Safeguards against shipping and freight fraud

image for fraud alert

Hello everyone and welcome to the first article of 2014.. Wishing all the readers the best of health, wealth, happiness, prosperity and joy for the new year..

During the course of last year, I received several emails from various readers around the world asking for my opinion and advice on remedies to certain situations brought about by fraudulent activities that some of them have been victims of..

Many were duped by forwarders, taken for a ride by shippers and intermediaries, made to pay double so on and so forth..

Therefore, I thought I will start off this year with some tips on safeguards against some of these shipping and freight fraud..

  1. Know your trading termsImage for Incoterms
    • First and foremost, really really read and understand about Incoterms®..
    • A large volume of fraud, duping and mistakes happen because the buyer or seller don’t understand the Incoterms® that has to be used for a particular transaction.. It is NOT a one size fits all solution..
    • Each sale is individual and has to be treated differently..
    • You can read more information and some case studies about Incoterms® here..
  2. Trust
    • Trust as you know is earned..
    • If you are doing business with a company for the first time there are several safeguards you should take..
    • For example, if you are selling to a first time buyer overseas but agreed on Cash Against Delivery (yes it happens) don’t be nice and issue a Seaway Bill or do a Telex Release (yes this has also happened) before you get your money..
    • In such cases, it is always good to issue Original Bills of Lading and hold on to them till you receive the money in your account.. Don’t send them the OBL or issue a Telex Release based on a proof of payment.. Many times the proof of payment has turned out to be a fraud.. Wait till your money is in your account..
    • Seek the assistance of banks, there are instruments like Letter of Credit that can assist in ensuring that you get your money..
    • Once the trust has been developed and has been earned through repeated business, you can use your discretion..
  3. Verify and distinguish
    • Verify whether the company and person that you are buying from is genuine and actually a legal entity..
    • There are many fly by night middlemen who pretend to be the supplier, manufacturer, seller etc and you will find out much longer that their company doesn’t really exist..
    • If the business is new, I would strongly suggest that you should pay a visit to the company at the origin and convince yourself that the seller and the product is genuine..
  4. Choose the right partner image for partner
    • If you are an exporter or importer and use a freight forwarder or a customs broker, look for someone that has a GOOD reputation..
    • A lot of the times, clients look to save a few pennies and end up choosing run of the mill agents and end up actually being blackmailed by them into paying more and still don’t get their cargo in time..
    • A good place to start looking for a good agent would be freight forwarder, customs broker associations in your area.. You can also check with Customs or Port authorities in your area for some recommendations.. They are always glad to be of help..
    • If you wish to do any product inspections or analysis etc, (which you should if you are dealing with the company for the first time) do your own research and appoint your own agent to do these activities rather than the shippers agent.. There have been cases where the buyer has used the sellers agent and has been given false information leading to loss..
    • If you are a forwarder and looking for partners in other parts of the world, look for similar forwarding associations in the destination country and choose the right partners.. Many freight forwarders choose the wrong partners and end up paying them more commissions and destination charges unnecessarily..
  5. Learnimage for learn
    • If you are in the business of exporting or trading, you NEED to know, you HAVE to know, you WANT to know how the whole process works.. Don’t just be content knowing or trying to know only what happens in your area, know the whole process..
    • This way, if something untoward happens, you know how to handle it, who to speak to and not to panic..
    • Speak to your Agent, the shipping line, and if possible Customs, Port, Chamber of Commerce to understand the various roles and how each entity fits in the whole chain..
    • Read blogs or websites like Shipping and Freight Resource to understand more (couldn’t resist that :)) and if you don’t find answers to any specific question, ask the author..
  6. Know the costs
    • Whether you are buying and selling on FOB, CIF, CPT, DAP know the costs at origin and destination and what costs you are expected to pay..
    • A large number of queries that I have received pertain to such issues whereby the seller expects the buyer to pay for X activity and buyer is rejecting or vice versa..

This list is by no means exhaustive, but just some of the important ones that I thought I would share with you and is based on the queries I have received and case studies I have been sent..

Do you have any tips that you would like to share on how to safeguard against shipping and freight fraud..??



You can share your views about above article here..

9 comments on “Safeguards against shipping and freight fraud

  1. Sorry Vaibhav, you are incorrect. CIF may be used for ALL modes of transport, while CIP may be used ONLY for sea transport.That is clearly stated in Incoterms 2010.

