Common corrupt practices in maritime industry

Maritime corruption has a negative effect on the industry, impedes social and economic development and contributes to security risks in ports and onboard ships and endanger the well-being, health and safety of seafarers.

Kitack Lim, secretary general of the International Maritime Organization (IMO) said that “The maritime industry is frequently exposed to the risk of corruption. Shipping is part of a vital multinational transport and logistics chain, delivering 11 billion tons of goods annually – including much-needed medicines and protective equipment during the pandemic.

“However, research has identified that seafarers may be subjected to corrupt demands, such as unlawful requests for payments to allow ships to enter and depart the port or disproportionate penalties applied for minor errors. This can lead to interruptions to normal operations, delaying ships and creating a risk to navigation and seafarer safety.

“The Maritime Anti-Corruption Network (MACN)’s anonymous reporting mechanism has collected close to 40,000 reports of corrupt demands globally. This is most certainly a cause for concern.”

Illegally gaining an advantage over others

The lack of transparency in the sector has made it vulnerable to bribes associated with lucrative maritime contracts. Where large shipping and commercial vessel companies are involved, they very often bid for long term contracts from large scale manufacturers/ exporters. Bribes are often paid to gain contracts, affect quota allocation or influence tenders.

According to Reuters, there were claims that Maersk Group allegedly bribed Brazil’s state-owned Petroleo Brasileiro SA, Brazil’s largest oil manufacturer emerged in May 2014.  They were said to have used a brokerage with little experience to pass bribes to a director for privileged information on the schedules of ships used to transport oil and derivative products in order to gain an edge in bidding for contracts.

In the case of Sargeant Marine published by The United States Department of Justice, the company was engaged in an eight-year scheme to bribe foreign officials in Brazil to obtain valuable contracts to sell asphalt. Sargeant Marine also admitted that between 2012 and 2018, they bribed four officials in Venezuela in exchange for inside information.

Biased evaluation of maritime assets

Every day, vessels and cargos enter ports and clear customs, involving numerous stakeholders across several jurisdictions. This scenario creates huge opportunities for corruption, such as illicit payments, one of the biggest problems faced by shipping companies.

A marine surveyor is a professional who conducts inspections, examines marine vessels to assess and report on the condition of the vessel itself and the cargo on it. One of the many duties of a marine surveyor includes the inspection of the vessel before it docks into the arrival port. Upon accepting bribes, marine surveyors will issue favorable reports that allow ships to enter terminals.

Bribery in ports can cause severe safety risks such as in the case of dangerous goods.  If a bribery incident allows a vessel with high-risk defects to enter the port, it poses a grave threat to both the people working in the terminal and the terminal itself. 

The role of clearing agents

Organization for Economic Co-operation and Development (OECD) describes clearing agents as an intermediary, individual or legal entity that is put in contact with or in between two or more trading parties. Firms engage clearing agents who specialize in clearing cargo through the port on behalf of their clients.

The clearing agents will record detailed information at the level of each shipment on arrival and clearance times and dates, expected storage costs at the port, the size of the client firm and a wide range of cargo characteristics such as its size, value and product type.

Clearing agents then submit all the required documentation, monitor the clearance process and make all necessary payments to customs’ officials and port operators, including bribes.

Some of the main reasons for a bribe payment include to jump a long queue of trucks to get into the port, evade tariffs or to get officials to close an eye to a lack of important clearance documentation.

Deflating the invoice

Under-invoicing is a common type of fraud whereby the importer asks the exporter to declare on the invoice that the goods are of lower value than the actual sale price. Typically, the purpose is to understate the declared value of the goods to avoid customs duties and import taxes at the time of importation. The issuance of a false commercial invoice upon a purchaser’s request could constitute a violation of the books and records provision of the Foreign Corrupt Practices Act (FCPA).

Under-invoicing also open doors to Trade Based Money Laundering (TBML), the process of disguising proceeds of crime and moving money through the use of trade transactions in an attempt to legitimize their illicit origin. TBML was recognized by the Financial Action Task Force as one of the three main methods by which criminal organizations and terrorist financiers move money for the purpose of disguising its origin and integrating it back into the formal economy.

This scheme involves the buyer and seller colluding and conspiring to manipulate the price of goods and services through deliberate false pricing and moving money in or out of a country without the need for physical cash transfers.  The common techniques used in TBML are over, under and multiple invoicing for goods and services as well as over or under-shipment.

A scheme involving under invoicing would see the seller invoiced the buyer for goods at a price below market value, allowing the buyer to resell the goods and receive an additional profit for the difference between fair market value and purchase price paid. The exporter is also able to transfer value to the importer (i.e., moving money into a country) while avoiding scrutiny associated with direct form of money transfer.

Corruption during customs clearance

Corruption can involve facilitation payments to customs officers to allow illegal goods through or turn a blind eye to specific procedural requirements.  Research by Dennis Ndonga published in World Custom Journals revealed that the nature of corrupt activities that customs officials typically engage in vary from country to country and range from acts of extortion, patronage, nepotism, embezzlement, kickbacks and cronyism.

Research by Irene Hors published in the OCED iLibrary categorized custom corruptions into routine, fraudulent and criminal corruption.

Routine corruption occurs when private operators pay bribes to customs officials in order to receive a normal or accelerated completion of customs procedures. One of the repercussions of enticing custom officials to perform their obligation is the creation of a culture where customs procedures are delayed until a bribe is offered to them.

The officials will promptly attend to files of operators who have paid bribes while making others wait, or the officials may pretend to be absent or engaged elsewhere when a requested action is much needed and only become available once a bribe is paid.

Fraudulent corruption occurs when operators persuade customs officials to turn a blind eye to certain procedural requirements in order to reduce their tax liability or other import/export obligations. This form of corruption is, in essence, initiated by operators who seek customs officials’ cooperation in committing fraudulent acts in their favor.

In such cases the importers/exporters provide incorrect information regarding the nature, quantity, origin or value of their goods, and collude with customs officials by offering them bribes to ignore the true details.

Criminal corruption occurs when criminals offer bribes to customs officials to allow them to smuggle illegal substances. For example, incidences of collusion of drugs and arms traffickers with customs officials fall under this category.

Captain Rajesh Unni, founder and CEO of Synergy Marine Group and MACN board member said that “Corruption consistently endangers the morals of the entire world and not just our industry alone. It is a cancer and is our rightful duty to challenge it both individually and collectively to create an impartial, safer, and brighter future for the generations ahead.

“If we do not take a stand against it now, we are invariably supporting it and we will most certainly continue to fall victim to its damaging effects. Because of its rampant spread and deep-rooted history over centuries in most aspects of our daily lives, the fight against corruption cannot be an individual effort, but needs to be a collective and altruistic effort by everyone in our industry looking to make the world a safer place.”

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