Keeping ships afloat: Maritime fraud affects us all

On July 5, 2011, the tanker ship, Brillante Virtuoso, which was carrying 140,000 metric tons of fuel oil, was drifting within Yemeni waters. Later in the day, a small boat with seven armed men approached the vessel. The men, who claimed to be a “security team” to escort the tanker through the Gulf of Aden from the Arabian Sea, hijacked the ship and demanded that the vessel proceed to Somalia.

Within an hour, the ship’s main engine inexplicably broke down, and the armed men set the vessel on fire and left. A U.S. warship rescued the Brillante Virtuoso. The vessel’s owner later sold it for scrap and filed an insurance claim for US$77 million. However, investigators discovered that the vessel’s owner had staged the hijacking to commit insurance fraud. (See Brillante Virtuoso - an extraordinary attempt at maritime insurance fraud, by Chris Zavos, Jo Ward, Suzy Oakley and Jacob Hooper, Kennedys Law, May 10, 2019.)

Fraud on the seas

The number of piracy and armed robbery incidents in Asia almost doubled in the first half of 2020, in which 51 incidents were reported versus 28 incidents in the same period a year earlier. (See Piracy and armed robbery incidents in Asia almost double in H1 2020, by Marcus Hand, Seatrade Maritime News, July 16.)

Illegal bunkering (“bunkering” is supplying fuel for ships) is estimated to cost companies and governments up to $3 billion a year. (See Data science project initiated to tackle illegal bunkering, by Lee Hong Liang, Seatrade Maritime News, Feb. 13.)

Seafarers International Research Centre’s (SIRC) recent research provides insights into many corrupt practices involving port officials, such as demands for cash payments, theft of products and equipment, facilitation gifts and fuel-supply fraud. (See Film highlights corruption and theft faced by seafarers, by Marcus Hand, Seatrade Maritime News, Feb. 25.)

These are just a few examples of fraud occurring within the maritime industry.

But why should you care about maritime fraud? Because it disrupts many supply chains and can add unneeded costs to your organization’s balance sheet.

Defining maritime fraud

According to the International Maritime Bureau, maritime fraud generally involves one or several parties: buyer, seller, shipowner, charterer, ship’s master or crew, insurer, and banker broker or agent.

As per the bureau’s definition, maritime fraud “occurs when one of these parties succeeds, unjustly or illegally, in obtaining money or goods from another party to whom, on the face of it, he has undertaken specific trade, transport and financial obligations.” (See Guide to prevention of maritime fraud, I.C.C. Publication No. 370, 3, 1980, as cited in “What is Maritime Fraud?” Dominion Trading.)

Maritime fraud can occur anywhere — on board vessels or within oil and gas, shipping and trading companies. We’ll cover the most common fraud schemes here.

DOCUMENT FRAUD

This includes fraudulent misrepresentations of cargo documents (i.e. bills of lading, cargo invoices etc.) and presenting fake letters of indemnity.

Forged bills of lading

Bills of lading are evidence of the contracts of carriage, receipt and documents of title to goods. Fraudsters will falsify bills of lading to take delivery of cargo ahead of the genuine receiver to steal it or sell it to another party. (For a full definition of bill of lading, see Legal Dictionary, Nov. 11, 2016.)

The most popular forgery method — impersonation of authorized shipment receivers so thieves can steal entire deliveries — often requires some insider information and copies of original bills.

Unfortunately, insurance doesn’t cover all forged bill of lading frauds for shipowners and genuine receivers. In 2015, a Belgium shipping agent released six containers of castor oil against fraudulent bills of lading, which appeared genuine at first glance. The insurance case was finally settled after almost four years of negotiations for US$160,000 — US$110,000 less than the originally claimed amount. (See Forged bills of lading, ITIC, Oct. 10, 2013.)

Criminals can also falsify bills of lading and certificates of origin to evade sanctions. Authorities have found that sanctions evaders have falsified shipping documentation of petroleum products, petrochemicals, metals and sand to disguise their origin. (See Sanctions Advisory for the Maritime Industry, Energy and Metals Sectors, and Related Communities, Department of Treasury, Department of State and U.S. Coast Guard, May 14.)

In June, Reuters found that China had never stopped buying oil from Venezuela, despite the U.S. tightening sanctions against Venezuela in August 2019. According to Reuters, crude oil from Petroleos de Venezuela SA (PDVSA) keep arriving at China ports with the help of a Switzerland-based unit of a Russian state-owned oil company.

For example, in July 2019, the tanker Adventure, chartered by a China National Petroleum Corp. subsidiary, took 1.9 million barrels of Venezuelan crude from another vessel in Malaysian waters.

The manager of the Adventure, Greece-based Eastern Mediterranean Maritime Ltd, said it had never entered into any agreement with PDVSA and was fully compliant with U.S. sanctions. The cargo’s bill of lading and certificate of origin stated that the oil had come from Malaysia.

