Cargo misappropriation: How to reduce your risk

Cargo misappropriation is a significant risk for cargo owners, amid economic challenges, political instability, and jumps in commodity prices that increase the incentive to steal goods. When a cargo mysteriously disappears, the impact on a cargo owner’s balance sheet, brand, business operation, and the wider supply chain can be devastating. However, by implementing effective deterrents, insureds can reduce the likelihood of misappropriation and expedite the claims process in the event of a loss, leading to a quicker settlement.

What is cargo misappropriation?

Cargo misappropriation is the illegal use of another’s property for an unauthorised purpose by any person with a responsibility to care for and protect those assets. It may involve the theft or physical removal of goods but is more often perpetrated as a documentary fraud. Perpetrators of documentary fraud can:

Issue warrants or a holding certificate for a cargo to multiple parties.
Deliberately falsify where goods are held, meaning an owner may fall foul of knowing the whereabouts of their stock when making an insurance claim.
Intentionally not sign a contract, leaving the ownership of the goods in dispute.

The parties commonly involved in cargo misappropriation include the contractual buyer or seller of the cargo, the warehouse owner or operator, a collateral manager who controls the stock, or a third party in control of the stock, such as a surveyor or logistics company.

They typically look for products that can be sold quickly and converted into cash. Food products such as grain, rice, and sugar are popular targets, as are high-value but low-quantity cargoes such as petroleum products.

Cargo misappropriation is a global problem but is more prevalent in emerging markets where economic factors can make local warehouse owners and their employees more vulnerable to the temptation arising from hundreds of millions of dollars’ worth of goods in their custody.

As misappropriation in cargo insurance contracts can be defined in different ways, it is important to understand the terms in your policy and ensure compliance with any monitoring or reporting provisions to ensure coverage is triggered.

How to reduce cargo misappropriation risk

The behaviour of the insured company, including the effort it has — or has not — taken to safeguard cargoes against the risks of misappropriation of goods, is of paramount concern to insurers. The steps insureds can take to mitigate the risk of cargo misappropriation include:

1. Carry out regular stock inspections

Goods are commonly audited when entering and exiting storage. Cargo owners should, however, ensure stock is inspected frequently and thoroughly for the duration it is stored. Insureds that can demonstrate they have fully audited their stored cargo regularly will be in a better position to make an insurance claim in the event it goes missing than if they bought a cargo and not checked its status for months. In addition, insureds should make sure defined and robust cargo release procedures are in place at the storage location.

Exchanges can hold commodities on the same shelves for decades. These commodities can change ownership numerous times, but not undergo repeated independent verification. Prospective buyers should personally inspect goods that are in store, as photos of the stock may be unreliable and out of date.

2. Make cargo less attractive to criminals

Measures can be taken to make cargo a less appealing target for misappropriation. These include instigating video surveillance and unannounced physical stock control inspections that entail a detailed review of stock inventory lists.

Cargo owners should ensure inspectors are wary of ruses like empty box constructions where a façade of products hides empty boxes. It is imperative that stacks of boxes are checked meticulously, using mirrors on sticks, if necessary. Inspectors need to diligently check each container instead of quickly scanning the entire load.

3. Avoid commingling of cargo

Wherever possible, owners should seek to use dedicated warehouse space that allows them sole usage, even if that is a sectioned-off area or a compartment within a warehouse. This reduces the number of individuals with access to the goods, meaning the likelihood of people tampering with or stealing the cargo is diminished. It is also vital that goods are not sitting unlabelled in a warehouse. Every bundle should be labelled with a unique number to aid identification and tracking.

4. Use original documents with signatures and stamps

The digital world has allowed operations to expand and for physical distances between deskbound staff and stocks to grow wider, creating more opportunities for misappropriation. Sales that don’t involve the physical movement of stocks also create the conditions for fraud, as does the lack of evidence required for some forms of electronic trading. Documentation attached to emails or sent by fax with electronic signatures can be falsified, for example. To reduce the risk of falsified documents, cargo owners should insist on using original documents with signatures and stamps, where possible.

How to insure cargo against misappropriation risk

Optimum insurance terms are usually available to cargo owners who can demonstrate they have robust misappropriation mitigation measures in place. Insurers will likely ask owners how frequently their stock is inspected, whether goods are segregated, clearly labelled, and identified as belonging to them, and if the warehouse insures the goods. They will also want to see documents to prove the goods exist. A broker or an insurance adviser can tailor a proposal to showcase the specific measures taken to minimise risks that can lead to favourable insurance terms.

Aerial of cargo container ship carrying container under big crane loading cargo import and export service transportation at sea port.

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Cargo misappropriation: How to reduce your risk