mid term assignment international trade fraud

Despite this limitation, the Iraqi government frequently attempted to utilize the Oil-for-Food Programme to procure goods on behalf of Iraqi entities with minimal involvement in humanita

MINISTRY OF EDUCATION AND TRAINING

PHENIKAA UNIVERSITY

MID-TERM ASSIGNMENT INTERNATIONAL TRADE FRAUD

Course Ti International Payment

Lecturer: Đào Bích Ngọc

Hanoi, June 2024

II Literature Review 1

1 International Trade Fraud: Definition and Impacts 1

2 Common types of International Trade Fraud[3] 2

2.1 Non-payment and Non-delivery of Goods 2

2.2 Shell Companies and Forged Documents 2

2.3 Impersonation of Bank Representatives to Obtain Original Documents 2

3 Existing Regulatory Organizations and Frameworks 3

3.1 WTO Establishing Trade Rules 3

3.2 ICC Clarifying Responsibilities 3

3.3 WCO Preventing Misdeclarations 3

4 Prevention and Mitigating Methods of International Trade Fraud 3

4.1 Due Diligence 3

4.2 Compliance and Training 4

4.3 Culture of Transparency 4

III Case study about UN Oil-for-Food Programme Scandal 4

1 Background 4

2 Case Description 5

3 International Trade Fraud Behaviors 5

3.1 Diversion of Goods within Iraqi Ministries 5

3.2 Resale of Programme Goods Outside Iraq 7

3.3 Substandard Goods 7

3.4 Above-market Pricing of Goods 9

4 Investigation and Reinforcements 10

4.1 Government Accountability Office (GAO) Investigation 10

4.2 Independent Inquiry Committee Investigation 11

4.3 Iraqi Governing Council Investigation 12

5 Lessons 13

IV Conclusion 13

CITATIONS 14

I Introduction

In the context of globalization for economic and social development, each country as a player on the global arena faces many opportunities as well as challenges and difficulties

On deciding to join the global economy, both developed and developing countries may choose to facilitate foreign suppliers beside domestic ones by different methods like abolishing tariff barriers and national protective measures as well as simplifying and streamlining administrative procedures while ensuring accuracy

However, due to factors like loopholes in the economic management legal system, outdated physical infrastructure as well as underqualified workforces of officials, public servants, and employees, opportunities have been created for commercial fraud activities

to flourish and increasingly expand in scale with more sophisticated and complex methods

Despite continuous warnings from domestic agencies, foreign affairs agencies, and trade offices abroad, the number of global enterprises in general and Vietnamese businesses in particular falling victim to fraud or becoming embroiled in disputes has been on the rise, causing direct financial losses to businesses and negatively impacting business confidence and economic relations between countries and their partners For instance, following the incident involving 100 containers of cashews, Vietnamese businesses have become hesitant to engage in business with Italian partners or negotiate large contracts.[1] For this reason, our group has decided to look at "International Trade Fraud" to delve into basics of the topic and look into ways to combat the issue as well as famous case studies The structure of our assignment is organized as follows In the first part (Introduction),

we give a brief overview of international trade fraud, followed by the definition, impacts, categorization as well as ways to avoid and alleviate it in the second part (Literature review) Then, we will investigate a relevant case study, and eventually summarize our key findings in the final part (Conclusion)

II Literature Review

1 International Trade Fraud: Definition and Impacts

In its widest sense, fraud is a term that has never been consistently and exhaustively been defined According to Law.com, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right Therefore, international trade [2] fraud refers to the act of deceiving or manipulating someone for personal gain during a trade transaction, therefore targets the exchange of goods and services, often between

businesses in different countries While it is often mistaken for international commercial fraud, the latter actually involves a wider range of business activities rather than solely international trade, for example accounting fraud, insurance fraud, etc

As mentioned above, international trade fraud may imply both direct and indirect financial losses to businesses, therefore to their countries as a whole Additionally, the issue leads to a decrease in the confidence of victim businesses and credibility between related parties

2.1 Non-payment and Non-delivery of Goods

Businesses may be tricked into paying for goods that never arrive, a blatant form of fraud Alternatively, contractual disputes can arise when the actual execution of a transaction deviates from the agreed-upon terms, leading to disagreements over payment

or delivery Force majeure claims, where unforeseen events are used by trading partners

to avoid contractual obligations, can also be a tactic employed by fraudulent actors Examples of this type of fraud include Vietnamese exporters have faced pressure from Algerian partners to lower agreed-upon prices or even refuse shipments upon arrival at the port, citing reasons like falling commodity prices or finding cheaper alternatives

