The Quest
August 2011 - Issue 71
Inside this issue:
CBP updates 301 bond form

New bill proposed to fight fraud in trucking

Ways to red-flag fraud, by Andrew Spector, Esq.

New report identifies cargo theft trends

China proposes increase in FMC optional bond rider

Updates on liquidated damages for Periodic Monthly Statement

CBP updates mitigation guidelines for advance cargo information violations

U.S. government urges companies to strengthen Internet security
Trucking associations ask NHTSA to examine truck crashworthiness standards


Ways to red-flag fraud
By Andrew R. Spector, Esq., Hyman, Spector & Mars, LLP
During the course of evaluating any cargo claim, itís important to understand the framework of the buyer/seller dispute. Typically, when cargo is moving in transit, there are two parties to the sales contract. These entities will negotiate amongst themselves to allocate the risk of loss through contractual terms, which could include the Incoterms that pertain to insurance or a declaration of value for a cargo loss.

Therefore, in most standard legitimate business disputes regarding loss or damage to cargo in transit, the shipper or consignee will have either allocated risk through contractual terms between themselves, including an obligation to insure one of the ends of the transport. Fraud, however, causes losses and claims, which may not always pertain to a loss in transit as the cargo may never have existed.

During our many years of defending freight forwarders, customs brokers, carriers and logistics providers from lawsuits, we have seen certain trends that we refer to as ďred-flags.Ē These trends are relevant to the analysis of issues concerning potential fraudulent conduct. Surely, most claim scenarios will be presented as routine, with a commercial invoice and perhaps no reason to doubt packing lists, piece counts, pick slips and other documentation to indicate what cargo was shipped.

In some instances, however, there are unusual facts that suggest a careful scrutiny should be made. The fact pattern of the claim may also indicate a breakdown in terms of the methodical standard buyer/seller issue.

Below are some of the red-flags that may be evidence of potential fraudulent conduct:

  1. Discrepant documents. Valuation on a commercial invoice does not match the import valuation.

  2. Declaration of value for insurance is inconsistent with the commercial invoice.

  3. Absence of commercial invoices, packing lists and/or purchase orders.

  4. Replacement costs vs. contract price. The standard for determining the value of a cargo claim separate and apart from limitation of liability can be the contract price or the replacement cost. Which value is being used by the shipper and why? Is the cargo specially manufactured for a definite purpose?

  5. High valued shipments that were not insured or underinsured.

  6. New customers. Many speculative large claims are first-time customers. Are they litigious? Why did they switch service providers? How often do they switch?

  7. Accounts receivable. Companies that havenít paid several outstanding invoices will often conveniently manufacture a claim to avoid remittance of unrelated prior invoices.

  8. The logistics provider is requested to issue an on-board bill of lading or other documents indicating the receipt of cargo that wasnít received.

  9. Requesting a special favor or accommodation with a promise for further lucrative business.

  10. The logistics provider being placed in the middle of a buyer/seller dispute can emerge from a failed letter of credit transaction. Details of the document should be verified.

  11. Unreasonable terms of sale and delivery. A review of email chronology between staff and customers could indicate ďset-up language,Ē meaning that the shipper or consignee insisted on unreasonable terms such as a guaranteed time or special services via email (email set-up claims).

  12. Nature of the customerís business. Does it seem legitimate and legal? Is the shipper or importer violating a law or public policy, such as circumventing specific government regulations?

  13. Initiation of business relationship. How was the business generated? Was the logistics provider contacted by the shipper or importer? Was any investigation conducted regarding the legitimacy of the shipper or importerís business?

  14. Details of the shipper, consignee and/or importer. Does the email address correspond to the business? Look for Gmail and Yahoo accounts, particularly for large businesses, which almost always have their own domain name. Was a P.O. Box provided instead of a physical address?

  15. An inexperienced entity presents a complicated shipping transaction to an obscure or dangerous place in the world.

  16. Shipper-loaded containers.

  17. Absence of documentation to prove contents of cargo.

  18. Lack of cooperation during the claims process. Claims processes should be routine and systematic.

  19. A shipper or consignee that is highly impatient and unrealistic about the claims process may constitute a red-flag.

  20. Requests to release cargo without presenting the original bill of lading.

In trying economic times, studies show that fraud becomes more prevalent. The logistics provider can minimize exposure to fraudulent claims for cargo loss of damage by paying close attention to the red-flags that can be an indication of improper conduct. This means the company needs to be thoughtful as it evaluates the type of services and transactions at hand. Awareness of the unfortunate reality that logistics providers may be victimized by fraud is an essential step in avoiding the risk of fraud.

Andrew R. Spector, Esq. is a partner at Hyman, Spector & Mars, LLP, licensed to practice in Florida, New York and Texas and serves as defense counsel for Avalon Risk Managementís professional liability and cargo legal liability insurance programs and specializes in the representation of logistics providers.

For more information please contact:
Andrew R. Spector, Esq.
Museum Tower, 27th Floor
150 West Flagler Street
Miami, FL 33130
Phone: (305) 371-4244
Fax: (305) 371-5930


Avalon Risk Management
150 Northwest Point Boulevard | 4th Floor | Elk Grove Village, IL 60007
Phone: (847) 700-8100 | Fax: (847) 700-8116



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