Is tackling fraud at sea about to become big business for lawyers? The International Maritime Bureau (IMB) certainly thinks so. The Guildford-based anti-crime bureau which helps tackle fraud at sea, is looking to ramp up and formalise the network of lawyers it instructs internationally. It hopes that the move will help it to step up its fight against the increasing levels of maritime fraud.
The move itself is evidence of the upward trend in shipping fraud, although statistics in this area are notoriously hard to come by. “It’s very hard to quantify a clandestine activity,” says the IMB’s assistant director Peter Lowe. “People are reluctant to report, mainly because they don’t want to be duped. In banks there is generally a culture of keeping things under wraps rather than publicising them.” A senior Lloyd’s underwriter blames it on his systems not being “configured to give such information”.
Lowe, a lawyer by training who left Holman Fenwick & Willan 21 years ago to join the IMB, is choosing some 50 law firms worldwide to assist the organisation in tracing assets related to ships linked to frauds at sea. “We hope to have one law firm in our network per country,” says Lowe. With a panel on this scale, Lowe hopes his organisation will be more effective in combating fraud.
Awash with fraud
The IMB, which has 25 staff, is part of the International Chamber of Commerce (ICC). It is often relied upon by lawyers investigating fraud at sea thanks to its contacts in ports worldwide, who can help trace ships, tell if a stolen cargo is being unloaded and inform the authorities to stop the sale of illicitly-gained cargoes.
“We’ve got agents in every country,” says Lowe. “This could be a police officer we have informal ties with or other forms of investigators we’ve built up relationships with over the years. This can be useful to lawyers. We also collect a lot of data on fraudsters so there is interest from lawyers there too.”
The combination of law reports awash with fraud at sea claims and Lowe’s need for a panel of solicitors suggests there is little let-up on a whole range of maritime frauds. Chasing ship owners’ money is of the busiest areas, according to Lowe. Asset tracing in the ship context works as follows: insurers, ship owners, cargo owners or a law firm are investigating a fraud at sea; the evidence has been gathered and now the ship owners want compensation; lawyers have to act quickly as money, particularly if owned by an alleged criminal, tends not to hang around; lawyers can go to court and get a freezing order on the assets of the purported criminal – a shipping company who has stolen cargo, for instance; finally, a judge can order a worldwide freezing order.
But all this takes time. By the time lawyers are en route to raid the criminal’s property or open up their bank account, the property could have been sold or the account moved. The IMB hopes its new panel will bring speed and efficiency to this process.
The other route is through the fraud police. But Hugh Dalzell, a shipping litigation partner at DLA, says: “There’s no compulsion on them to assist, and they may feel they shouldn’t be giving any information. However, if a specialist Fraud Squad – like the City of London Squad – can help, this can be invaluable, especially in obtaining and securing evidence where use of a criminal search warrant can be more effective and is almost bound to be cheaper than a civil search order.”
Nick Parton, joint founding partner of ship litigation practice Jackson Parton is no stranger to a fight and has been in the business for years. He acted in a leading case involving the scuttling of a ship off Aden in 1986. In those days, he says, it was common practice to scuttle ships near potential war zones and pretend the conflict was to blame. He has also acted in litigation around the scuttling of at least one Greek vessel and an array of fuel theft cases.
Like most shipping lawyers, he gets a glint in his eye when he talks about certain ship owners – they have their ‘pranks’, which are officially construed as frauds. But for Parton, as with many shipping lawyers, this is what makes his job fascinating. It adds colour to an otherwise routine day.
One arbitration he handled is a good example. The arbitrator made observations that most City shipping lawyers, but few outside the area, have known about for a long time. It is worth quoting. “I’ve lost count of the number of cases where I’ve been satisfied that a Greek-managed or operated ship passing through the Mediterranean, put into a Greek port without the fact being made known voluntarily to her charterers,” said the arbitrator. “Commonly, when such a deviation is discovered or at least suspected, the owners’ excuse is the landing of a sick crew member. In such cases, because the charterers are not advised, log entries are usually falsified (for example, by exaggerating weather conditions) so as to cover up the deviation.”
The arbitrator went on: “There are innumerable cases in which I and other arbitrators have been more than satisfied that ships’ logs have been falsified to conceal other diversions, or some deficiency or breakdown. Again, it is common to exaggerate weather conditions and to insert false problems.”