According to Reuters, between July 1, 2019 and Dec. 31, 2019, tanker ships delivered at least 18 shipments totaling 19.7 million barrels of rebranded Venezuelan crude to Chinese ports. (See Vast amounts of Venezuelan oil are hidden en route to China, bypassing US sanctions: data, documents, Reuters from Energyworld.com, June 13.)

BUNKERING FRAUD

Oil prices have increased significantly in the last 20 years thus providing strong incentives for fraudsters because bunker fuel accounts for 30% to 70% of the overall costs of a vessel. (See Crude Oil Prices - 70 Year Historical Chart, Macrotrends.)

Maritime fraud can occur anywhere - on board vessels or within oil and gas, shipping and trading companies.

Bunkering fraud can occur within delivery quantity and quality, and consumption quantity by the vessel. (See Fraud in the Maritime Industry, Maritime Connector, Jan. 30, 2014.)

Cappuccino effect 

A fuel seller overstates quantity by pumping air into bunkering fuel to increase its overall volume from 2% to 5%, thus creating the “cappuccino effect.” The air in the fuel will disappear and oil volume will decrease in about 18 to 24 hours, which is normally long enough for the ship to depart from the port with a supposedly full tank. (See 13 Malpractices In Bunkering Operations Seafarers Should Be Aware Of, Marine Insight, Dec. 12, 2019.)

Because many companies still use standard flow meters, which only measure volume and not actual mass of fuel, the pumped air is registered as additional volume. More technologically advanced meters are capable of measuring the true quantity or mass of the fuel delivered. (See What is Cappuccino Bunker Effect on Ships? Marine Insight, Dec. 29, 2015.) These high-tech mass-flow meters became mandatory for bunkering in Singapore in January 2017. (See Mass Flow Meter Malpractice? by Kaivan H. Chinoy, Ship & Bunker, May 2, 2017.)

Temperature effect

Culprits overstate fuel quantity and charge higher prices by warming the oil, which expands its volume. (See 13 Malpractices in Bunkering Operations Seafarers Should Be Aware Of, Maritime Insight, Dec. 12, 2019.) A relatively small temperature increase could cost a company millions of dollars a year in losses for a large fleet. High-tech mass-flow meters could again come to the rescue.

Mass-flow meter tampering

Fuel costs make up to 30% to 70% of the overall ship operating costs depending on the ship type. Thus, it’s essential to accurately determine the amount of the bunker fuel on a vessel. (See White Paper - Reliable Bunkering Practices Enhanced By New Technologies, Ascenz, Nov. 4, 2019.) Mass-flow meters tend to produce more accurate results, but don’t consider them as a foolproof solution to marine fuel-related malpractice because fraudsters can tamper with them also.

Crooks can place industrial grade magnets on mass-flow meters to alter bunker metering computers so they record greater quantities of delivered marine fuel. The Maritime and Port Authority of Singapore (MPA) has revoked licenses from several bunker operators that used magnets for tampering. (See Singapore suspends Southernpec bunker craft licence over mass flow meter tampering, by Lee Hong Liang, April 28, 2019 and A top 10 Singapore Supplier Has Bunker Tankers Suspended Over Mass Flow Meter Irregularities, Ship & Bunker, March 14, 2017.)

In August 2019, a bunker tanker officer was sentenced to five months in jail for altering a mass-flow meter. (See Magnets on MFMs: First suspect charged over MFM tampering in landmark case, Manifold Times, Aug. 28, 2019.)

Fuel adulteration

Criminals can adulterate bunker fuel with used vegetable oil from restaurants, byproducts from manufacture of plastics and cosmetics, used motor oil, vulcanizing agents from rubber production and “tall oils” — byproducts from wood pulp production.

Adulterated fuel can severely damage vessels’ engines. For example, in 2018, more than 200 vessels around the world suffered serious — sometimes complete — engine failure because of bad bunker fuel. The ships were stranded in some of the biggest ports in the world, including Houston, Panama and Singapore. (See Contaminated fuel is poisoning global shipping, by Dr. David Soud, Dr. Ian Ralby and Rohini Ralby, Atlantic Council, Sept. 24, 2018 and Dirty secrets: tainted shipping fuel sparks calls for tighter quality control, by Roslan Khasawneing, Reuters, Sept. 5, 2018.)

Offending fuel contains styrene, indene, phenol, 4-cumylphenol and fatty acid methyl esters, all of which companies aren’t required to test for under the ISO 8217 bunker-fuel standard. (See Contaminated bunkers — Is there an answer to the problem? by Sze Kee Gho and Maggie-Jo McGregor, Shipowners, July 24, 2019.)

In March 2019, two companies — the National Shipping Company of Saudi Arabia and the Mexican petrochemical company, Indelpro SA — filed lawsuits against Valero, the second-largest U.S. refiner, alleging a Valero subsidiary sold contaminated bunker fuel that damaged their ships in 2018.