    In response to Prashant’s query as to the difference between CIF and CIP, I wonder why he references a link to Incoterms 2000. . . . They are obsolete, having been replaced by Incoterms 2010, effective January 1, 2011. A copy of the Incoterms 2010 book can be purchased from the International Chamber of Commerce (ICC) at http://www.iccbooks.com/Product/ProductInfo.aspx?id=653. Nobody involved in international trade should be without it . . . Yes, there is life beyond EXW, FOB, CIP and CIF, all of which may be unsuitable for many shipping situations for the reasons stated in the Incoterms rules.

    As to the difference between CIF and CIP, all one needs to do is to read those sections of the Incoterms 2010 rules to answer that question. Obviously, Prashant does not own a copy of the Incoterms rules and has not read them. The chart he references is not the Incoterms rules, but merely a brief graph that assists those who have already read the rules and if fact the chart he references Incoterms 2000, which has been obsolete since January 1, 2011 when Incoterms 2010 replaced them. At best, these charts are not a substitute for the Incoterms rules and can be dangerous, especially if an obsolete chart is used.

    The first difference between CIP and CIF is that CIP is used for all types of transportation and CIF is used for water transport only. This is clearly stated in the Incoterms 2010 rules.

    For CIF/CIP it is the seller who takes out the insurance based on his invoice value to the buyer, but the risk of loss belongs to the buyer from the time the goods are loaded on the ship for CIF or delivered to the carrier in CIP. The named port after the CIF term is where the seller has prepaid the freight not to the point where the risk of loss transfers. If the goods are lost in transit, the sellers account receivable is collectable, so the buyer must make sure the insurance will cover his loss.

    CIP reflects what actually happens. For LCL the seller hands the cargo to the carrier at the CFS and for FCL at the CY. Of course there could even be a first local carrier from the seller’s premises, but the goods are always handed over to the carrier long before they reach the vessel. And from that point, just as with CPT, the buyer bears the transit risk but with CIP the seller obtains insurance cover for that risk.

    Under the Incoterms rules “C” terms (CPT, CIP, CFR & CIF), the named place differs from the place of delivery. Under these four Incoterms rules, the named place is the place of destination to which carriage is paid. Indications as to place or destination can helpfully be further specified by stating a precise point in that place or destination in order to avoid doubt or argument.

    Under CPT the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between the parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. When CPT, CIP, CFR or CIF are used, the seller fulfills its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination.

    Under CIF, the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

    When CPT, CIP, CFR, or CIF are used, the seller fulfils its obligation to deliver when it hands the goods over to the carrier in the manner specified in the chosen rule and not when the goods reach the place of destination.

    Under both CIP and CIF, the seller must make arrangements for the carriage of the goods to the agreed destination. While the freight is paid by the seller, it is actually paid for by the buyer as freight costs are normally included by the seller in the total selling price. The carriage costs will sometimes include the costs of handling and moving the goods within port or container terminal facilities and the carrier or terminal operator may well charge these costs to the buyer who receives the goods. In these circumstances, the buyer will want to avoid paying for the same service twice: once to the seller as part of the total selling price and once independently to the carrier or the terminal operator. The Incoterms 2010 rules seek to avoid this happening by clearly allocating such costs in articles A6/B6 of the relevant Incoterms rules. Unless one actually reads the Incoterms rules, rather than the charts, they cannot understand this.

    From a seller’s perspective, CIP is more advantageous than CIF and with containerized goods it is more suitable to use CIP rather than CIF. With CIF the seller is responsible for placing the goods on board the vessel and contracting for carriage from that point. The buyer’s risk commences at this point but the seller takes out insurance for that risk so that the buyer can make a claim if need be.

    A buyer might prefer CIF provided the seller is willing to bear the risk for the condition of the goods through vessel loading. The problem then becomes that under CIF, the seller procures carriage to the destination port. This could work if the buyer handles the on-carriage from the arrival port (either unloading the container there or arranging with the carrier to use it for the on-carriage movement). However, it is more likely that the seller is contracting transport on a door-to-door basis, which doesn’t fit CIF. The parties would also have to work out appropriate insurance arrangements so that the on-carriage is somehow covered, but that seems like a lot of tweaking to avoid CIP, which was designed for such situations.

