Over the years, I have received several questions from readers relating to a variety of topics on this resource..
Some of them are really valid questions especially if you consider that some of these questions may be from someone importing for the first time or someone exporting for the first time..
It makes you think of the issues that those entering international trade for the first time or shipping their first container would be facing in getting it completed successfully..
The business of shipping, freight and trade could all be a bit overwhelming as there are several processes to be followed and for those who are doing it for the first time, asking questions and finding the right answers is extremely important..
Here are some questions which I received from one of the readers of this resource, possibly, someone who is starting out new or someone experiencing some new problems with their shipments..
1) What happens if the nominated bank sends forged papers based on which the issuing bank releases payment to the nominated bank. I mean, if there was no actual shipment taking place (only fake papers sent to the Issuing Bank)
When shipments involve a Letter of Credit (LC), all the documents required as part of the documentary credit process will be clearly outlined in the LC.. Some of the documents required could be Bill of Lading, Commercial Invoice, Packing List, Certificate of Origin, Analysis certificates..
The shipper has to submit all documents once the shipment has been effected and they are in possession of the bill of lading..
The verification by the bank consists of only checking that the documents as required by the LC have been submitted completely and it is correct in all respects in terms of the LC requirements.. The bank is not obliged to verify whether the cargo mentioned in the bill of lading was actually shipped on the vessel or not..
The reasoning for this is that the bill of lading submitted to the bank is the only transport document involved in the shipment and this document is issued by a shipping line who will only issue it after verifying that
1) the container has been cleared by customs for export for the specified vessel
2) the container has been physically loaded on the vessel/voyage from the load port mentioned on the bill of lading
Banks, therefore, take the bill of lading issued by the shipping line to be authentic and will proceed with the finalisation of the payment transactions based on the documents submitted..
2) What happens if the goods shipped actually does not match the agreed specification of the goods?
As regards the specification of the goods, the bank does not see the cargo physically, so here again, they cannot and will not verify if the cargo specifications mentioned in the bill of lading or commercial invoice are physically correct as packed in the container..
They will merely check if the description of the goods mentioned in the bill of lading and commercial invoice and other documents submitted match the description of the good mentioned in the LC..
If there is a variance between these two descriptions, they will reject the wrong documents but they cannot do anything about the goods already shipped physically..
3) As a buyer do I have any guarantee that the (1) Goods are actually shipped (2) Goods match agreed specification and quantity? If they do not match, as a buyer how can I have a remedy?
Whether it relates to documentation or verifying actual cargo in the container, to be brutally honest, if you don’t trust the shipper, you don’t have any guarantee and it is up to you as the buyer to take appropriate measures to safeguard against shipping and freight fraud..
If you are unsure of the shipper and the cargo being shipped, you should employ an independent surveyor to be present at the seller’s premises when the cargo is being packed in the container, verify the quantity and specification of the goods and present that survey report to you along with pictures..
With regards to the cargo being actually shipped, you can also ask your surveyor/agent to track the container from the time it is packed and enters the port and they can liaise with the shipping line to get you a confirmation that the container has been loaded onboard..
If until this stage everything has been above board, then the shipping line’s bill of lading showing that the container has been shipped is proof enough..
If you still want to check further, you can track the container or bill of lading on the shipping line’s tracking system where if you give the bill of lading or container number, it will bring up the details of where the container/vessel is currently located..
As you can see, things like this could be quite tricky and that is one of the main reasons many of the customers employ the services of a Freight Forwarder as these are some of the services that a freight forwarder provides..
Better safe than sorry I say.. 🙂
The International Maritime Bureau (IMB) is a division of the International Chamber of Commerce (ICC) established to help fight maritime crime and malpractice..
Apart from investigating and reporting on various frauds, including documentary credit fraud, charter party fraud and cargo theft, one of IMB’s tasks is to assist ICC member banks in authenticating trade finance documentation..
The IMB has previously warned banks to check shipping documents with particular caution as attempts to manipulate pre-financing have gained momentum..
This warning seems to have been issued on the back of an increase in pre-financing fraud involving importers in West Africa and exporters in China wherein falsified shipping documents were submitted to the banks to unlock funds before goods are actually shipped..
GTR reported Michael Kim, head of shipping at DLA Piper’s London office as saying 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.
IMB director Pottengal Mukundan is of the view 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.
Fraudsters are finding new ways every day to circumvent the various checkpoints in the banking and trade channels and as per the IMB, although unauthorised pre-financing scams are not a new phenomenon there is a danger that it may reach a point where sellers may receive funds and do not subsequently ship the goods..
The IMB suggests that banks can refer to the IMB for safe sharing of information between various companies and sectors, which can help frustrate potential fraudsters..
If anyone has any REAL LIFE EXPERIENCE of the issues discussed above, do share it for the benefit of all..
*** This article has been republished after critical updates ***
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