Dealing with foreign suppliers is challenging – there’s simply less visibility, and less legal recourse when things do go wrong. And they do go wrong.
Due diligence is the best approach. In this article, we outline what can go wrong with international supplier relationships and explain how intensive due diligence can mitigate supplier fraud risks.
How supplier relationships can go wrong
International trade and international outsourcing offer immense opportunities for growth. But with greater opportunity also comes greater risk.
Trade across borders, and your business exposes itself to a complex web of global sourcing jurisdictional gaps where enforcement is difficult, and liability is often transferred unknowingly.
Fundamental supplier fraud
The most direct risk involves engaging with entities that are purely fraudulent. This includes “suppliers” who set up professional-looking websites to sell non-existent goods, collecting payment before vanishing, as well as fraudulent “buyers” who use stolen financial details or overpayment schemes to defraud sellers.
Where that happens, the contract is fiction designed solely to extract funds, leaving the victim with no recourse once the digital storefront disappears.
Transferred regulatory liability
Also known as the DDP (Delivered Duty Paid) trap, it’s a situation where DPP terms can create a false sense of security. As the buyer, you may think the seller handles all customs responsibilities.
Unfortunately, where the international trade supplier commits customs fraud by e.g. under-declaring value, or by misclassifying goods (or worse, smuggling goods through third-party countries) the authorities can hold the buyer criminally and civilly liable for the unpaid customs.
Your cargo can get seized, resulting in massive fines, and even prison time if the authorities decide that you’re guilty of “willful blindness”. That can all come about regardless of what the contract stated and what your trading partner promised.
Logistical extortion and intermediary fraud
The chain of custody itself presents multiple points of failure, particularly through fraudulent freight forwarders or customs brokers who demand “advance fees” for taxes or clearance that do not exist.
We’re talking about scams where forwarders hold goods hostage until extortionate fees are paid or tampering with container seals to replace high-value cargo with junk.
Additionally, businesses risk intellectual property theft where local entities register a brand’s trademark before the legitimate owner can, effectively holding the brand ransom in the destination market.
Real life examples of supplier fraud
Last year, it emerged that a man called Thomas Robinson (aka Tam O’Braan) operating under the business name “The Wee Tea Plantation,” ran a scam for five years – passing off ordinary teas as a rare, premium variety.
Robinson claimed that the tea was grown on his own estate in Perthshire, Scotland, using special techniques.
Yet, it was simply ordinary wholesale tea. He bolstered his credibility by repackaging the tea – while also fabricating key industry awards as well as his academic qualifications.
He targeted high-profile clients in the hospitality sector, including luxury hotels, the Caledonian Sleeper train service, and the Royal Botanic Garden Edinburgh. It was estimated that Robinson successfully conned these businesses out of a total of $740,000 USD.
Food Standards Scotland investigated, and Robinson was found guilty of two counts of fraud at Falkirk Sheriff Court. It’s an egregious case, but there are countless other examples:
- Fake credentials: This Alibaba vendor presents falsified documentation to buyers, masquerading as legitimate manufacturers. The imposter uses a variety of tactics including displaying certificates that are for a different, genuine company.
- Business email compromise: In this instance, the City of Saskatoon lost over $1 million when a fraudster successfully impersonated the CFO of a prominent construction company via email to request an urgent change in the company’s banking information. As a result, a legitimate payment intended for the construction firm was redirected and sent directly to the criminal’s bank account.
- Corporate impersonation: Here, a fraudster set up a fake profile impersonating the UK logistics firm Trans Orbis Forwarding Limited on Timocom, a freight exchange platform. The criminal accepted genuine international haulage bookings, which were carried out by unsuspecting hauliers. The fraudster received the payment and disappeared, leaving the unsuspecting hauliers to invoice the real Trans Orbis, which had no knowledge of the work.
From the above examples you can see the breadth of fraud strategies, and just how widespread fraud is. Every company is at risk.
Resorting to legal action isn’t always realistic
Pursuing foreign sellers for unpaid duties isn’t always a viable option, unfortunately. Costs are prohibitive and chances of recovery are low. The expense of cross-border litigation can dwarf the actual financial loss, and poorly drafted contracts and unfavourable jurisdictional clauses can mean it’s tough to enforce contracts – even in the face of fraud.
Unscrupulous sellers often “judgment-proof” shell entities, able to dodge successful legal claims. Lawsuits can also draw unwanted attention both from potential customers and future suppliers.
It goes for customs disputes too. While a DDP (Delivered Duty Paid) agreement commercially obligates the seller to pay, the government holds the “Importer of Record” solely responsible. The upshot is that you simply can’t rely on litigation to try to claim back the customs the seller was supposed to pay.
How to guard against bad supplier relationships
It’s far better to prevent a bad supplier relationship by vetting suppliers, rather than relying on legal actions once the relationship has soured. That starts with due diligence, right at the start of a sourcing or outsourcing decision.
Proper due diligence includes a mix of judgement, care, and prudence that a company can take to ensure that its trading partners are qualified with a track record and current operations can be trusted.
Due diligence during procurement involves investigating potential suppliers to ensure there are no obvious risks. Points to consider throughout the due diligence process include: Accessing resources, such as trade counsellors, government agencies, export credit agencies, agents, trading houses and business references, should be part of due diligence research. The decision to globally source/outsource organizational activities should not be made quickly.
Due Diligence
For more on how to maximize cost savings, create a competitive advantage and minimize potential risks by finding the best possible suppliers or outsourcing opportunities explore Global Value Chain.
It can be a daunting task, but there are resources that help. Consider talking to trade councillors and government agencies to see where the current pitfalls lie, and how to guard against these.
Your export credit partner can also help – and trading houses are also a good port of call for due diligence research.
Prevention is the only strategy
Whatever you do, never rush into a decision with a foreign trading partner – these decisions should never be made quickly.
As the “Wee Tea” case demonstrates, a professional facade can easily mask deception, and once a relationship sours, legal recourse is often prohibitively expensive or practically impossible.
Relying on contracts to protect your interests in cross-border deals is a gamble that frequently leaves buyers with no way to recover lost funds or salvage their reputation.
Rigorous, proactive due diligence is critical.
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