    1. Prashant Roy says:

      Thanks David. That was a very detailed, well worded, easy to grasp explanation and I really appreciate and thank you for your effort. Also for bringing to my notice about the Incoterms 2000. I shall be getting the latest edition soon.

      Regards

      Prashant Roy

  2. vaibhav sharma says:

    Hi Prashant ,

    All risk and responsibility of both INCOTERMS (CIF ,CIP) shall be transfered to buyer at their nominated place or port, yet the major difference is that CIP must be used in Air Mode or CIF for Sea Mode.
    In both case Freight and Insurance shall be bear by seller.
    CIF-COST INSURANCE AND FREIGHT
    CIP-CARRIAGE AND INSURANCE PAID

    Regards,
    Vaibhav Sharma

    1. Prashant Roy says:

      Dear Vaibhav,

      Thanks for your effort but I am still not convinced because this website says that CIP is also used for Ocean shipments that are containerized.

      CIF is also used for Ocean shipments but for those that are not Containerized.

      I presume that the term Containerized means FCL and the non-containerized means LCL.

      Correct me if I am wrong.

      Regards,

      Prashant Roy

    2. Prashant Roy says:

      Sorry, missed the link to the Website in my previous comment and is given below:

      http://bhavanigroups.com/incoterms_2000.pdf

      Prashant Roy

  3. 1. The fake freight forwarder scam. This year’s most popular edition of the fake company scam seems to be that of fake freight forwarders. One version of this scam is not all that different from the fake IP registration scam in that both involve gaining trust, getting money, and then disappearing. The fraudulent forwarders pose as legitimate companies with spare cargo capacity. Their truck arrives on-time to collect the freight and then disappears, never again to be seen.

    To accomplish this fraud, organized gangs create their own websites, advertising themselves as freight forwarders. These sites are characterized by very basic information, freemail accounts like Yahoo, Hotmail and Gmail rather than a company email address, and mobile phone or Skype contacts only.

    Freight forwarders themselves are falling victim to real but fraudulent Chinese freight forwarders who ship freight, purportedly at very low rates, and then demand ransoms of thousands of dollars to release bills of lading. The British International Freight Association (Bifa) warned operators to be wary of emails from unknown Chinese forwarders, looking for UK partners and offering cheap ocean rates.

    Here is how it works: Once a signed and sealed agency agreement is in place between both parties and business starts, all appears to be normal. This is until the cargo arrives at the port and no-one has received the original bill of lading from the forwarder in China. When contacted, the forwarder demands a large ransom for the release of the original bill of lading. Companies which refuse to pay find themselves on an expensive rollercoaster ride of meetings with customers, lawyers, insurers and shipping lines in order to obtain the original bill of lading so the cargo can be released. By spreading shipments around a number of shipping lines, fraudulent forwarders can make this recovery process even more onerous.
    These forwarders may be real companies who are just out for the quick kill, or fraudulent companies that are not registered in China at all as a freight forwarder, making it more difficult to take any recourse.
    2. The come to China to celebrate our deal scam. In this scam an alleged Chinese company emails a foreign company to express a desire to buy a few million dollars of the foreign company’s product or service. The terms of the deal are quickly worked out and the Chinese company suggests that a representative of the foreign company come to China to sign the contract and to celebrate the two parties having cooperated so well in inking their deal.

    The foreigner(s) gets to China (usually some fairly out of the way city in China) and is treated to what appears to the foreigner to be a really expensive meal at which the contract is signed. At this point, the foreign company is told that Chinese custom requires that the foreigner buy the Chinese CEO an expensive gift and pay a notarization fee. The foreigner is then taken to purchase a nice piece of jade and requested to pay a couple of thousand dollars for the “notarization fee”. Oftentimes the foreigner just gives the Chinese company people cash to go off and buy the CEO gift on the foreign company’s behalf.

    It isn’t until weeks later that the foreigner learns that there is no deal and, in fact, there is no Chinese company either. The big lure of this scam is that nobody wants to fly all the way to China, have a great meal at someone else’s expense, and then be too cheap to spend USD$3,000 to $8,000 more to seal the deal.
    Before getting on a plane, do some due diligence on the company AND if the company shows up as real, contact them to make sure that they are really the ones with whom you are dealing. Sometimes just one email to the company that is purportedly behind the deal is enough to determine that a scam is being perpetrated.

