When it Comes to Supply Chain Fraud Risks, are you Swimming with Sharks?

In supply chain security, when you think about fraud, your instincts usually start with ‘Russia’ for it has been the country where cases of fraud – and, fraudulent pick-ups, in particular – have accounted for most losses in recent years. But, crime groups are quick to learn and in the last 2 years, the TAPA EMEA Intelligence System (TIS) has recorded cargo thefts involving fraud in 32 other countries across the Europe, Middle East & Africa region.

Losses involving fraud are usually extremely costly. The average loss for major cargo thefts (€100K or more) reported to TIS since 30 June 2022 is more than €468,000.

In this special report, Josh Finch of TT Club, the independent provider of mutual insurance and related risk management services to the international transport and logistics industry, looks at the types of fraud most commonly impacting supply chains, and what you can do to help stop them…

During the past two years, TT Club has seen a dramatic increase in incidents of theft involving fraudulent actors infiltrating the supply chain to steal physical assets and cargo. Involving tactics first seen in Russia during the previous decade, criminal organisations in Europe and North America have adopted these methods of theft to steal entire loads of roadfreight.

Claims analysis shows that in 2023, TT Club witnessed that 6% of European theft claims and an astonishing 43% of North American theft claims involved an element of fraud. Some of these incidents involve a fraudulent carrier, while others involve a fraudulent party acting in the capacity of a freight forwarder. Such thefts are often highly targeted, resulting in the loss of high value cargo and hinting at insider involvement.

Given the apparent effectiveness of these fraudulent strategies being adopted by criminal organisations, TT expect that this trend will continue. So, what are the tactics used by criminals to infiltrate the supply chain, and what can businesses do to protect themselves from this threat?

Tactic 1 – Fraudulent Carriers

The most common type of threat is that posed by carriers assuming a false identity. In such cases, a criminal organisation with access to commercial vehicles directly assumes the identity of a legitimate haulage firm. In many instances, the imitation is very sophisticated. The thieves may create a fake website and false contact details that look very similar to the details of the actual haulage firm. They may post these details on freight exchanges or approach shippers directly and request work. Since they are in direct contact with the shipper, they provide details of a driver and vehicle that then arrives at the shipper’s site.

In other cases, where a carrier’s IT system has been hacked, they may learn of a shipment scheduled to take place and arrive at a shipper’s site to collect a planned load. Thieves who use this method of fraud have been known to create duplicate shipping documents and these often appear accurate down to the finest detail. In one instance, TT Club witnessed during 2023, the fraudsters even went so far as to correct a spelling error in the original bill of lading document.

Thieves often intentionally target goods that are being shipped long distances by road. This gives them plenty of time to move the cargo to a destination of their choice before anyone realises that something is wrong. The thieves will answer the phone for a day or two, always with a new excuse for why the shipment is delayed. After the goods are safely off the road, the thieves simply stop answering the phone.

Tactic 2 – Fraudulent Freight Forwarders

In many instances, the fraudulent party may be a freight forwarder or a fraudulent carrier who subcontracts to a legitimate carrier. In such cases, the fraudulent forwarder assumes a false identity using methods similar to those previously described. Instead of using their own driver and vehicle, however, they subcontract the job to a legitimate trucking company. Any due diligence checks undertaken on the carrier will not in this case raise any red flags. In such cases, the fraudulent forwarder will in the first instance provide the driver with legitimate instructions.

However, soon after the load is collected, the forwarder will contact the driver and fraudulently claim that the delivery destination has changed. The new destination may be much closer than the original one and the legitimate carrier, having been promised to be paid the same rate for a much shorter journey, will be only too happy to drop off the load at the new destination.

Again, the thieves may answer the phone for a time until the cargo is hidden. Then the phone will go silent, and they will never be heard from again.

Mitigation Strategies

The most important mitigation strategy is to maintain stable partnerships with known and trusted businesses.

Staff should be trained to be sceptical of situations where an unknown person calls from a known partner such as a carrier or freight forwarder. Where new carriers or forwarders must be used, it is important to conduct full due diligence checks on all third party businesses. It is recommended to complete at a minimum a credit check and to request to see copies of the new business’ insurance certificates. Additionally, it may be helpful to request copies of the new business’ financial statements. All of these documents can be falsified, of course, but the more thorough the check the more difficult it will be to maintain the ruse.

The length of time that a company has been in business can also be a good indicator of whether they are legitimate. Meeting in person before granting a new company work can be a highly effective way to discourage thieves from attempting to work with your business.

Granting work to unknown companies by contracting via a freight exchange is strongly discouraged, as is working with a company that cannot produce an insurance certificate. Fraudulent businesses often seek work using such exchanges.

Being in possession of an insurance certificate, however, is not by itself an ironclad guarantee of credibility. Fraudulent businesses have been known to enter into an agreement with an insurance provider in order to receive a certificate of insurance and give themselves a veneer of credibility. However, a business with a long-established relationship with an insurer is much less likely to be fraudulent.

Finally, sub-sub-contraction is to be strongly discouraged. TT Club has often seen that fraudulent parties are introduced into an agreement by subcontractors who themselves do not perform due diligence. It is highly recommended that subcontractors are contractually forbidden from further subcontracting work to other third parties. Where this clause is in place, ensure that sites are enforcing it.

Subcontractors who are unable to complete a job may themselves subcontract without notification. It can be operationally daunting to turn away a driver knowing that a load may go undelivered. However, accepting this practice means introducing a large degree of security risk into an operation. Ultimately, customers usually accept that logistics is a chaotic business and deliveries sometimes fail despite meticulous planning. They are, however, much less likely to accept a major loss of cargo in addition to a failure to deliver.

Stay vigilant

Fraud takes on many forms and can impact supply chains in a number of ways. Unfortunately, the prevalence of fraudulent carriers and freight forwarders continues to grow each year. It is important that businesses stay vigilant against such practices.

Firstly, it is important that IT systems are hardened and that leaks of information do not come from inside the business. Thieves may exploit weakness in IT infrastructure in order to gain access to information about load plans, carriers in use, and documentation, in order to gain access.

Secondly, in addition to the due diligence practices outlined, it is important that all staff are informed about these types of risks.

Ultimately, it is the transport administrator or the transport desk clerk who are on the front lines preventing fraudulent carriers from making off with valuable cargo. It is important that all staff are made aware of these risks and empowered to take action when something doesn’t feel right.

About the Author

Josh Finch is a Logistics Risk Manager for TT Club’s Loss Prevention department. Josh joined TT Club in 2023 having 15 years of experience in the logistics industry in various operational and project management roles. He has extensive experience managing warehouses and running road freight transport operations. He is an International CPC qualified Transport Manager.

FRAUD FACTS

Countries in EMEA recording cargo losses involving fraud:

Albania Angola Belarus Belgium Benin Bulgaria Burundi Cameroon Congo Cyprus Czech Republic Egypt France Germany Greece Hungary Italy Kazakhstan Mauritius Mayotte Montenegro Netherlands Poland Portugal Romania Serbia South Africa Spain Sweden Syria Turkey United Kingdom

Source: TIS