Detecting Fraud in Marine Cargo Insurance: A Checklist

Know the counterparty

• Seller and buyer verification. Verify the identity and background of first-time and second-time sellers and buyers. Look for histories of fraud or unusual practices.
• A company formed recently, or a director with a history of serially opening and closing companies in short spans, especially in tax havens such as Hong Kong, Singapore, Dubai or Mauritius, is a major red flag.
• Customer due diligence. Use a proper process and external background checks to verify identity and reputation of every party.

Follow the money and the duty

• Invoice scrutiny. Compare invoice value with market rates and history. Look for over- and under-invoicing.
• Multiple invoices. Investigate cases where one invoice is issued for remittance and another for duties.
• Duty drawback. Verify claims against customs records.
• Duty evasion. Watch for repeated under-declaration, and verify declared value against customs. Where shortages and non-deliveries are never claimed from customs, cargo is cleared in full on the bill of entry, yet shortages are claimed from the insurer, check whether it is convenience or a pattern.
• Tax haven intermediaries. Scrutinise merchants or indentors based in tax havens. With some African and South-East Asian destinations, exporters use such traders for hawala-style settlement: India to the haven at value X, the haven to the end destination at value Y, and the difference (Y − X) is where the illusion happens. These are hard to track until a full fraud case surfaces.

Check the documents and the cargo

• Bills of lading and delivery orders. Verify authenticity and that they match description and quantity. Confirm delivery orders and telex releases, and stay in regular touch with bankers.
• Cargo inspection. Inspect or audit physically where needed, and confirm the cargo matches the paperwork.
• Documentation review. Review contracts, bills of lading, invoices and certificates of origin for inconsistencies among them.
• Data analysis. Use analytics to flag unusual patterns, changing cargo values and shifting routes.
• Industry benchmarking. Compare claims and cargo values with benchmarks to surface discrepancies.

Build the organisation around it

• Whistleblower mechanism for employees, clients and stakeholders, with confidentiality.
• Training and awareness on common fraud schemes.
• Regular internal and external audits of claims and transactions.
• Collaboration with law enforcement, customs and industry associations.
• Legal action when fraud is proven: report to authorities, pursue civil remedies or end the relationship.
• Fraud specialists with marine cargo experience, consulted where the case justifies it.
• An adaptive approach. Fraudsters change tactics, so detection rules must change too.
• Reporting suspected fraud to the relevant authorities and regulators.

A note on method

The most effective approach pairs data analytics with field experience in claims and inspection. Analytics finds the anomaly; a person with cargo experience judges whether it is fraud, bad luck or a clerical error.

Red flags are prompts for inquiry, not proof of wrongdoing.