Due diligence and fraud, a case study

Being a risk manager nowadays requires an enormous range of skills and knowledge, covering compliance, pricing, credit, operational and market risk, geopolitics, sanctions, and deep commercial awareness. Throw in the unfolding impact of the Covid-19 pandemic (not least on the availability of sources), and it’s hardly surprising that in the fast-paced world of shipping and commodities, the importance of basic “vanilla” due diligence is sidelined. 

Sometimes management and compliance models can find their “boxes ticked” by entirely the wrong information. Here’s a brief case study on how a client reached out to us to cover this angle, and saved himself significant money and time in the process:

 

Case Background

Our client received a purchase offer from a Russia-based company related to one of our client's vessels, which had been circulated for sale for a number of months. The offer was forwarded to our client by a shipbroker, with which our client has had a close working relationship over many years; the offer appeared to be genuine and in line with our client's expectations, and the “usual” KYC documents had been provided, including a company background, personal identity documents and a UBO statement seemingly compiled by a lawyer, signed and stamped. Despite this, our client had some concerns over the ease with which negotiations advanced, but had neither the time nor the resources to conduct an investigation into the buyer's background. Our client approached Infospectrum for an assessment.

 

How did we add value?

The proposed buyer was a low-profile Russian company, with no contact number, website, or significant market presence. While we were rapidly able to confirm that the proposed buyer was a properly-registered Russian company, the registry was unable to confirm current beneficial ownership. We were able to fall back on our business contacts and obtained a telephone number for one of the alleged owners of the company. Despite claiming to be Russian, the individual had no Russian accent and could not speak the language when tested. Having been caught in his own lie, our conversation was terminated by this individual rather quickly, and subsequent phone calls were not answered. A signed and stamped statement of the company's UBOs, which had been presented to our client, was determined by us to be falsified and incorrect. Later, through one of our local market sources, we were able to contact one of the company's real owners, who confirmed what we had suspected: Our client had been communicating not with the company's legal representatives, but with persons who were unlawfully representing the company and claiming to act on its behalf. It was also discovered, in speaking with the owner, that the company's name and other details had been abused in sales and purchase-related transactions in the past.

 

The upside

Our research provided vital, timely, and cost-effective information to our client, enabling them to react in time and prevent potentially significant damages from being sustained, at a cost of only GBP 390. In addition to halting all communication, our client successfully withheld payment of a fee requested by the fraudsters for a seemingly legitimate purpose. The broker was also advised of our discoveries, leading to greater awareness of identity theft and fraud among all parties involved. 

As we discussed in our earlier blog about transparency, the sheer volume of data available to risk managers can sometimes obscure reality. While the above example enabled our client to save time, money and perhaps some embarrassment, the potential pitfalls of insufficiently detailed due diligence in other transactions (for example, being exposed as having contracted with a front for a sanctioned entity) are far more severe. We have seen many buyers of vessels and commodities present themselves as “clean” (albeit low-profile) entities, with shareholders and directors who are not sanctioned, but with time and experienced due diligence, proven to be quite the opposite.

Next time your gut tells you something might not be right, or you don’t have the time to research something yourself, give us a call. We’ll be happy to discuss.

 

If you are interested in discovering how our expertise can support your organisation with compliance, credit reporting, and risk management, download our KYC Fundamentals booklet now.

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Published on 14 Apr 2020

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