International trade inevitably involves multiple stakeholders in different parts of the globe. Fraudulent activity has always been one risk to consider. This article highlights recent cases impacting forwarder relationships, together with due diligence advice.

Where fraudulent activity is concerned, the legitimate operator must be aware of the risks and erect defences to protect their business. Due diligence should be a fundamental component of any business' risk management strategy. In fast paced globalised markets, due diligence can all too easily be overlooked, resulting in significant financial losses. Whilst adept in the art of deceit, perpetrators prey on insufficient checks being undertaken prior to engagement.

"The legitimate operator must be aware of the risks and erect defences to protect their business."

Where their own network of offices is not sufficient, freight forwarders have always relied upon the services and support of other freight forwarders and agents for local expertise and presence. Many such relationships are long standing and often reciprocal. Issues may arise where arrangements need to be extended; then, effective due diligence is critical to counter fraudulent activity.

A number of cases of fraudulent activity have recently arisen, particularly involving Chinese freight operators. A common scam follows this pattern: the fraudulent freight operator gains control of original bills of lading, refuses to release them, and holds the receiving freight forwarder to ransom for several thousand dollars.

Where language, jurisdiction, time zone and distance separate the stakeholders, expedient resolution in such circumstances can be both challenging and expensive.

Ordinarily this risk involves a newly formed agency agreement, either where forwarders are exploring new geographical opportunities or simply changing their current agent.

Frequently, once a signed agency agreement is in place between the parties, business appears to operate normally for a period. When arranging shipments, the sending freight operator will invariably name itself as the shipper under the bill of lading to maintain control over the documents. The trigger point is when the cargo arrives at the destination port and nobody has received the original bill of lading.

The fraud comes to light when the receiving forwarder contacts the sending freight operator and requests the release of the bill of lading, resulting in advice that the documents are unable to be released without first receiving a further payment. The reasoning behind the additional payments may differ; a late payment to a third party, a penalty or unexpected fees due to a third party. The demands typically run into the tens of thousands of dollars.

This type of fraud has been used on both single shipments and multiple container shipments; whilst higher value shipments may be more susceptible the fraudsters appear to be indiscriminate. The process can be more onerous and complex where the fraudulent freight agent elects to spread multiple shipments across a number of shipping lines.

The receiving freight forwarder now has the dilemma of whether to pay or not. Payment carries no guarantee that the unscrupulous freight operator will actually release the bill of lading, since these are not necessarily legitimate businesses. Electing not to pay the demand potentially leads to a series of financially and commercially damaging discussions with customers and lawyers.

Invariably, when faced with this situation, it will be necessary to appoint a local law firm to engage with the fraudster with a view to reach an amicable solution, obtaining the original bills of lading and facilitating the release of the cargo at destination.

Such cases demonstrate the importance of performing due diligence through the initial selection process.

"Such cases demonstrate the importance of performing due diligence"

Where the decision to change or use an alternative agent is derived from an unsolicited approach, determining its legitimacy can be challenging, but in itself should raise red flags.

Similarly where searches for local agents are conducted online, proceed with caution. For example, low rates is often a poor selection criterion. If what is being offered seems too good to be true, it probably is.

Performing due diligence on a prospective freight agent in another jurisdiction can appear a daunting task; in an age where every conceivable document can be manipulated and forged, relying on electronic documentation should no longer be considered a satisfactory means of verifying the legitimacy of a business.

There exist several options for a foreign entity to search for and screen reliable candidates. Following the experiences with Chinese entities, here are pointers for that jurisdiction.

1. Where possible, consult with others in the freight industry who may be familiar with the market and able to recommend a reliable candidate.
2. Seek advice from TT Club's local office.
3. Consult with the China International Freight Forwarders Association (CIFA) www.cifa.org.cn. CIFA have a number of dedicated departments such as 'Membership affairs' (email: wangxy@cifa.org.cn) and 'Credit Risk Evaluation' (email: linzhong@cifa.org.cn). 
4. Interrogate official websites, such as the National Enterprise Credit Information Publicity System ( - only available in Mandarin) where you may verify the company has been duly registered, including details of when was it registered or canceled, any censure by an authority, lawsuits and judgments.
5. Consult the Chinese Shipping official website, http://www.chineseshipping.com.cn/bl/blzcd01.asp. This site enables a search against all freight forwarders who have duly registered as NVOCC with the authorities. 
6. If still unsure appoint a local lawyer to conduct an independent investigation into the freight forwarder's back ground. While this will attract a modest upfront cost, it will undoubtedly reduce the risk of becoming the victim of fraudulent activity.