Maritime Frauds

As a general rule, fraud is usually against ignorance of another and is not seen as a fraud, till it is too late.  A successful maritime fraud being International in nature, involves parties in different countries, thousands of miles away and mostly unknown to each other. There are many types of maritime frauds. But being a cardinal shipping document and negotiable instrument, a Bill of Lading (B/L) lends itself as a vehicle through which to perpetuate frauds involving Ships and Masters. If freight is pre paid, B/L is marked freight paid, otherwise freight to pay. Furthermore, since a B/L is also a document of title, its holder is owner of goods covered by it.

lawzmagazine.comObviously, if B/L is endorsed freight prepaid, it is of more value than a B/L endorsed Freight to Pay. Therefore charterers and shippers prefer to obtain a B/L endorsed freight prepaid. In most voyage and time charters, there is usually a clause which provides that Master shall “sign Bills of Lading as presented.” There is usually another clause in the same C/P, which stipulates when and how freight is to be paid, which is usually a number of days after B/L is signed.

Commercially it allows Charterer or shipper to negotiate his B/L against letter of credit (L/C), realize his money and pay freight or hire out of that money which is inclusive of freight.

But this clause, “Master to sign B/L as presented,” has nothing to do with Master’s right to endorse a B/L about quantity and condition of cargo loaded. If real nature of these clauses is not fully understood and Master does not take due precautions, he can get into a lot of trouble.

Charterers, shippers and even ship’s agents often use these clauses in a Charter Party (C/P) to persuade Master not to endorse B/L as to quantity or condition of cargo. They may even offer him a Letter of Indemnity (LOI) in exchange of a clean B/L or in exchange of a B/L marked freight paid when it has not yet been paid. If Master agrees to any such inducement he becomes party to an International fraud against buyers of B/L in a different country, who buy it for value, in good faith, based on what is written on it.

No C/P clause prevents Master to endorse B/L, truly describing quantity and condition of cargo loaded on board.

In fact it is his legal duty to do so, under International Maritime Law. If Master agrees to inducements by shippers or charterers and does otherwise, he becomes party to an International fraud.

In a recent case a ship was to carry a full load of steel coils. When she came alongside the loading berth, Master of the ship found that the steel coils lying on the wharf earmarked for his ship, were rusted, damaged and dented. He gave written notice to shippers that he would endorse the B/L accordingly. The shipper took no notice and loaded the cargo. When B/L’s were presented to the Master and he insisted to endorse them with actual condition of the cargo he was presented with the same C/P clause. But master refused to sign clean B/L. When the confirming bank refused to honour the documents, the shipper sued the shipping company. UK Court of appeal decided that Master had every right to endorse the B/L with actual condition of cargo loaded on board his ship and in such a case shipper had two choices, either to accurately describe the cargo so that Master could then sign B/L “as presented,” alternatively to take back his cargo. This is a clear case which lays down the law in such a case.

Another example is when last date of shipment stipulated in L/C has expired and agents AND shipper try to persuade Master to sign or authorize ante dated B/L’s. This is nothing but a fraud against the importer who has established L/C with the precondition that goods must be shipped before a certain date. If that date expires, L.C expires and no bank is authorized to honor it. But Master never sees the L/C. Therefore thoughtless act of a Master to authorize antedated B/L’s on the ‘say so’ of shippers or agents, validates the L/C with banks because they only go by the date written on the B/L. This perpetuates a fraud against the importer. Again, a letter of Indemnity (LOI) against such ante dating is of no value against the importer or receiver of the cargo in another country, because monies covered under the L/C established by the importer would have been already paid to the exporter by the banks. Also a LOI cannot be enforced in another Country against a different party, because of principle of Sovereignty of Nations.

Yet there are trade practices where B/L’s are deliberately pre-dated to take advantage of a higher price.

