From the perspective of shipping, how to avoid the risk of bulk goods trade fraud

Due to the long time of cross-border shipping, the large number of entities involved, and the high value of bulk goods, there is a risk of being exploited by trade fraud activities. Therefore, carriers and consignees need to pay attention to the risk points throughout the shipping chain.

In order to avoid the risk of fraud in the maritime process, in addition to strengthening the punishment for fraud, it is also necessary for the carrier and the consignee to take active response measures from their respective perspectives.

Trafigura's February 2023 trade fraud will not be the last in the field, and ocean carrier SOPs, compliance systems, and consignee responses are not set in stone and should be dynamically adjusted based on the actual situation.

In the field of international bulk trade in goods, sea freight is the most important mode of transportation, and in recent years, there have been frequent incidents of bulk trade fraud, most of which involve high amounts. Take, for example, the latest events of this year: on February 9, 2023, Trafigura Group published a statement of legal action on its website, revealing the huge trade fraud suffered by Trafigura.

The main thrust of the statement is that Trafigura has recently uncovered a series of systematic fraud carried out by a series of companies linked to Mr Prateek Gupta in relation to nickel products that were partially shipped in containers in 2022. Trafigura found that there was no nickel product in the container when it arrived at the port of destination for inspection. With most of the containers still in transit, Trafigura could have lost up to $577 million based on its maximum exposure. In response, Trafigura stated that it had taken legal action against Mr. Prateek Gupta and the companies involved.

Trafigura's statement only mentions legal action against the trading party, so why did it not file a claim against the ocean carrier? Is there a legal risk that the carrier will be held liable? Let's take a look at the risks from the perspective of ocean freight.

01 There is a risk that all aspects of shipping will be used to constitute fraud

Cross-border trade in bulk goods is usually achieved through the transfer of ownership and control of goods through sales documents, among which the bill of lading is one of the relatively complex and important documents.

Due to the long time of cross-border shipping, the large number of entities involved, and the high value of bulk goods, there is a risk of being exploited by trade fraud activities. Therefore, carriers and consignees need to pay attention to the risk points throughout the shipping chain.

(1) Risks in the process of cargo shipment and bill of lading

In the handover of container goods, it is necessary to pay attention to the condition of the container body and seal. In the loading of non-containerized cargo, the ocean carrier shall inspect and record the surface condition and quantity of the cargo if there is a reasonable way to avoid mismatch, insufficient quantity and serious damage to the cargo.

In the issuance of bills of lading, there may be situations where the shipper requires the carrier to issue a bill of lading that is inconsistent with the actual situation based on the trade contract or letter of credit.

例如，信用证条款中通常只接受清洁提单，信用证“46A:Documents Required”中会列明，“Full set (Including 3 originals and 3 non-negotiable copies) of clean on board ocean bills of lading made out to order and blank endorsed…”如提单存在批注则会构成单证不符，卖方（托运人）仅能在买方修改信用证或接受单证不符的情况下才能获得信用证项下的款项，这使卖方较为被动。

此外，贸易合同或信用证中通常存在对最迟装运时间的要求，如信用证44c:Latest date of shipment。

In practice, the date of shipment recorded on the bill of lading is usually regarded as the date of shipment. If the actual loading time recorded in the bill of lading is later than the latest shipment time, there will be a document discrepancy under the letter of credit. If the price of the goods falls, the buyer may be reluctant to cooperate with the modification of the terms of the letter of credit or accept the non-conformity of the document.

For this reason, in practice, it is common for the shipper to require the carrier to issue a clean bill of lading or backsign a bill of lading based on a letter of guarantee.

(2) Risks in the transportation of goods and the circulation of bills of lading

During the transportation of goods, the shipper or charterer may make a temporary request to change the port of discharge, change the consignee, or issue a conversion bill of lading. The reasons behind this requirement are different, and carriers need to identify the specific reasons and act with caution.

For example, the issuance of conversion bills of lading may be based on the lessee's desire to protect its trade secrets (e.g., not wanting downstream customers to know the actual supplier of the goods), or it may be the lessee's desire to evade high tariffs or specific trade sanctions.

The former will be less risky than issuing a conversion bill of lading for the purpose of circumventing duties and sanctions, while the latter will result in a fine for the carrier, confiscation of the goods, and may also constitute fraud to the consignee.

