CARGO MISAPPROPRIATION: WHERE THE RISKS LIE
Misappropriation gives rise to claims that routinely run to millions of dollars.
Yet the drivers and mechanisms of misappropriation, and the ways potential victims can mitigate the risks, are not always understood.
Misappropriation, to all intents and purposes, is theft, but in insurance terms there is a distinction.
Crucially, misappropriation can only be committed by people entrusted with the care and custody of someone else’s goods and who, generally speaking, have the responsibility of keeping them safe and accessible to their owner.
Goods held in a third-party warehouse are most at risk.
Misappropriation may start out on a small scale, perhaps as an expedient to overcome what the perpetrator hopes will be a short-term problem. But can quickly get out of control.
If misappropriation from a warehouse goes undetected for weeks or months, and if the perpetrator is hiding his tracks by providing false stock information, building an accurate picture of what has gone wrong can be complicated.
Problems often come to light when the owner of warehoused goods finds their contractual buyer has been in protracted default on their purchase agreement. Perhaps this is because of shifts in international to local pricing, duty levels, local currency to US$ exchanges rates or adverse shifts in futures pricing. Perhaps the buyer has been found to have been helping themselves, just not paying for the goods in advance.
Fungible products – such as oil, grains, ores, sugar and rice – are particularly vulnerable to misappropriation.
In a warehouse or depot where multiple consignments are not strictly demarcated, questions of ownership become moot and commingled cargoes provide opportunities for fraud.
Commodities are often warehoused in parts of the world where wages are low, and often vastly so when compared to the value of the goods stored.
If the warehouse management is over-stretched and underpaid, if the security personnel are poorly remunerated, and if the warehousing company or the buyer is struggling, it is not hard to understand why misappropriation occurs.
Nor is it hard to see how the problem can remain hidden, often for protracted periods.
There are short-term ploys that can conceal the extent of misappropriation. The concealment can be as straight forward as commingling fungible cargoes or as labour intensive as creating hollow stacks.
It can involve misapplying seals, swapping and hiding pledge cards or re-dating old photographs to pass them off as new.
In the case of bagged commodities, such as sugar and rice, it can be as elaborate as re-bagging, presenting expired stock as new or as simple as misrepresenting the stock of one party as that of another.
All the scams can be thwarted. They key is due diligence before the goods are warehoused and effective monitoring once they are stored.
The objective is to prevent the growth of a permissive environment where misappropriation can go unchecked.
This paper is intended as a general summary of issues in the stated field. It is not a substitute for authoritative advice on a specific matter. It is provided for information only and free of charge. Every reasonable effort has been made to make it accurate and up to date but no responsibility for its accuracy or correctness, or for any consequences of reliance on it, is assumed by Gray Page.