The Impact of Maritime Fraud on Developed Countries

It’s fascinating how maritime fraud encompasses such a wide array of illicit activities, from car theft to food fraud and everything in between.

Maritime Cargo Theft

Every 36 seconds a car is stolen in the United States.

The US customs and border protection is to protect things coming into the US not outbound. They are only able to inspect a small fraction of the cars that are leaving the port. Once a vessel departs through international waters the cars that slip through are likely not to be recovered. 400,000 are exported every year – only from the port of Newark. Not all can be inspected. Finding the stolen ones is like finding a needle in a haystack.

Trafficking of Stolen Cars

Who makes the most money from this? One of the the most popular destinations in West Africa, Ghana. Where owning a car can be the difference between poverty and middle class. A lot of people do not know these cars are stolen and even if they did most simply can’t afford to care.

There are different types of stolen goods one of them being food. Black market shipping of food, particularly seafood is done through thieves holding a vessel hostage until they unload all the goods inside. They are then sold through the black market or online marketplaces. According to the Food and Drug Administration, food fraud affects 1% of the global food industry. 1% doesnt seem like much right? But for an industry worth over 11.1 trillion, with a T, this equals a loss of $40 billion per year.

Fabricating details about an animal’s true origin along with dilution or substitution were the most prevalent types of fraud committed from 2012 to 2021. A common example of this is diluting an expensive extra virgin olive oil with a cheap vegetable oil.

Schemes and Criminal Rings

In August of 2022, seven people were indicted for running a criminal enterprise dedicated to extorting and misleading shipping companies into paying extra fees for loading and unloading cargo at the port of San Juan Puerto Rico. The ruse was built around paying a fee to use non-union labor. The scheme racked up a total loss of $1.2 million.

How do criminal rings do this? Who is aiding them? And who is affected in the process?

The Brilliante Virtuoso

One of the most famous examples of maritime fraud in history is that of the Brillante Virtuoso. The Greek-owned vessel, carrying a large cargo of fuel oil, was hijacked by armed men posing as a security team. They set the ship on fire and abandoned it, but it was later rescued by a U.S. warship. The owner attempted to claim insurance for $77 million but was denied. Investigations revealed that the owner had bribed Yemeni coast guard operators to stage the hijacking. Despite being implicated as the instigator of the conspiracy, the owner has not faced criminal charges. This concise summary doesn’t do the story justice. Read more here or learn more about this and other forms of cargo schemes at one of our Transport webinars. Continuing Education

Somali pirates caused chaos in important global waterways from about 2008 to 2018. They had been dormant until late last year when pirate activity started to pick up again.

Somalian Pirates Return

More recently, The Insurance Journal reported about an armed piracy attack off the coast of Somalia. Somali pirates caused chaos in important global waterways from about 2008 to 2018. They had been dormant until late 2023 when pirate activity started to pick up again. It is suspected that pirates are taking advantage of the chaos happening in Yemen and Gaza to hijack vessels.

Fraudulent Actions

Fraudulent Ship Registration:

Fraudulent Ship Registration: According to the International Maritime Organization (IMO), there have been several cases related to the fraudulent use of a country’s flag, and/or to the fraudulent operation of a registry, without the purported flag country’s permission or knowledge. By registering a vessel under a false flag or changing its flag without proper authorization, criminals can evade detection and the authorities.

Bill of Lading Fraud:

This document shows ownership of the cargo being shipped and outlines the terms and conditions of the shipment. This illegal forgery can occur in various ways, such as issuing duplicate bills of lading, falsifying the weight or quantity of the cargo, or altering the consignee or destination. One common form of bill of lading fraud is known as “phantom shipments.” This is when the carrier issues a bill of lading for a shipment that does not exist. The carrier may then use the fraudulent bill of lading to obtain financing or credit from a bank or other financial institution, using the non-existent shipment as collateral.

The importance of close controls on the preparation and transference of bills of lading arises from their service, not only as receipts but as proof of the transport contract and of ownership of the goods. A bogus bill may be sold along with forged accompanying documents to a buyer who may later find that the cargo and perhaps even the ship does not exist.

Losses have been estimated by the shipping community at the equivalent of $1 billion per year.

Scuttle Fraud:

Underwriting, also known as ship insurance, is considered one of the riskiest maritime ventures. Those who underwrite a vessel essentially gamble their money on the belief that the ship is seaworthy and that the owners are acting in good faith. However, if the owner is dishonest and has the means to commit fraud, underwriters, despite their precautions, are often at the mercy of the fraudster. The process of sinking a ship for fraudulent purposes, known as ship scuttling, is one of the major types of fraud against insurance companies Despite suspicions of deliberate destruction, proving the crime can be difficult, leading to underwriters paying out insurance money without conclusive evidence.

Insurance companies don’t want to seem uncollaborative or have a reputation as being hard to work with, so they eventually pay out at least a portion of the claim. When insurers do deny coverage due to suspicious circumstances, they are in threat of being sued by the ship owners and other affiliates that have money to gain from the settlement. Scuttling is thought of as the perfect crime because there aren’t many witnesses and insurers always pay at least a partial amount of the claim.

Stay Informed

Keep your ship safe in stormy waters and familiarize yourself with the steps and required documents to file an insurance claim for maritime policies:

• The original or copy of shipping invoices, shipping specifications, and/or weight notes;
• Original bill of lading, waybill, and/or other contract of carriage;
• Landing account and weight notes at destination;
• Documentary evidence of the extent of the loss or damage; and
• Any correspondence with the carrier or bailee about their liability for loss or damage;
• As the insured, you must have all waybills, bills of lading, and custom declarations, correctly stating that the insured goods have been declared accurately and correctly.

Here is a list from the U.S. Department of Justice on preventative measures to avoid fraud at sea:

• Verify the status of the contracting party (importer/exporter)
• Ensure the existence of the contracted vessel
• Confirm the vessel’s location in the port for loading
• Enlist a third party to verify cargo loading on the specified vessel
• Monitor the vessel’s scheduled route
• Inspect cargo upon loading and discharge
• Implement methods for detecting, extinguishing, and suppressing ship fires