For example, if a shipper sets separate prices for the same cargo to buyers from different countries, and the charterer requests the shipowner to change the port of destination based on the idea of earning the difference in price under the trade contract, can the shipowner agree to the charterer's request for port change? The author advises shipowners to be cautious in handling such requests.

(3) Risks in unloading and releasing goods

During the unloading process, some charterers will require the shipowner to unload the cargo based on a letter of guarantee. For example, some charter party clauses will stipulate that the cargo will be discharged only by a letter of guarantee signed by the charterer, which is a common clause in voyage charters and time charter parties.

There is a literal difference between "discharge" and "release/deliver", but in some ports or terminals, the shipowner no longer has control over the cargo once it has been discharged. For example, in some Vietnamese ports, cargo is usually required to be unloaded on a barge, which is equivalent to releasing the cargo once it is unloaded. The same is true for some shippers in China. Even in public terminals where the release process is more standardized, there are also cases of collusion between local agents and cargo owners to release goods.

In the process of releasing goods, there are also fraudulent incidents of using fake bills of lading to pick up goods. For example, in the case of International (Holdings) Co., Ltd. v. Hanjin Shipping Co., Ltd., T Tanker Pte Ltd and M.T.M Shipping Management Pte Ltd., the High People's Court of Guangxi Zhuang Autonomous Region found that the bills of lading Nos. SP/DUM/BEL-01 and 02 involved in the case were fake bills of lading.

In recent years, with the improvement of the port pick-up process, cases of using fake bills of lading to pick up goods in China have become relatively rare, but there are still cases of using fake bills of lading to defraud goods in African ports. For example, the trade fraud mentioned in the "Kelsen International Trade Co., Ltd. v. Mediterranean Shipping Co., Ltd. Dispute over Cargo Transportation Contract in Maritime and Sea Waters Case" is an attempt by a relevant entity to defraud the goods with a fake bill of lading.

02Common measures to avoid the risk of fraud in the shipping process

In order to avoid the risk of fraud in the maritime process, in addition to strengthening the punishment for fraud, it is also necessary for the carrier and the consignee to take active response measures from their respective perspectives.

(1) The carrier shall be cautious in accepting all types of guarantees

From loading, transportation to unloading, the entire sea freight link involves bills of lading. In addition to the clean bill of lading, the backdated bill of lading, the advance bill of lading, and the conversion bill of lading, there are also corresponding letters of guarantee for the release of goods without bills, the change of port discharge, and the change of consignee. The letter of guarantee is resolved, and the pressure is transmitted to the lessee; If there is a slight defect in the surface condition of the cargo, the charterer can be required to issue a clean bill of lading guarantee, and the master can issue a clean bill of lading to leave the port, and issue a protest letter to all parties in a timely manner after leaving the port.

In addition, with the development of blockchain technology and digital bill of lading platforms, carriers can use such platforms to reduce related risks, such as avoiding the risk of false bills of lading caused by the use of paper bills of lading. Of course, new things may also have new risk points, such as the risk of being hacked by hackers and fraudulently processing digital bills of lading, and the risk of the digital bill of lading platform itself being hacked.

In the standard operating procedures, it is necessary to embed a compliance system that reflects the characteristics of maritime enterprises. For example, the storage measures for the special paper and copy of the bill of lading may be used by trade fraudsters to make false bills of lading if leaked.

In addition, considering that most ships sail around the world, they also need to comply with the requirements of foreign legal systems, especially the sanctions of the United Nations Security Council, the United States, the European Union, the United Kingdom, etc.

If you collude with relevant entities to circumvent sanctions, you may encounter serious legal consequences. Of course, the establishment and improvement of the compliance system also needs to consider the scale and cost of the enterprise, business areas, and route characteristics for targeted design.

(2) The consignee shall pay close attention to the dynamics of the goods and the authenticity of the bill of lading

Given that all aspects of maritime transport can be used to commit fraud, the consignee should pay attention to the entire process of the movement of goods and bills of lading. In the loading process, a special person is arranged to supervise the loading to ensure that the goods loaded into the container or loaded onto the ship are the goods actually purchased by the buyer under the trade contract.

