FRAUDS IN INTERNATIONAL TRADE

It is heartening to note that the total amount of frauds occuring in International trade is very small, compared to the total volumes of actual International trade. However when a fraud occurs, some times  there could  be irretrievable damage and companies subjected to the fraud may go into liquidation. It is therefore essential for bankers, importers and exporters to be fully aware of the types of frauds that can occur and the measures to prevent occurance of frauds in their International trade.

Major areas of frauds in International Trade

a) Commodity frauds:  The foreign seller  ( exporter) may not send the goods ordered by the buyer ( importer). The seller may stuff the container with rubbish in the container and cover the top with little quantity of the material ordered. The seller may send the goods of inferior quality. He may send goods of lesser quantity.

Frauds of this nature happen mostly because of the buyer's greed to get goods cheaply. The buyers fall prey to advertisements like, "bargain offer, unbelievable, but true, cancelled orders, ship on high seas" etc. The buyers do not bother to get proof of the product, do not check on the seller, do not ask the banker for advice, do not show the contract to lawyer.

b) Documentation frauds : The seller may forge documents like, Bill of lading, airway bill, insurance policy and certificate of origin etc ( cargo being non existent). In case cargo is shipped, the seller may alter the essential particulars in the documents to suit his purpose. He may create multiple transport documents in respect of a single shipment and cheat several buyers.

c) Documentary Credit frauds :  Some times, the Letter of credit instrument itself may be forged by the importer and sent to the supplier's bankers. Forged letters of credit from Nigeria are common.

d) Insurance frauds : Marine insurance documents are forged by the supplier. Sometimes, essential particulars like description of goods and the amount of cover etc may be surreptitiously altered by the supplier in a genuine document.

e) Maritime or cargo frauds :   These are frauds committed by the Captain or crew of the ship. They may change the painting of the ship, change the name of the vessel and deviate from the intended voyage, embark on a remote port and sell the cargo for throw away prices and flee.

Analysis of frauds

International Chamber Of Commerce (ICC), Paris, a highly respected International body for facilitating smooth International Trade, have analysed several cases of fraud in International trade and some of the findings are as follows ;

a)  Buyer's losses usually take place through LC s ( Letters of credit). LC is a safest instrument,  for importer and exporter, as long as they check on each other by way of references or bank reports before entering into LC tranaction. If the importer fails to check on the seller, an unscrupulous seller may  find it most convenient to use the LC mechanism to get prompt payment without actual shipment of goods,  if he is able to produce forged documents .

b) Buyer discovers that goods are not on board only when the vessel is due to arrive. In the meantime, fraudulent seller having taken the money disappears. Fraudulent sellers may not ship the goods, or they may ship rubbish to add weight to the containers or they may ship goods of inferior quality.

c) Sometimes the seller manages to get the bill of lading pre - dated, i,e, takes a date on the bill of lading which is prior to the actual date of shipment. He does this with a view to take payment under the LC by complying with the condition for last date for shipment. Here he actually ships goods after the date stipulated in the LC. The net effect is that the buyer may receive the goods with lot of delay and he may in the meantime  lose the orders procured by him in his domestic market. The goods imported may be of no further use because of frustrated orders.

d) An exporter creates confidence in his buyer by executing initial  orders promptly. Later he asks his buyer to open a transferable LC. The buyer having faith in the expoter opens transferable LC. The exporter ( first beneficiary) gets the LC transferred to second beneficiary at another centre. The second beneficiary produces forged documents  and obtains payment. When the fraud surfaces, the first beneficiary pleads innocence and puts the blame on the second beneficiary. In fact, the second beneficiary may be an agent or associate of the first beneficiary himself.

e)  Bill of Lading is a simple document and can be easily forged.

d) Little control over physical custody of bill of lading forms is exercised by Shipping companies. Fraudulent sellers or agents have easy access to these forms.

e) Exporter or importer when subjected to fraud, seeks out deep pockets. They try to put the blame on banks and try to get the amount from them through litigation etc. In the mean time, the real culprit ( offender) escapes,  and tracing him after inordinate delay will be extremely difficult.

f) Greatest danger for the banks would be when buyer and foreign seller are in collusion.

Advices of ICC - IMB for Banks and traders

From the above analysis, International Maritime Bureau ( IMB)  a wing of ICC - CCS ( Commercial Crime Services) gives the following advices to bankers and traders to prevent occurance of frauds in International Trade :

a) Buyers ( importers) should check the track record of sellers ( exporters) and vice versa before actually entering into the trade - deal.

b) When importer receives a request for opening transferable LC, he should check the track record of all the intended  beneficiaries (first, second etc)  before arranging for  the opening of LC.

C) Banks should on a sample basis verify the genuineness of the key  documents by contacting the shipping lines, air lines, insurance companies etc, at least in the initial stages of their relationship with the exporters and importer clients. This can eliminate a long term intended fraud of a higher magnitude.

d) Banks should check on the activities of clients to ensure that the good imported / exported do exist and are in line with the business activities declared to the banks.

e) Most of the forged documents ( bills of lading) in the fraud - cases  detected, were found to be issued by NVOCC s ( Non vessel owning common carriers). This is a dangerous class of agencies who connive with the exporters and make forged bills of lading available to them for a fee. Importers should therefore never agree for clauses permitting bills of lading issued by NVOCC s.

IMB ( International Maritime Bureau), a wing of Commercial Crime Services ( CCS) of the ICC ( International Chamber Of Commerce) has been providing invaluable services to the ICC members in preventing frauds. It is first to detect emerging trends and highlighting the warning signals in plenty of time to minimise the risk to traders and financial institutions. More information on their services and fraud related news may be obtained on their website - www.icc-ccs.org.