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Frontier Trading: How to Fight Fraud

Protecting your business against fraud when conducting international trade
By Lydia Danon and Andrew Flynn of CYK
Published on April 28, 2021

image of folder ©NICK YOUNGSON

Copper ore Copper ore. © JAMES ST. JOHN

Mercuria Energy Group’s recent loss of £26 million to trade fraudsters has made headlines for a variety of reasons. The sums involved are not insignificant. The boldness of the fraudsters replacing copper blisters with spray-painted stone slabs is striking. Yet this headline detail belies the apparent sophistication and organisation behind the fraud; the copper blisters had been inspected, authenticated and sealed, and yet still it proved possible to switch out the real articles with phony goods.

In these circumstances, one might fairly ask what more Mercuria could have done to protect itself from this fraud? Criminal investigations are underway and it is hoped that Mercuria will recover its money from the fraudsters. Such a stark case might risk the development of a fatalistic attitude, but it is worth remembering that trade/commodities fraud takes many forms, and underhand tactics can be thwarted before losses are suffered and recovery attempts and mitigation become necessary.

Mercuira’s problems have been compounded by its inability to make a non-delivery claim against the seller’s insurance, as all but one of the insurance contracts used by the seller were fake. Document-based fraud plays a significant role in trade fraud, and by its nature presents opportunities for early detection. While some forgeries can be very difficult to detect, it is always important to inspect any important documents in a transaction for obvious signs of fraud, and to consider verifying with signatories that they have in fact executed the relevant document.

The Export Import Bank of the United States has identified a number of red flags that can indicate further due diligence might be required. These include, among others:

• a lack of clarity or certainty regarding the identity of counterparties or descriptions of goods, or unclear disclosure of commissions or fees
• discrepancies between financial statements or between invoices and bills of lading
• documents which on their face do not make sense e.g. product descriptions in bills of lading which should not fit inside a container, such as heavy equipment
• documents which repeat the same errors or contain missing details, which may suggest they are altered versions of a genuine document.

The Bank also notes that fraudsters may exploit legitimate companies’ documents and letterhead, so discrepancies between the legitimate company’s public contact details and those on the document may also be a red flag. More generally, we would suggest that any instinct or “gut feeling” from an experienced reviewer that a document does not look quite right should trigger further questions and investigation.

Of course, fraudsters can and do evade detection and when they do it is important to have in mind the various legal tools which are available to both bring the offenders to justice and, it is hoped, recover the stolen funds. When a fraud such as this is uncovered, time is of the essence: the longer the funds are out of your hands, the greater the risk that they will be laundered through multiple transactions of smaller and smaller quantities, and eventually become untraceable. In addition, some of the most powerful weapons available to private parties in the English courts, such as freezing injunctions, effectively require the applicant to demonstrate urgency; any delay in seeking the courts’ assistance increases the risk that relief will be refused.

The moment grounds for believing a fraud may have been committed are established, it is important to seek advice from experienced civil fraud lawyers. They can assist with the initial investigation and ensure that it is conducted in a way which preserves any evidence which will need to be presented to the courts. Lawyers can also assist with the content and timing of notifications to relevant insurers, and in making reports to police and/or other relevant law enforcement agencies.

The precise legal strategy to be deployed will vary depending on the circumstances of the case and where legal action is likely to be brought. However, if there is any English connection to the litigation, the English courts can provide a number of significant remedies to private parties, including the two so-called “nuclear weapons” of the English courts: worldwide freezing injunctions and search and seizure orders. Freezing injunctions can, if the English court considers it appropriate, also be granted in support of claims being litigated elsewhere.



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