For valuable goods, you can consider sending a special person to escort them to avoid the situation that Trafigura encounters with the wrong version of the goods. In the circulation of the bill of lading, if the consignee has any doubts about the authenticity of the bill of lading, it should play a positive role as soon as possible, such as changes in the international trade link (the consignee refuses to accept the goods, the goods are resold, etc.), and the lessee has a reasonable need to adjust the specific arrangements of the transportation link.

However, in many cases, it may constitute fraud against the consignee, and in this case, the letter of guarantee will not protect the shipowner. In cases of fraud, the charterer and the owner are found to be complicit and the owner is usually unable to recover from the charterer. Shipowners may also lose the rights of the P&I Club for risk protection, maritime liability and, in serious cases, criminal offences.

In addition, there are differences in the details of each batch of transportation, which requires the shipowner to make specific judgments and take corresponding measures based on comprehensive consideration of business relations and risks. Taking the common clean bill of lading guarantee as an example, it is necessary to consider the specific situation of the goods, such as steel cargo, which will have some rust when loading on the ship, such as refusing to issue a clean bill of lading due to fine rust will be too harsh, or will lead to the impossibility of trade.

Therefore, a clean bill of lading issued in good faith by the carrier in the belief that the surface of the goods is rusted and does not affect the use of the goods should not be found to be fraudulent. In the absence of fraud, the shipowner may seek compensation from the charterer who issued the letter of guarantee based on the bill of lading if the consignee subsequently makes a claim against the consignee.

(3) Carriers are required to establish standard operating procedures and compliance systems

In most of the cargo transportation links, the shipping industry has formed a relatively mature practice, so shipping companies can develop standardized operating procedures based on their own characteristics.

For example, when loading grain in South America, the master of the ship will often annotate the apparent condition of the cargo in the bill of lading, while the shipper may take steps to restrict the departure of the vessel. At this time, the following treatment can be considered: if the surface condition of the cargo shows that the cargo is obviously deteriorated, the P&I Club should be notified to appoint an inspector to board the ship to collect evidence, and at the same time, the charterer and the shipper should be required to negotiate with the carrier and other relevant parties to obtain direct communication.

The consignee can get in touch with the shipowner and all parties in the charterparty chain, and communicate with the agent and the master who issued the bill of lading to confirm whether the copy of the bill of lading in the hands of all parties is consistent. At the same time, it is verified by the trajectory of the ship.

If it is confirmed that it is a fake bill of lading, it should apply to the court for a stop payment order as soon as possible under the letter of credit; If payment is made by wire transfer, the payment arrangement for the relevant payment should be changed and, if necessary, the transaction should be completed in person or through a third-party account. In the event that the loss has already occurred, the court shall promptly make every effort to recover the loss through a court injunction or the police.

03 Epilogue

As far as Trafigura's trade fraud is concerned, if the carrier handles the container in accordance with the normal process of receiving, transporting and delivering the container, it is difficult for Trafigura to require the carrier to bear the liability for compensation if the lead seal is intact and the original loading and unloading are realized. In practice, the carrier is unable to verify the specific condition of the goods in the sealed container, so it will be stated on the bill of lading (e.g. the terms are not known), which can usually play a role in protecting the carrier.

In the author's view, Trafigura's huge trade fraud will not be the last fraud in this field, and the ocean carrier's standard operating procedures, compliance system and consignee's response plan are not static and should be dynamically adjusted according to the actual situation.

It should be noted that the above content mainly focuses on the analysis of trade fraud that may be involved in the maritime link, and trade fraud may also occur in the link outside the maritime sector. If you take a holistic approach to your prevention strategy, you need to consider the risk of fraud outside of the ocean sector

During the transportation of goods, the shipper or charterer may make a temporary request to change the port of discharge, change the consignee, or issue a conversion bill of lading. The reasons behind this requirement are different, and carriers need to identify the specific reasons and act with caution.

A clean bill of lading issued in good faith by the carrier in the opinion that the surface of the goods is rusted does not affect the use of the goods shall not be considered fraudulent. In the absence of fraud, the shipowner may seek compensation from the charterer who issued the letter of guarantee based on the bill of lading if the consignee subsequently makes a claim against the consignee.

Article source: China Ocean Shipping, author Li Lei.

Source: Wudaokou Supply Chain Research Institute, E Energy Circle