For example, coffee and cocoa prices may be higher for Sept.  shipment as against an October shipment. Seller of an early October shipment will try and force the Master or ship’s agent to issue B/L pre-dated to September 30 to take advantage of the higher September price. If buyers are able to establish that Master or the ship’s agent misrepresented date of shipment on the B/L they may have a valid claim against the ship.

These are simple Maritime frauds not in connivance with the Master but by taking advantage of his ignorance in commercio legal matters. It may prove fatal for Master to go by advice of his local agents who may have different interests to cater to, in their own country, than to look after interests of the ship and Master. Therefore his best source for advice and assistance should be owners and their P&I club. Correspondents of P&I clubs in a foreign country, even if of the same nationality as agents and receivers, may not advise him wrongly, as any liability on the ship, may eventually fall on the P&I Club.

Then there are more complicated and mostly pre planned International Maritime frauds. Here are some examples.

A Greek vessel on T/C to Dutch charterers was sub chartered to carry a load of sugar to Somalia. She was kept idle by charterers in Bangkok, waiting for cargo. During this time Charterer’s agent invited Master ashore many times, and entertained him lavishly with every facility, courtesy and hospitality. Suddenly, on a Saturday afternoon few barges came alongside and loaded 6874 bags of sugar as against 6874 tons nominated by the Master for his 8200 DWT ship. Loading finished at 0200 early Sunday morning when the same agent  who had lavishly wined, dined and entertained the Master, came on board and told him that they had no more cargo and he should sail forthwith to save them more loss. He added that dead freight and demurrage will be paid but that this early on Sunday morning, neither manifest, nor B/L could be prepared. He promised to forward all papers to discharge port. At the last moment just before shaking hands with the Master the agent dramatically produced a one line letter from his pocket which stated, “I authorize my agents M/S so and so, to sign B/L.”  Master fell for it and signed a clean letter of authority.  L/C for $ 5.9 Million was negotiated in the Bank early Monday morning against cleverly prepared B/L’s for 11000 tons of sugar, signed under master’s clean authority.

The ship was detained by Somali authorities at Berbera, for not delivering 11000 Tons of sugar for which $ 5.9 Million were paid by L/C. Master explained that a 8200 DWT ship cannot carry 11000 tons of sugar. He had nominated 6874 tons and loaded only 6874 bags. But he could not convince Somali authorities that HE had not taken part in a clever fraud against Somali people. Imprisoned for 9 months, released under amnesty, Master died after arriving Greece. Ship was towed to Greece after 5 yrs.

In this case the loaded quantity was exactly 6874 bags instead of 6874 tons. Therefore even if Master did not give a blank authority letter to charterers agent but authorized them to sign B/L for 6874 bags, the authority letter could still have been forged with the word Tons instead of the word bags, unless the letter of authority stipulated the number of bags in letters as well as figures.

It is not only Commercial parties who indulge in Maritime Frauds. Governments of highly respected countries are no exception.

When South Africa was under Arab Boycott list due to their Apartheid policy, Govt. of South Africa found ways and means, rightly or wrongly, to get badly needed oil which they could not get legally from any Arab Country.

M.T Salem was chartered by nationals of a European country at the instance of their Govt. She loaded a full load of oil in Kuwait ostensibly under B/L for that Country outside the Arab Boycott list. Kuwaitis knew that the oil was going to Durban but closed their eyes. The ship was directed to Durban after sailing and her name was painted over during the voyage to read LEMA as against Salem. After discharge at Durban, the ship took in full load of seawater in all cargo tanks to make her appear fully loaded. Name Salem was repainted.

The ship was scuttled off the African Horn during the voyage. There was no loss of life. Huge claims were made against underwriters for total loss of ship and cargo. Insurers found that she did not sink suddenly through an explosion, as was made out, but was in fact scuttled. Entire fraud was uncovered and three Governments of three highly respected countries had to eat humble pie. Claim was never paid.

