When can Maritime Fraud occur?

Although already having established some form of guidance with respect to the legal requirements for maritime fraud, the picture at this early stage is still extremely hazy. A brief inquiry into some of the factors facilitating the commission of fraud is therefore called for in order to illuminate the picture further.

Maritime fraud occurs not only as result of the gullibility of its victims, but also as result of the interaction of a great deal of independent factors stretching across political, social and economic boundaries:
`Frauds are based on game situations, intriguing challenges, in which criminals seek to compromise the security controls of a system...but frauds will not succeed unless the system is flawed and bears the seeds of its own subversion. Conditions must be conducive, and they may even be seductive.[1]'
It is important to note that maritime fraud, and in fact, frauds of any description cannot be seen in isolation. A key question to ask is: what motivates the defrauder? This is not intended to be an enquiry into criminology, but valuable lessons can be learned from the answer.

In addition to the professional, there is the orchestrator of fraud who, as result of their peculiar circumstances, being overwhelmingly drawn towards the option of maritime fraud.[2] Incidents of fraud within this category surface more readily in a worsening economic climate.

Economic recession also creates the perfect environment for the professional defrauder, as increasing numbers of vessels are laid up, resulting in an inexpensive vehicle for fraud. As times toughen, standards fall inevitably, and insurers and ship-owners ask fewer questions.

Apart from the obvious factor of economic recession conditions, there will at any given time exist a number of factors facilitating one type of fraud or another. This may include wars and civil disturbances, which are ideal situations to exploit. Countries in the grip of strife still require commodities, yet as result of this disturbance, reputable shipping lines will attempt to steer clear of these troubled areas.[3]

The most obvious case in point is undoubtedly that of Beirut, where a number of unofficial ports have in the past undermined the law of the land, creating perfect havens for the discharge of stolen cargoes. Perhaps the most important factor worthy of consideration is the vast changes in the shipping industry during recent decades, which include:
`- freer availability of credit for purchase of ships; - introduction of specialized, capital intensive ships ; - faster turn-around times; - the changing role of the ship-owner ship-owner - ship operator - multimodal transport operator; - instantaneous communications ; - simplification of documentation; and - widespread use of computers'[4]
Whereas the industry has for many years been based on a slow evolution of custom and commercial practice, the comparatively quick changes in the last few decades have caused a number of anomalies. These include such factors as the inability of law to keep up, and paperwork lagging behind transactions, in turn creating a perfect environment for the fraudulent minded opportunist.

The letter of credit system bears witness to a system based on trust, the checkpoints ensuring merely that the paperwork has been prepared correctly rather than checking on the truthfulness thereof.[5]

A very important key is a high demand for certain resources or specific articles, the higher the demand, the greater the danger that the articles will be the subject of crime.[6]

Once factors exist conducive to the commission of the fraudulent act, the game can commence, but the actors in the plot have to play their parts in order to facilitate a successful fraud. There is something inherent about the act of fraud, which requires the victim to make an omission or act in accordance with the misrepresentations made by the defrauder.

In some cases the belief by the victim that the proposed scheme has elements of illegality or is not quite legal, may actually have the effect of swaying the latter's mind to participate in the scheme. `It is the "something for nothing" syndrome which is present, I suppose, in all of us to a greater or lesser degree.'[7]

More often than not, the victim is so dazzled by clever words of persuasion that all caution is thrown to the wind. In many cases, it is the underwriter who may potentially suffer as result of this folly. An obvious example is that of a claim on the hull and/or cargo, for an allegedly lost vessel under the headings of `perils of the seas' or `barratry'.

Many different variations of the basic scenario of a scuttled vessel exist, including that of selling the cargo many times, notwithstanding the fact that neither the cargo nor the vessel existed in the first place.

There can be no doubt that maritime crime is big business indeed.[8] One of the biggest problems most certainly, is that of detection. In practice, investigation will not occur before a claim is brought, and then only if the claim is large enough to warrant the costs of an insurance investigation. Petty fraud succeeds at this stage, and short delivery of goods is a common occurrence.[9]

When investigations are initiated, the investigator is faced with few available facts in order to prove the commission of fraud. Investigators and marine claim managers are accordingly necessitated to conduct their investigations in accordance with a sixth sense.

Although insurers do co-operate in liaison with bodies such as the International Maritime Bureau (I.M.B.), as well as surveyors and average adjusters, no satisfactory system of coordinating facts has been found as yet. In this respect, a primary obstacle has been the lack of the manpower to administrate a system of full co-operation and disclosure.[10]

There is a definite need for better liaison between all concerned in the marine underwriting industry. As matters stand currently, it is quite possible for insurers to pay out, independent of each other, on suspicious claims without the sharing of knowledge that the insured concerned had submitted fraudulent claims in the past.[11]

On the other hand, insurers may find it more convenient to pay out on suspected fraudulent claims, especially when taking into consideration the potential complexities facing the cargo surveyor. It is often suggested that insurers pay out far too easily on suspicious claims.[12]

Ships particularly at risk of being used in fraudulent schemes include vessels which are twelve years old or more, smaller than 10 000 tons and flying a flag of convenience.[13]

Very often the same parties seem to be involved. Peter Kapoor's findings indicate that in some seventy cases of known suspicious sinkings, thirty-one vessels have sunk under the agency of five companies, four companies having been involved in six other vessels which sank.[14]

Maritime fraud is a phenomenon occurring within a complex framework, depending on a vast number of factors. It is something which may be difficult to detect before it is too late, but a measure of neurosis on the topic will certainly do no harm in an attempt to prevent the occurrence of this phenomenon.

Carl Smit, 7 August 2012


Arthur J. Klinghoffer Fraud of the century - the case of the mysterious Supertanker Salem (1988) 1.


Barbara Conway The Piracy Business (1981) at 14.


See generally, Barbara Conway op cit note 2 at 15-19.


Peter Kapoor A Systems Approach to Documentary Fraud (1987) (unpublished thesis) 6.


Conway op cit note 2 at 22, 23.


I.M.B. Publication `The first 10 Years'(1991) 20.


Rowan Bosworth-Davis Fraud in the city: too good to be true (1988) at 3.


See for example the estimations of Peter Kapoor `Analyses of losses due to Maritime Fraud' 3 BIMCO Bulletin (June 1986) 8443.


Personal interview with Mr K. Luck of the I.M.B., (1991) London.


A good example is that of the I.M.B.'s cargo coordinating programme which has thus far failed to properly get off the ground due to insufficient co-operation.


Personal interview with Mr Mike Schrimpton of K.G.C. Adjusting Partnership, October 1992, Johannesburg.


Chris Hewer and Michael Gray On the Rocks: Tales of Shipping and Insurance (1982) 78. The dispute cited involved the sinking of a vessel containing an alleged cargo of 700 tons of corned beef, the cargo having become the subject of a £ 1 million insurance claim. It was found that the beef had been stowed prior to shipping for 3 years and was not fit for human consumption.


Barbara Conway op cit note 2 at 21.


Peter Kapoor `Definition and classification of Maritime Fraud' (1983) Lloyd's Maritime and Commercial Law Quarterly 33.