The Saudi Arabia shipping company said it paid more than US$1.1 million for repairs and replacement fuel for a ship that drifted at sea for two days before restarting and arriving at Alexandria, Egypt, for repairs. (See Companies sue Valero for bad marine fuel, by Erwin Seba, Reuters, March 29, 2019.)

An International Marine Organization regulation issued in January from the International Convention for the Prevention of Pollution from Ships requires all shipowners to either stop using high-sulfur fuel oil or install scrubbers to clean emissions to comply with a global 0.50% sulfur cap. According to Mark Church, director of marine liability insurer, the North of England P&I Association Limited, this regulation could result in more blending and more claims of fuel contamination. (See Off-spec Houston bunker fuel triggers ‘explosion of claims,’ by Bethan Moorcraft, Insurance Business, Jan. 8, 2019.)

Here are additional bunker fuel frauds:

Forged fuel invoices

In 2017, Vermont UM Bunkering, a Singapore-based ship fueling company, overstated fuel delivery amounts in invoices and forced its customers to make excess payments of more than US$8 million within five years. The company, two of its directors and a former bunker manager were each charged with engaging in a conspiracy to commit criminal breach of trust by dishonestly misappropriating approximately 250 metric tons of marine fuel oil entrusted to Vermont Bunkering. (See Oil bunkering company and two of its directors face charges related to fraudulent transactions, by Shaffiq Idris Alkhatib, The Straits Times, Nov. 16, 2017.)

Forged receivables and debt fraud in bunkering businesses

Bunkering businesses have always needed loans to cover their operations, and banks have been keen to provide it. However, when some bunkering companies didn’t manage those loans well and had to liquidate, fraud allegations followed. Coastal Oil (Singapore) Pte. Ltd., which filed for bankruptcy in December 2018, owed at least 10 banks a total of US$380 million, in which Singaporean banks offered 60% of the loans. (See Coastal Oil Singapore in US $380 million debt to at least 10 banks, Manifold Times, Jan. 4, 2019 and Coastal Oil Singapore Hit By Debt Fraud Allegations, Ship & Bunker, Jan. 7, 2019.)

In January 2019, Cosco Shipping International said that most of the receivables assigned to its indirect wholly-owned subsidiary Sinfeng Marine Services Pte. Ltd. were fraudulent. Most of Sinfeng’s 2017 and first half of 2018 spend was with Coastal Oil, which filed for voluntary liquidation in December 2018. (See Coastal Oil Singapore Hit By Debt Fraud Allegations, Ship & Bunker, Jan. 7, 2019.)

Six additional bunkering companies filed for bankruptcies from 2014 to the beginning of 2019 — some of which were embroiled in fuel scams. (See Bunkering and Banks - Once Bitten, Twice Shy? by William Hogg, Infospectrum, Jan. 28, 2019.)

Preventing maritime fraud

How can businesses protect themselves against maritime fraud? First, maintain a clear chain of custody for cargo documents and carefully scrutinize bills of lading prior to accepting shipments. If you find red flags, such as spelling errors and documentation inconsistencies, shut down your entire operation until you’ve ensured a document isn’t fabricated.

Check for watermarks, appropriate papers and ink (including color, density and even texture) to prove authenticity of bills of lading. (See Fraudulent bills of lading by Mohammad El Hawawy, Al Tamimi & Co, June 2013.)

Consider using paperless, electronic bills of lading, which could help reduce fraud risk, optimize costs and make the process more transparent.

Perform robust due diligence on vessels and all involved parties to ensure you’re not dealing with sanctioned entities.

For those in the maritime shipping business, employ experienced crew and qualified bunker surveyors. They’ll closely monitor fuel supplies and check for visible and physical signs of possible problems — such as changes in temperature and signs of injected air — and investigate any significant differences.

Use mass-flow meters for better accuracy. Proper meter selection and installation procedures are crucially important to ensure correct measurements. To prevent meter tampering, place seals at appropriate points to hinder unauthorized connections or insertions of magnets. Surveyors should check that seals aren’t broken and seal numbers match seal verification reports. When seals are broken or missing, disregard meter results and quickly inform management. (See Mass Flow Meter Malpractice? by Kaivan H. Chinoy, Ship & Bunker, May 2, 2017.)

Thoroughly test all fuel for contaminants with advanced gas chromatography mass spectrometry instrumentation. (See Bunker Fuel Chemical Contamination Screening, Intertek.) 
And, as always, segregate employees’ duties to bolster internal controls.

Don’t let fraud sink the ships

Of course, we can’t eliminate maritime fraud, especially when company employees are involved, or several fraudsters collude. So, companies should not only establish controls but vet all parties before engaging in any business activities, conduct regular staff trainings, promote hotlines and strengthen ethical tone at the top to help prevent fraud from happening in the first place — and keeping the ships afloat.

Anastasia Nazarova, CFE, is a corporate auditor at Chevron Products UK Limited in London. She’s the 2020 ACFE Hubbard Award recipient for the best Fraud Magazine article in 2019, “Dark world of oil theft and fraud,” in the July/August issue. Contact her at anastasia_wish@yahoo.com.