Master should be wary of people who come on board, throw their weight and rank around and make promises. Even if promises made to him by local authorities are genuine, he can get into trouble in International Trade and Commerce, once outside Jurisdiction of THAT Country. Usually, a B/L is transacted through exporter’s bank in his country and sent to importers Bank at destination. On receipt of original B/L, importer’s bank, which usually establishes the L/C, delivers it to the importer, debits him and remits the monies to exporter’s bank who has either already paid to the exporter or pays him on receiving money from importers bank. Importer in turn presents B/L to Ships agent to take delivery of his cargo.

Theoretically if importer receives the goods without surrendering B/L to ship Agents, he gets the goods free because he has not bought the B/L for value from his bank.

In a case in Finland a receiver told the ship agent that receipt of B/L by his bank from India was delayed and that he will deliver the B/L soonest it is received by him from his Bank. He requested for a delivery order to avoid payment of demurrage to the port authority. The ship agent obliged.

When the B/L actually arrived in his bank in Finland the receiver refused to accept it by making some excuse. He had already received the goods without it and therefore got them free with out paying for them. When the exporter in India did not get his money through the banks he sued the ship agent for delivering his goods without taking possession of the B/L. Supreme Court of Finland ordered the ship agent to pay damages to exporter for face value of goods in the L.C, because he did not get paid by the buyer’s Bank for goods he shipped.

In practice if there is delay to receive B/L’s through banks, importer normally furnishes a guarantee to ship agent by his bank to obtain delivery of goods without the B/L. In such cases the bank which gives the letter of guarantee maybe and usually is the same bank which established the L/C. To prevent such International Maritime Frauds it is also usual to endorse original B/L as ‘ACCOMPLISHED’ with date and signature when cargo is delivered and B/L’s are in hands of the carrier. This makes them null and void.

In another case, a container was delivered at destination against production of a fraudulent B/L.

British Court of Appeal held against ship owners and ruled that “B/L represents and secures legal title to goods and to their physical possession. A ship owner issues a B/L to serve as THE KEY to the goods, and ought to usually be well placed to recognize its own B/L. Only very clear wording would exempt a ship owner from his liability to deliver goods except against a genuine original B/L”.

In the 20th century, right up to the 1960’s, most ships sailed on liner basis and called at the same ports time and again. Ship owners had designated agents in each port who looked after every interest of the ship and the Master, because their own earnings came out of the many port calls made by ships of the same owners. They also earned commission from freight which they booked from that port for export. Therefore, such agents had every reason to be totally loyal to ship owners and their commercial interest and to ensure that they looked after the interests of their ships which called at the port including interests of the Master.

In this 21st century most ships, be they tankers, bulk carriers or others, operate under time or voyage charters.

Sometimes ship owners do not even appoint their own agents at strange ports at which the ships are made to call under the charter. Instead it is usually charterer’s agents who handle every aspect of the ship after she arrives at their port. Obviously, charters agents have more interest in looking after interests of the charters as against interests of the ship, Master and owner.

Therefore, it is just NOT enough for Masters of Foreign going ships to be trained navigators and ship handlers. They have many other responsibilities. To protect commercial interests of the ship is one such responsibility. It is time that international community included Education in its wider sense in the upbringing of seafarers to become effective Masters of Foreign going merchant ships of today, trading world wide, and not just TRAIN them in seafaring techniques which has been the order of the day for centuries.

Capt. A K Bansal,

L.L.B. (Hons) London,

Master Mariner, Bar at Law




2 thoughts on “Maritime Frauds”

  1. Captain Kell Walker LLM (maritime law) says:

    This article should be placed in a position that can be viewed by every master as a daily reminder on the issues that could arise in any port where the discharge or loading of ship’s cargo. If I may have the owner’s permission to copy the article and place it where ever I choose and believe that it is necessary?

  2. Upasna says:

    Very informative

Leave a Reply

Your email address will not be published. Required fields are marked *