A pack of lies
The toughest problem facing maritime lawyers, however, may not be tracing assets, but convincing a court that any fraud has taken place. According to one maritime fraud expert with some 30 years’ experience in the business: “Courts get confused over academic arguments about whether the ship is insured through war risk or hull risk or whatever, when they should really be focusing on whether a fraud has taken place – whether, in fact, the ship owner is telling a pack of lies.”
This is bad news. Increasingly, insurers are fighting claims for missing cargoes and scuttled ships. This is partly down to the increase in numbers of financial directors in insurance companies, resulting in a bigger effort to recover monies.
English judges have also been criticised for not being as forensic in ship fraud cases as they used to be. One shipping partner says: “Judges are not so good at finding facts as they used to be. Judges were better during the 1970s and 1980s at assessing facts than they are today. Equally, lawyers are becoming better at providing the evidence.”
Whatever the reasons, shipping fraud appears to be growing and the consensus among shipping lawyers is that the courts need to reflect this reality. As one shipping expert says: “There are some among the judiciary who say no ship is ever scuttled. The rest of us know just how easy it is.”
Case study: fraud at sea
In 1996, Austrian company FJ Elsner & Co bought 60,000 tons of sugar from large trading company Glencore. Glencore agreed to deliver the sugar in three journeys from Santos to Umm Qasr in Iraq.
Glencore hired Zalcoseda II. The vessel had recently been bought by Singaporean ship operators. Its previous owner was going to scrap it because of its unseaworthiness, but it sold the ship instead. Also, at the time Glencore chartered Zalcoseda II, it was under arrest in Ghana in relation to cargo it had carried on a previous voyage.
The ship was subsequently released and by the time it arrived in Santos, several days late, it had changed its name to Jahan. It had also changed its place of registration from Liberia to Belize.
As the cargo was put on board Jahan at Santos, the ship was seen to be leaking. Nevertheless, the loading went ahead and it set sail, only for it to halt several miles off anchorage and then spend several weeks trying to repair its engines. The captain then made way for Ghana instead of Iraq. To confuse matters, Jahan issued a false mayday off South Africa. The police spent three fruitless days looking for it.
Next, it was discovered that, in breach of contract, the captain of Jahan was unloading the sugar – most of it damaged – at Tema harbour in Ghana. Some of it had been sold. It transpired that the crew was from the ship yard in Bangladesh where Jahan was to have been scrapped by the previous owners.
FJ Elsner took action against Glencore in relation to the lost cargo. It claimed before an arbitration of the Refined Sugar Association that, under the Sales of Goods Act, Glencore was obliged to not charter a damaged ship.
Having lost this claim, Elsner’s lawyers, Nick Parton of Jackson Parton, argued that Glencore should not have chartered a ship while they were unclear about its owners. Parton lost the case before the same arbitration tribunal. Parton is now due to argue before the Court of Appeal that under Glencore’s sugar charterparty the ship had to be “tight, staunch and strong”. His argument is that it was not.gone missing the lawyers need to have sufficient contacts in ports around the world to help track it.
Shipping fraud: getting the work
A law firm may often act for one or more clients involved in a fraud. These could be the ship owner, the company that chartered the ship, the cargo buyer, the cargo seller, the ship registration company, banks, or the insurers.
On its client’s behalf, the lawyer often has to hurry to the scene of the fraud to handle it properly. This could be on the other side of the world.
Take, for example, a common fraud. A cargo of rice has left Colombo for Dubai. A day later, the ship suddenly ceases communication. The cargo buyers in Dubai call their London lawyers who make some initial check calls. Suddenly the International Maritime Bureau (IMB) agents report that the rice is being unloaded at Mumbai on India’s west coast.
In this case, the firm needs to have contacts on the ground – a nearby law firm, for instance – to stop the fraud from continuing. It may also need to dispatch lawyers to the scene. If the law firm cannot provide this service then it will go to a firm that can.
Furthermore, ship fraud requires particular skills. If a ship is on fire, the lawyers will have to organise an investigation into whether it was started deliberately, or if a ship has gone missing the lawyers need to have sufficient contacts in ports around the world to help track it.