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Internal fraud

Combating internal fraud and corruption – the constant integrity challenge

Andrew B. Brown

Chief Inspector, 
Police Scotland College Tulliallan, Fife



By its complex and international nature, the maritime industry can be vulnerable to various kinds of internal fraud. However, there are practical steps that companies can take to make life difficult for would-be fraudsters while enhancing the integrity of the organization.

By Andrew B. Brown

The proliferation of internal fraud and corruption in any organization can be likened to a disease that, left unchecked and treated, continues to spread, eventually leading to the untimely demise of the company and all of those within.

The shipping and maritime industry has numerous sector peculiarities that expose it to greater risk of such criminal activity:

  • Complex international and domestic regulatory compliance
  • High level of government interaction at various points in the business chain
  • Vast amounts of sensitive data requiring scientific data management
  • Heavy reliance on third parties in the business chain
  •  Complex accounting structures between shipping lines and shipping agencies
  • Often high congestion at foreign ports and weak government infrastructure
  •  High volume of daily cash turnover at numerous locations.

Such complex activities expose the industry to various types of fraud and corruption in their daily business. A recent Skuld report highlighted:

  • Bunkering fraud: Fuel can be the greatest daily single expense with the margin for profit in criminal activity high.
  • Cargo and document fraud: These can come in a wide variety of formats where misrepresentation is a common theme in quantity and quality.
  • Chartering fraud: Usually revolves around unknown or numerous third parties and an overly trusting approach.
  • Port-related fraud: In some foreign ports, vessels are at risk of fraudsters seeking to use the ship call as an opportunity to obtain payment for services and goods that were never provided.
  • Blackmail and extortion: A well established crime that plays on the victim’s fear of reputational loss.
  • Cyber fraud: A rapidly developing risk where information theft is a key element. Cyber attacks can open the way to wholesale theft of vast amounts of sensitive data.
  • Fake job fraud: Perpetrated against individual seafarers, usually from developing nations.
  • Information ‘phishing’: Fraudsters will seek to ‘phish’ information from various sources where the risks can range from monetary frauds to theft and hijacking of vessel and crew.
  • Physical security: Vulnerable cargo theft, container damages and misappropriation of fuel and other consumables.
  • Bribery and corruption: Payment of bribes to corrupt officials or agencies, in spite of anti bribery and corruption legislation.

By its very nature, corruption can be difficult to detect, as it usually involves two or more people entering into a secret agreement.

Companies must be alive to the risk of internal fraud and corruption. The senior leadership must ensure that they and their employees display high levels of personal integrity to be alive to the risk of this criminal behaviour.

Fraudsters and corrupt employees will constantly invent new ways to make personal or financial gain, usually facilitated by organizational and individual complacency. To mitigate such risks, adopting a series of measures that are underpinned by the organization’s values will make life for the criminal increasingly difficult, while at the same time enhancing the integrity of the organization.

  • Training: Ensure that all employees from board level to the factory floor understand the risks to the organization and, importantly, the policies and procedures implemented to prevent fraud and corrupt practice.
  • Leading by example: Taking a proactive stance allows employees to observe the correct behaviours where integrity is key to the organization’s success.
  • Code of conduct: This establishes the expectations around integrity and behaviour as an employee. Aligned with policies, risk assessments and mandatory processes, it clearly sets out rules and guidelines which, if contravened, can lead to disciplinary action.
  • Designated officer: Appointing someone as a Compliance Officer not only allows you to have an ‘integrity champion’ who can continually educate staff; it also allows for random internal audits to ensure procedural compliance and deter ‘insider’ fraud.
  • Anonymous reporting: Establishing such a mechanism allows employees to ‘peer monitor’ and highlight suspicious activity. This provides an invaluable and confidential source of intelligence.
  • Investigative ability: Train select employees to be able to investigate a suspected fraud; to gather and secure evidence; to link with legal advice; and to present findings to the authorities or in internal disciplinary hearings.
  • Security of information: Ensure robust processes in the destruction of paper files. Adopt a strong IT policy that covers internal and external communication, custody of digital records and databases and on-line security policies.
  • Due diligence: Should be applied to every new business partner and third party checks along with random internal audits on suppliers and vendors in your business chain. A periodic review should confirm their credibility and trustworthiness.

Adopting such integrated measures will put the company on the ‘front foot’ in preventing, detecting and responding to such criminal behaviour within. Membership of the Maritime Anti-Corruption Network (MACN) allows you to share best practice, pick up on new trends in fraud and corruption and share intelligence on corrupt third parties. It will keep you in that prevention mode.