As Fiona Li, Syndicate Manager (Claims), Eastern Syndicate, Steamship Mutual informs, the hacking of email accounts and the frequency and sophistication of intercepted and fraudulent emails has increased over recent years. This has caused payments to be made inadvertently to fraudulent bank accounts.
Some victims may eventually manage to recover their money, but many are the unlucky ones that have to abandon any recovery, because of insubstantial amount and/or costs involved. Nevertheless, Steamship highlights a recent case in the English Commercial Court that dealt with a ‘payment interception’ fraud, in K v A. In this case, the defrauded paying party retrieved more than US$1million, but also lost US$161,646 because of situations in foreign exchange rates.
The case
In K v A, A agreed to sell, and K agreed to buy a bulk cargo on FOB terms with Vicorus SA (V) as a broker. The contract required 100% net cash payment within 2 banking days to A’s bank upon presentation of a commercial invoice and other documents.
When the cargo loading was completed, A sent emails to K via V on 2 November 2015 attaching an invoice and then an amended invoice, for US$1.16 million, seeking K’s payment to a bank account maintained at Citibank NA, New York branch.
V’s email records showed that the emails with the invoices were forwarded by V to K on the same day, however K received were emails which appeared to come from V, containing payment instructions for remittance via Citibank NA’s New York branch in favour of Citibank NA at its London branch with different account details purporting to identify A as the beneficiary.
After that, it was discovered that the London branch account was in the name of ‘Ecobank’ (the Fraudulent Account), although there is no suggestion of wrongdoing by Ecobank itself.
For another week or so, A and K exchanged several emails, either via V or directly, dealing with various matters. These emails were manipulated in a similar way to the initial invoices, and the fraud went unnoticed for some time.
Upon discovery of the fraud, investigations indicated that the funds were still in the Ecobank account, although K’s US$ payment had been converted into Pounds Sterling. As such, arrangements were made to recall the funds from Ecobank and reallocate them to the Correct Account.
On 24 November, Ecobank approved the debit from their account of £674,831 which was less than the original credited sum of £768,372. It is also not clear from the judgment how this discrepancy took place, but Citibank explained that the difference was because of fluctuations in exchange rates.
The funds were then transferred to the Correct Account on 18 December 2015 valued at about US$1 million, leaving a shortfall from the contractual price of US$161,646, for which A started arbitration against K.
Preventive measures
In order to prevent similar incidents, precautionary measures should be taken to ensure payment into the correct bank account. These can contain a clear specification of account details in the contract, and verifying, as well as checking the authenticity of any additional apparent change of account details.
According to Steamship, many operators have been affected by frauds of this type, but after contacting the Club immediately on discovering the fraud, they were able to take prompt steps against the bank in the relevant jurisdiction, thus recovering these monies if still in the account to which they had been remitted.
What is more, unless sufficient time is allowed for checking account details, complications can occur in charterparty contexts. This happens as an owner will normally have the right to exercise liens on cargo / hire / freight, suspend performance and/or withdraw the vessel in default of timely hire and/or freight payments.
In addition, time charter clauses such as 11(d) of NYPE 2015 give the owner the right to suspend performance immediately once hire is outstanding, without the need to tender any grace period notice. For this reason, Ms. Li suggests that it is important for hire payments to be arranged sufficiently in advance to avoid negative consequences where there appears to have been a change in account details.