2.2 Shell Companies and Forged Documents

Fraudsters create fictitious companies to masquerade as legitimate trading partners These shell companies are often bolstered by forged documents like invoices, bills of lading (B/L), or other trade documents, allowing them to establish credibility and secure contracts with unsuspecting businesses

The ease with which limited liability companies can be formed in some countries, including EU member states, has been exploited by fraudsters for this purpose In Mexico, instances of impersonation have been reported, with fraudsters posing as representatives of brokerage firms, government officials, or financial institutions This manipulation is used to gain victims' trust and induce them to transfer deposits before absconding with the funds

2.3 Impersonation of Bank Representatives to Obtain Original Documents

Fraudsters may resort to impersonating bank officials or even create fake bank accounts

to gain access to original trade documents Once they have these documents, they seize the goods without ever making the agreed-upon payment

Another tactic involves manipulating contract terms Fraudsters may attempt to induce their victims into agreeing to changes in contract terms or payment methods, such as

requesting advance payment of all or part of the original bill of lading (B/L) These modifications are designed to facilitate their fraudulent schemes

A Vietnamese company exporting black pepper to Senegal in 2019 fell victim to this tactic, being tricked into transferring original documents and never receiving payment upon delivery

3 Existing Regulatory Organizations and Frameworks

International organizations play a crucial role in combating trade fraud, safeguarding a healthy business environment and promoting free trade Notable organizations include the World Trade Organization (WTO), The International Chamber of Commerce (ICC) and The World Customs Organization's (WCO)

3.1 WTO Establishing Trade Rules

WTO sets the stage for fair trade by establishing agreements like the Customs Valuation Agreement This ensures countries value imported goods accurately, preventing manipulation Additionally, the General Agreement on Tariffs and Trade (GATT) promotes transparency in trade practices and discourages practices that hinder it

3.2 ICC Clarifying Responsibilities

ICC defines clear responsibilities for buyers and sellers through their Incoterms® 2020 guidelines These guidelines clarify tasks, costs, and risks associated with international goods delivery, minimizing potential disputes and fraudulent activities For example, Incoterm 2020 DDP helps prevent tax evasion by requiring sellers to cover import taxes, leaving less room for manipulation

3.3 WCO Preventing Misdeclarations

WCO’s Harmonized System (HS) plays a vital role in preventing fraud by providing a standardized system for classifying goods in international trade Each good receives a unique HS code, making it difficult to misdeclare the nature of the product to avoid taxes

or import restrictions This system helps prevent fraud like tax evasion and the import of prohibited goods

4 Prevention and Mitigating Methods of International Trade Fraud

4.1 Due Diligence

When vetting potential business partners, companies should have standardized checklists, involving requesting and verifying business registration documents, tax compliance certificates, audited financial statements, background check, etc For high-risk transactions, on-site visits to verify the physical presence and operations of potential partners may be necessary

Compliance teams must stay up-to-date on the ever-changing international trade laws and regulations Comprehensive compliance manuals outlining procedures for various trade scenarios, such as customs clearance and export licensing, should be readily available and regularly consulted

Developing a comprehensive training curriculum that covers various aspects of trade fraud, from document verification to financial analysis, is also essential Conducting regular simulation exercises where staff can practice identifying and responding to fraudulent scenarios enhances practical skills Implementing a certification program for trade compliance professionals within the organization can incentivize continuous learning Partnering with academic institutions or professional bodies to provide advanced training and stay updated on the latest fraud prevention techniques is also valuable

4.3 Culture of Transparency

Blockchain-based supply chain management systems offer a valuable tool for enhancing transparency as they can provide end-to-end visibility of goods movement, recording key events like order placement, manufacturing completion, shipping, and customs clearance Integrating Internet of Things (IoT) devices, such as GPS trackers and environmental sensors, adds a real-time layer, allowing companies to monitor the location and condition

of goods in transit Additionally, implementing a supplier portal where all parties can access and update relevant information in real-time fosters greater collaboration and reduces the risk of fraud

III Case study about UN Oil-for-Food Programme Scandal

1 Background

The Oil-for-Food Programme (OIP) was initiated by the United Nations in 1995 under

