Banks warned over fraudulent shipping documents
Banks are being urged to check shipping documents with particular caution as attempts to manipulate pre-financing have gained momentum.
The ICC’s International Maritime Bureau (IMB) has warned against a pre-financing fraud involving importers in West Africa and exporters in China, whereby false shipping documents are provided to unlock funds before goods are actually shipped.
The IMB identified the scheme when authenticating bills of lading submitted by member banks. Though matching the details of genuine shipments, the documents contained enough discrepancies to start an investigation, during which all major carriers confirmed that the documents were not genuine.
Michael Kim, head of shipping at DLA Piper’s London office, warns that these frauds, though committed by exporters, could have dangerous consequences for banks. “It’s is very important for the seller’s bank to check the contents of the bill of lading very carefully, because if they don’t recognise that it is fraudulent, and transfer the shipping documents to the confirming bank and the buyer’s bank can spot that the bill of lading is fraudulent, they can refuse to pay the seller’s bank. Without being able to get the invoice confirmed by the buyer’s bank, the issuing bank could lose quite serious amounts of money,” he tells GTR.
He adds that even if the confirming bank does not recognise anything fraudulent, the buyer may sue the banks involved if the carrier refuses to give them the goods because of discrepancies in the bill of lading.
“A lot of responsibility rests on the banks’ shoulders; that’s why it is so important for them to stop and check the shipping documents to make sure that they are genuine. If they make a mistake, they can lose money or be subject to claims by the buyer.”
Although most of the time goods are shipped after the fraudulent exporter received payment, IMB director Pottengal Mukundan explains that this practice is an abuse of the documentary credit system and can expose banks to a number of risks.
“From the bank’s perspective, the biggest risk is that there could potentially be two or more sets of documents in circulation for the same shipment, each generating a set of trade finance [documents] for the same cargo, but going through different banking channels. One reason for the success of such schemes is that banks do not share their information on transactions. Other schemes which build upon this vulnerability include money laundering and long-term frauds in which the bank itself becomes the target of the scam,” the IMB adds.
As Kim points out, fraudsters are finding more and more clever ways to go unnoticed. “The problem is that fraudulent people tend to build good relationships with banks for about one year, and then a year later they commit a fraud and run, leaving no recourse for the issuing bank,” he says.
And as time goes by, the quality of the false sets has increased, making it harder to notice discrepancies. “Unauthorised pre-financing scams are not a new phenomenon, but the ultimate danger is that it may reach the point that sellers may receive funds and do not subsequently ship the goods,” Mukundan warns, adding that banks can refer to the IMB for safe sharing of information between various companies and sectors, which can help frustrate potential fraudsters.