By Nicola Nel Sunday, October 15, 2017

The marine insurance industry is no stranger to fraudulent claims. Where an insured shipowner decides deliberately and unlawfully to wreck or sink his own vessel (termed “scuttling” in maritime speak), you can be sure that the money and stakes involved are high. The added benefit (from a fraudulent insured’s perspective at least) is that, if all goes according to plan, all physical evidence of the incident will be lost to some deep and inaccessible final resting place on the ocean floor. The devil is in the details though, and it will often be discrepancies in the version of events as reported by witnesses and crew members which give the game away.

Although true in many cases, it would be wrong to assume that the proximate reason for an owner deciding to take such a drastic step is simply to scam an insurance payout from their hull and machinery underwriters. In some instances, scuttling has been used by shady shipowners as a means to destroy evidence of other more nefarious dealings.

It is coincidental that South Africa and the Port of Durban happen to feature in what is arguably one of the most notorious and fascinating cases of maritime fraud in history, that of the scuttling of the supertanker “Salem”.

The facts of this interesting case are summarised in the subsequent court case heard by the House of Lords, and the story goes something like this.

The year was 1979 and South Africa, still being in the throes of Apartheid, was subject to a fuel embargo. During November of that year, and desperate to get fuel into the county, the South African Strategic Fuel Fund Association (SASFFA) entered into an agreement with a company called American Polamax International Inc. for the purchase of about 1.5 million barrels of Saudi Arabian light crude oil (or equivalent) to be delivered in Durban in December of that year. American Polamax, together with a number of other special purpose companies which feature in the story, were controlled by the conspirators which had hatched the plan for this elaborate fraud a few months prior.

Payment for the crude was to be by way of letter of credit, and the conspirators used the contract entered into with SASFFA to obtain an advance payment from Mercabank Ltd to finance the purchase of the vessel “South Sun”, which was re-registered and named “Salem”. The “Salem” was then manned by the conspirators with a master and principal officers who were also party to the conspiracy and who would cooperate with the conspirators.

The vessel was then chartered out to an innocent party, Pontoil SA, who contracted the vessel to carry a cargo of Kuwaiti oil from the Arabian Gulf to Genoa, Italy. All of the documentation processed at the loading port, as well as the bills of lading issued by the Master, was consistent with this information (the shipper being Kuwait Oil Co. and the charterer being Pontoil). Meanwhile, the conspirators managed to convince SASFFA to accept the Kuwaiti crude instead of Saudi Arabian crude at a reduced price of some USD45 million.

In deceit of the charterer and shipper under the bill of lading, the “Salem” set a course for South East Africa with the intention of calling at Durban, South Africa instead of for Genoa, Italy.  During the course of the voyage, the charterer (Pontoil SA), as holder of the bill of lading (which gives the holder title to the cargo) on-sold the cargo of oil to Shell for about USD56 million.

The conspirators then caused the vessel to call at the Port of Durban under a different name, the “Lema”, where she discharged as much as possible of her cargo (some 180,000 tons) at the Single Buoy Mooring off the Bluff. The vessel there took on sufficient ballast water so as to give the impression of being fully laden for the remainder of her voyage. The conspirators collected the purchase price from SASFFA and then, about two weeks later, scuttled the tanker in the Atlantic ocean off the coast of Senegal in an attempt to conceal the elaborate fraud that had been perpetrated.

As far as the reason for the sinking is concerned, the story went that there had been a series of explosions which caused the Master to give the command to abandon ship. The vessel had gone down very quickly due to ingress of water, without leaving any time for the crew to investigate the damage. From the get-go, there were a number of suspicious factors which raised red flags with authorities and investigators, including discrepancies in the versions of different crew-members and the presence of hardly any oil on the surface of the ocean where the vessel sank (remember, at this stage there was supposed to be about 200,000 tons of oil on board). Perhaps the most amusing of the suspicious factors is that, when the whole crew were rescued from their lifeboats by a passing ship, it became apparent that the crew had had sufficient time to pack up all of their belongings into suitcases, as well as to prepare packed lunches to sustain them while waiting to be rescued!

The above facts led to a number of court cases, both in prosecution of the master and principal officers as well as the main conspirators, many of whom served time in prison as a result. The hull and machinery underwriters successfully repudiated the claim for the loss of the vessel. Shell, being the party entitled to ownership and possession of the cargo of crude oil, also instituted action for recovery of the market value of the cargo from the cargo insurer. In fact, at the time of the incident, Shell’s insurance claim (in excess of USD56 million) was the largest single claim ever to have been made against Lloyd’s of London.

Given the recent downturn in shipping markets, particularly the dry bulk sector (which now seems to be steadily improving), one would expect incidents of scuttling and insurance fraud to have been on the increase in recent years. We may however need to wait some time before coming across another story as bizarre and brazen as the incident of the “Salem”.