UN Security Council Resolution 986 Its objective was to alleviate the prolonged suffering of Iraqi civilians under comprehensive UN sanctions imposed after Iraq's invasion of Kuwait in 1990, enabling Iraq to sell oil on the global market in exchange for humanitarian goods such as food, medicine, and other necessities for Iraqi civilians, while preventing the country from enhancing its military capabilities The Iraqi government could only purchase approved goods not under embargo, with stringent restrictions on items potentially used for military purposes Delays in approval processes meant essentials like pencils and folic acid often took months to reach the Iraqi population, many of whom relied solely on the programme's provisions

Managed through an escrow system overseen by BNP Paribas until 2001, revenues from oil sales were designated for war reparations to Kuwait, coalition operations in Iraq, and

UN activities Operational arrangements began in 1996, and the first food shipments arrived in 1997

Initially proposed during the administration of the U.S President Bill Clinton in response

to concerns about the impact of sanctions on ordinary Iraqis following the Gulf War, the programme ran until its effective termination in 2003 with the U.S invasion of Iraq It was formally concluded in 2010 Despite its humanitarian goals, the programme was marred by significant corruption and misuse of funds, including actions of international trade fraud

2 Case Description

One of the largest scandals in the history of international aid The program, overseen by the United Nations Security Council, quickly became plagued by allegations of widespread corruption and trade fraud The 1,000-page report by Paul Volcker, former head of the US Federal Reserve, found "serious instances of illicit, unethical and corrupt behavior within the United Nations"

The trade fraud within the Oil-for-Food Programme involved a complex web of illicit activities Key players included corrupt officials within the Iraqi government, international companies, and middlemen including UN officials who facilitated the fraudulent schemes These schemes ranged from price manipulation and kickbacks to falsification of documents and illegal surcharges on contracts The accusations also appeared in the U.S and Norway

Until 2001, funds for the Oil-for-Food Programme were handled by BNP Paribas, a bank where Iraqi-born Nadhmi Auchi, reportedly worth around $1 billion according to Forbes, held a significant stake Auchi, ranked as the 13th wealthiest individual in Britain by The Guardian, had previously been given a 15-month suspended sentence for his involvement

in the Elf scandal Described as “the biggest fraud inquiry in Europe since the Second World War” by the British newspaper, “Elf became a private bank for its executives who spent £200 million on political favors, mistresses, jewelry, fine art, villas and apartments” In 2003, Elf merged with TotalFina to form Total S.A., a major multinational oil company

3 International Trade Fraud Behaviors

3.1 Diversion of Goods within Iraqi Ministries

Resolution 986 and the Iraq-UN Memorandum of Understanding stipulated that funds held in escrow for purchasing goods were exclusively designated for meeting the

humanitarian needs of the Iraqi population Despite this limitation, the Iraqi government frequently attempted to utilize the Oil-for-Food Programme to procure goods on behalf of Iraqi entities with minimal involvement in humanitarian relief efforts

According to Iraqi officials, certain ministries were allocated funds beyond their specified budgets to procure goods for entities ineligible to contract under the Programme These entities included the Ministry of Defense, the Ministry of Military Industrialization, the General Security Directorate, and the Presidential Diwan In some cases, the ultimate recipient of the goods, rather than the purchasing ministry, conducted tender processes, negotiated directly with suppliers, and reviewed technical specifications of the commodities being procured Alternatively, the purchasing ministry assumed these contracting responsibilities Directives to divert goods to these ministries came from the Leading Committee, the Office of Vice President Ramadan, the Presidential Diwan, and the Presidential Office.[5]

Officials from the Ministries of Agriculture, Electricity, and Transportation and Communication have acknowledged being tasked with purchasing goods for other government bodies on occasion For instance, the Ministry of Agriculture frequently acted as a proxy for the Ministry of Defense Officials also highlighted that Belhasa Motors and Al-Qasit, firms based in the United Arab Emirates, were the principal suppliers respectively to the Ministry of Defense and intelligence services Commonly diverted items included trucks, particularly models suited for artillery towing, tires, batteries, forklifts, and even date palm excavators, which were used for uprooting palm trees and transporting them to Presidential Palaces

Ministry of Agriculture officials expressed initial concerns about being caught diverting goods but soon realized that the United Nations was unaware of these actions and thus unlikely to take corrective measures As highlighted in the Committee's previous Programme Management Report, the United Nations' monitoring mechanism suffered significant management failures that compromised its ability to effectively oversee operations

According to a Ministry of Transportation official, when inspectors inquired about goods diverted to the Ministry of Defense, they were informed that the items had been temporarily lent to another ministry and would be returned shortly Similarly, Minister of Transportation Al-Khalil mentioned that when United Nations inspectors requested to inspect a vehicle transferred to another ministry, the purchasing ministry would delay with excuses and then temporarily "borrow" the vehicle back for inspection purposes, after which it would be returned

