Shipping Fraud: A costly threat to businesses and how to safeguard against it

Authored by Andrew D’Alessio, Americas Ocean Cargo Product Leader, XL Catlin and Andrew Bumstead, Large Loss Specialist for Marine, North America

In today’s globalized economy, shipping plays a pivotal role in the success of businesses around the world. It’s the lifeblood of commerce, facilitating the movement of goods from manufacturers to consumers. However, with this great reliance on shipping comes the unfortunate reality of shipping fraud. It’s a costly threat that can severely hurt businesses, and it comes in various forms, such as double brokering, shipment misdirection, and fictitious pick-ups.

Recently, the Kentucky State Police shut down an organized crime ring responsible for more than $10 million in stolen cargo, throughout the state, The thieves specifically targeted the food and beverage industry. The investigation also looked into the increase in copper theft incidents. As a result of the investigation, some $5.2 million of cargo was recovered.

Understanding shipping fraud

Double brokering

One of the most common shipping fraud schemes is double brokering. In this deceptive practice, a fraudulent broker intermediates between the shipper and the carrier, pretending to have the authority to arrange the shipment. Unbeknownst to both parties, the fraudster often lacks the resources and connections to fulfill their promises. This results in delayed or lost shipments, leaving businesses with substantial financial losses.

Double brokering often begins with a convincing online presence and attractive rates, luring shippers to trust them with their cargo. However, once the cargo is in their possession, the fraudsters may disappear or demand additional payments to complete the shipment, causing significant disruption to the supply chain.

Shipment misdirection

Shipment misdirection is another perilous form of shipping fraud. In this scheme, criminals intercept cargo while it’s in transit, diverting it to unauthorized destinations. Often, this involves the manipulation of shipping documentation or hacking into communication systems to reroute shipments.

These fraudulent actions lead to a range of consequences for businesses, including delayed deliveries, additional costs, and the potential loss of valuable cargo. Moreover, the reputational damage incurred from failing to meet customer expectations can be long-lasting and difficult to repair.

Fictitious pick-ups

Fictitious pick-ups involve criminals posing as authorized personnel to collect cargo from shippers’ facilities. They use counterfeit documents or impersonate legitimate carriers to gain access to the goods. Once the cargo is in their possession, it is often sold on the black market, leaving the shipper with a considerable loss. Another method utilized is starting up a licensed business for appearances but quickly shutting down after several thefts; the processes is then repeated to avoid detection.

Failing to deliver on promises can severely damage a company’s reputation. Customers who experience shipping delays or lost cargo may lose trust in the business, leading to decreased customer loyalty and negative word-of-mouth.

Big and costly consequences

Shipping fraud poses a substantial threat to businesses, both financially and operationally. Here’s how it hurts them:

Financial losses: Businesses can incur significant financial losses due to shipping fraud. Whether it’s through double brokering, shipment misdirection, or fictitious pick-ups, the costs can be staggering. These losses not only affect the bottom line but can also strain cash flow and hinder growth.

Disrupted operations: Shipping fraud can disrupt the smooth operation of a business. Delays in shipments can lead to production setbacks, missed sales opportunities, and customer dissatisfaction. These disruptions can have a cascading effect on the entire supply chain.

Reputational damage: Failing to deliver on promises can severely damage a company’s reputation. Customers who experience shipping delays or lost cargo may lose trust in the business, leading to decreased customer loyalty and negative word-of-mouth.

Legal consequences: Businesses may also face legal consequences if they are unable to fulfill contractual obligations due to shipping fraud. This can result in lawsuits, fines, and a damaged legal standing.

Preventing shipping fraud

Now that we’ve examined the various forms of shipping fraud and their impact, let’s explore strategies to safeguard your business against these schemes:

Due diligence in hiring brokers: Before engaging with shipping brokers, conduct thorough background checks and verify their credentials. Ensure they are licensed and have a track record of reliable service. Don’t be swayed by overly enticing rates that seem too good to be true.Verify carrier information: Confirm the legitimacy of the carrier handling your shipment. Check their safety records, reputation, length of time in business and insurance coverage. It’s also wise to establish direct communication with the carrier to prevent fraudulent intermediaries.Secure documentation and communication: Safeguard your shipping documents and communication channels. Implement secure communication protocols to prevent unauthorized access or manipulation of information. Use encryption and two-factor authentication where possible.Tracking and monitoring: Utilize advanced tracking and monitoring systems to keep a close eye on your shipments in real-time. This allows you to detect any irregularities or deviations from the planned route promptly.Employee training: Educate your employees about the risks of shipping fraud and the importance of adhering to established protocols. Ensure that only authorized personnel release cargo and that they verify the identity of any pick-up representatives.Conduct regular audits: Periodically review your shipping processes and documentation. Conduct internal audits to identify any vulnerabilities or inconsistencies that could be exploited by fraudsters.Develop a response plan: Prepare a comprehensive response plan in case of a shipping fraud incident. This should include steps for reporting the incident, cooperating with law enforcement, and mitigating the financial and operational impact on your business.

Fighting fraud

Shipping fraud is a persistent threat to businesses worldwide. Whether through double brokering, shipment misdirection, or fictitious pick-ups, the consequences can be devastating. However, by implementing robust preventative measures and staying vigilant, businesses can protect themselves against these schemes.

Remember, the key to preventing shipping fraud is due diligence, secure communication, and a proactive approach to safeguarding your shipments and supply chain. In the ever-evolving landscape of commerce, staying one step ahead of fraudsters is crucial to maintaining the health and success of your business.