Tackling cargo misappropriation

05 April 2019

Cargo misappropriation continues to cause major concerns for clients and insurers alike. With effective deterrents, companies can reduce the risks and maintain an effective level of insurance coverage.

Cargo claims continue to affect the international cargo market due to commodity prices and wider concerns over the state of the global economy and political uncertainty – the classic factors behind rises in cargo theft or misappropriation.

Although not exclusively the emerging markets of BrazilIndia and China are prone to cargo misappropriation with local warehouse owners vulnerable to the temptation that hundreds of millions of dollars’ worth of goods can cause.

Misappropriation can be broadly defined as the illegal use of another’s property for an unauthorised purpose, by any person with a responsibility to care for and protect those assets. It may involve the theft or physical removal of goods but is more often perpetrated as a documentary fraud.

The intention of the person misappropriating the cargo is not necessarily to deprive the owner of that cargo forever and they may be trying to raise capital to pay off other debts and hoping that by the time the owner wants their cargo they’ve replenished it.

The downside is the theft is discovered too early or their actions to raise capital are not successful so there ends up being a shortfall.

Easy targets

Those misappropriating cargo typically look for products that can be quickly sold and converted into cash.

Food products such as grain, rice or sugar are popular targets, as are high-value but low-quantity cargoes like petroleum products.

UK law is currently straightforward in these matters, with all possible definitions, including misappropriation, bundled together as theft.

This is not the case in all legal jurisdictions, however, and there may be a legal distinction between theft and misappropriation in some countries.

It is important that local policy wordings reflect local laws but are kept as simple and inclusive as possible.

Insurers’ overriding concern is often the behaviour of the insured company and the efforts they have, or have not, taken to safeguard cargoes against the risks of misappropriation.

Pay attention

It is commonplace for goods to be inspected when entering and exiting storage but cargo owners must make frequent and thorough inspections of stock and ensure they have legally enforceable documents of title.

If a client can demonstrate that they’ve been auditing their cargo then they will be better positioned to make a claim compared to another client that has bought a cargo and then not checked its status for six months.

Several measures can be taken to make a cargo a less attractive target, including unannounced physical stock control inspections, which should include a detailed review of stock inventory lists or video surveillance.

Inspectors must be wary of ruses like empty box constructions where a façade of products in fact hides empty boxes. It is imperative that stacks of boxes are checked, using mirrors on sticks if necessary, rather than inspectors simply rubberstamping warehouse operations.

Commingled cargoes give rise to potential issues so, wherever possible, owners should seek to use dedicated warehouse space that allows them sole usage.

It is also vital that goods are not sitting unlabeled and anonymous in a warehouse: every bundle should be (where possible) labelled with its own unique number to aid identification and tracking.

The digital world has allowed operations to grow larger and for physical distances between deskbound staff and stocks to grow wider, creating more opportunities for misappropriation.

The cargo owner might be thousands of miles away and lots of things are now done remotely.

However, it is always good to have a local presence rather than trying to do everything from a desk somewhere and having trusted local colleagues, local counterparts and local operations is important, rather than just in the core trading hubs like London, Geneva and Singapore.

Electronic trading

Sales that don’t involve the physical movement of stocks also create the conditions for fraud, as does the lack of evidence required for some forms of electronic trading.

Documentation attached to emails or sent by fax with electronic signatures can be easily falsified.

Case study

A cargo owner with a long-term storage agreement with a bailee (an individual who temporarily gains possession, but not ownership, of goods under a bailment) requested that its cargo was released under the terms of the storage agreement.

The owner was unaware that, due to an economic downturn in that region and consequent withdrawal of credit insurance from local retailers, the bailee was over-stretched by its financial commitments and overwhelmed by debts.

The bailee gave the cargo owner several excuses why its cargo could not be released, including ongoing maintenance and transport logistical issues. The bailee was simply stalling the owner, however, as it had used the cargo to honour other release obligations – to other cargo owners.

By this point the Bailee was effectively bankrupt, so the cargo owner had no recourse against it despite being deprived of access to its cargo.

The claim the cargo owner presented to its cargo underwriters was complex, as the owner had not relied on regular physical and independent inspection of its cargo. To complicate matters further the cargo had been commingled with other cargoes.

Although insurers paid the claim, it took longer than normal to settle as the owner was challenged on its storage.

Jay PayneTALK TO AN EXPERT

If you would like to talk about any of the issues raised in this article, please contact Jay Payne, Senior Partner on 
+44 20 7466 6236.

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