    3. The new bank account to pay us scam. Too many smart companies fall for this and may be one of the most difficult to detect. This scam is usually employed against a foreign company that has been making purchases from a Chinese company for an extended period. The foreign company has been making its payments pursuant to purchase orders that specify the company bank account to which payment should be made. Suddenly, the “Chinese company” (note the quote marks here) sends an email to the foreign company requesting funds for outstanding POs be made to a new bank account. Often, the name on the bank account is not the same as the name of the Chinese company. Often, the bank account is in a different city or even in a different country. Often it is in Hong Kong.

    What is the scheme here? It is always possible that the Chinese company has changed its bank account, but you had better be quite certain of this before you switch your payment. In the old days, the scheme was either that the Chinese company had hit hard times and was seeking a double payment or an employee at the Chinese company was seeking to get your payment instead of the company. The Chinese company would get the money in Hong Kong and then claim that you had never paid and that you still owed them money because it was completely your fault for having made the payment to someone other than to them.
    Last year this scam became even more sophisticated when computer hackers started hacking into Chinese companies’ computers and sending out invoices that purported to be on behalf of the Chinese company.
    How can you avoid getting caught up in this type of fraud? Take note of the following:
    • The computer networks of many Chinese companies are not secure. The networks are subject to abuse by employees of the Chinese company and by outsiders. This means that you can NEVER trust an email communication from a Chinese company. Email is inherently insecure in China and you never know with whom you are really dealing when engaging in electronic communication with Chinese companies.

    • Chinese companies tend to be very loyal to their banks and so you should view with extreme suspicion any request to make a change in the payment bank. You should not even consider following such a request unless the request is made in writing on a revised purchase order stamped with the company seal. Even in that case, it is important to contact someone you know in the company with supervisory authority to ensure that the request is valid. Email requests to make a change should be ignored, but the request should be forwarded to your trusted Chinese company contact for an explanation.

    • Carefully review all bank account information. Monitor both the name of the payee and the location of the bank. Where the payee is even slightly incorrect, do not pay. Where the location of the bank is in the wrong city or country, do not pay. I have seen cases where foreign buyers paid to bank accounts outside of China to payees with no connection to the seller. These cases were all obvious frauds and the buyers lost their entire payment. I have seen millions of dollars vanish into thin air with this sort of scam. The Chinese parties committing the fraud will explain the need for this irregular payment as part of a plan to hold foreign currency outside of China. This kind of arrangement is no longer required in China. Explanations of this kind are indicia of fraud and should be ignored.

    4. The fake IP registration company scam. This is a tried and true favorite and it comes back in new forms every year. A favorite is the fake law firm or fake trademark/copyright/patent agent scam. Under that scam, a website proclaims really cheap trademark, copyright and patent registrations in China. The foreign company sends money and nothing ever gets filed. There are two variations on this one, one much more sophisticated and harmful than the other. The first and more simple version is for the fake China law firm or China IP agent to get a one-time payment and then do absolutely nothing further. Under this scenario, the foreign company quickly realizes it has been scammed and, more importantly, knows that it still needs to register its IP in China.

    Under the more sophisticated version, however, the fake Chinese law firm or IP agent keeps updating the foreign company and keeps requesting more money along the way. Many (probably even most) legitimate law firms and IP agents charge for registrations in stages so even savvy foreign companies see nothing wrong in this. The smartest of these sophisticated scammers even eventually send the foreign company a fake trademark registration certificate or copyright registration certificate (I am personally not aware of this having gone so far with a patent registration, but I would not doubt that it has). The foreign company then thinks it is covered for its China IP registrations and does not learn for many years later that it is not. By that point, of course, there are no further traces that might lead to the scammers.

    5. The fake company scam. Another type of fraud commonly seen is where criminal organizations buy failing operators and continue to trade under their name in a state of virtual insolvency. They are able to identify and accept cargo which is subsequently stolen in transit. One company suffered a multi-million dollar loss after cargo disappeared. Simply looking at the shipper’s business license would have revealed that it was a complete fake.

    1. Wow, now that’s what’s called an exhaustive comment covering many easy to miss yet elaborate scams in our industry.. Thanks David..

  4. Prashant Roy says:

    Hi Hariesh,

    An article well written and so apt to start the New Year.

    BETTER safe than SORRY !

    Also can you explain the fine difference, in any, between the Incoterms, CIF and CIP ?

    All the very best for the year 2014.

    Regards,

    Prashant Roy