During the Programme, Iraq reportedly also sold goods acquired through the Programme

to other nations, generating additional illicit revenue for the Iraqi regime According to trade data from the United Nations Commodity Trade Statistics Database ("Comtrade"), which compiles import/export information provided voluntarily by around 110 member states, Iraq's total imports (excluding oil) amounted to approximately $286 million from

1996 to 2002

The United Nations relies on the accuracy of data submitted by its members and does not independently verify the information in Comtrade Similarly, the Committee overseeing the Programme has not authenticated this data Moreover, the Committee has been unable

to ascertain whether the goods traded by Iraq were originally obtained through the Programme However, it is noteworthy that some of the items listed as sold by Iraq, such

as cotton yarn, are not known to be produced domestically within Iraq.[6]

Former Vice President Ramadan claimed that the Iraqi government did not officially engage in the resale of Programme goods outside Iraq However, he acknowledged the possibility that certain individuals might have stolen or acquired Programme goods illicitly, which were then sold on the black market or exported Another Iraqi official mentioned that the goods sold outside Iraq mainly consisted of locally produced Iraqi goods purchased by the government, which were subsequently resold for profit Nonetheless, some goods procured under the Programme were also reportedly resold outside Iraq

3.3 Substandard Goods

During interviews, multiple former Iraqi officials indicated that the Iraqi government frequently acquired goods of inferior quality through the Programme These individuals cited examples spanning various categories such as animal feed, vehicles, wheat, medicine, generators, batteries, and chemicals Instances were reported where spoilage occurred or Iraq received expired goods In July 1999, following a mission to Iraq, Mr Sevan, Executive Director of the OIP, informed the Security Council that “major problems being faced by the Government of Iraq are regarding supplies and equipment which on arrival are found to be defective or do not meet quality control standards.” Despite Iraq's ongoing issues with substandard goods, former Vice President Ramadan asserted that the Iraqi government did not adopt a policy of intentionally importing low-quality goods

Iraq's procurement of lower quality goods was significantly influenced by its official policy of favoring specific suppliers and those from preferred countries For instance,

former Minister Al-Khalil explained that the Ministry of Transportation sometimes had to opt for Russian cars over German ones to comply with mandates prioritizing purchases from certain countries Similarly, other officials stated that Iraq persisted in buying substandard goods from favored suppliers, despite previous issues with quality, to meet political directives set by senior members of the Iraqi regime

According to officials, the Ministry of Agriculture was compelled to purchase inferior vehicles from particular countries, and these vehicles often did not cost significantly less than those from reputable manufacturers However, Iraq also sourced some goods from well-established companies known for producing high-quality products, such as Mercedes, Volvo, Siemens, and General Electric, as indicated by records of humanitarian vendors

Several factors contributed to Iraq's acceptance of lower quality goods A Ministry of Trade official noted that the standard practice was to select the lowest bidder as long as the goods met minimum specifications, rather than seeking the highest quality available Moreover, Mr Sevan highlighted in a briefing to the Security Council that Iraq increasingly relied on less reliable brokers for procurement, which further reduced the likelihood of compensation when substandard supplies and equipment were received Throughout the Programme, ongoing discussions at the United Nations and with Iraq centered on commercial protection, particularly regarding Iraq's options when receiving substandard goods Felicity Johnston, Chief Customs Expert at OIP, explained that Iraq regularly communicated its concerns about the quality of goods obtained under the Programme to OIP and reported these to the Security Council In interviews, Iraqi officials pointed out that due to regulations, Iraq could not require suppliers to obtain performance bonds, limiting its ability to penalize suppliers of substandard goods beyond denying them future contracts Iraq raised these concerns with the 661 Committee, but consensus on effective protection measures could not be reached, leaving the issue unresolved

Additionally, Iraqi officials criticized Cotecna for stamping goods received (and thereby processing payments) before Iraq could conduct quality inspections Ms Johnston suggested that disputes between Iraq and suppliers should have been resolved through standard commercial dispute practices, such as returning goods, seeking repayment to the escrow account, or requesting replacement goods

There is also limited anecdotal evidence suggesting that the Iraqi regime profited illicitly

by procuring substandard goods Two former officials of an Iraqi state-owned enterprise informed the Committee that certain companies intentionally supplied inferior goods to increase their profits, potentially through illicit payments to the Iraqi regime However,