition that experienced document checkers close to the clients would have in detecting fraudulent documentation .

IMIF chairman Jim Davis sought to weigh up the implications of Mr Mukundan’s wide-ranging survey. Mr Davis said of ways of dealing with the problem: “It does imply a mass of bureaucracy; and you are indicating it should be taken to a whole new level of verification. Is that a bit worrying for the selling process?”

Mr Mukundan replied that this was not necessarily the case if done properly. “The CCS uses its extensive network of contacts which enables timely and relevant information to be provided to traders and banks.”

He said that the UCP (Uniform Customs and Practice for Documentary Credits, a set of rules written  by the ICC )is specific in that  the banks are not liable for fraudulent documents. The banks provide a system to facilitate payments for internationally traded cargoes. They are not intended to act as a guarantor of good practice by sellers or buyers.

The OECD Financial Action Task Force had identified trade finance as one of the risks for money laundering.

Mr Davis said: “You have opened a whole Pandora’s box of what can happen and does happen.  There is a lot of stuff moving around in ships and a lot of skilful people trying to get their hands on the money it can generate, in one way or another.” Unlike in the old days, now there is now a huge area that has to be watched.

The chairman thanked Mr Calogeras and his colleagues for their kind hospitality.