History, as we all know, is like a memory book, which records all the events of our past; so that we can go back to it, learn from its consequences, avoid the same mistakes and have a better meaningful life to live for the present, and of course, the future. With that in mind, I thought it would be great to share some of that history as it applies to fraud scams. Scams occurred way before they were ever written down, but unfortunately those stories are lost in time.
The first recorded scam is from 300 B.C. in Greece.While not referred to as ‘insurance’ at that time, a Greek merchant by the name of Hegestratos is said to have secured a ‘bottomry’ to cover the value of his boat in case it was to sink during the voyage between Syracuse (modern-day Sicily) and Athens, Greece.
The two shipping merchants named Hegestratos and Zenosthemis took out the ‘bottomry’ on a ship and cargo of corn.
A ‘bottomry’ was effectively a loan that could be taken out against the value of a ship. If the ship successfully completed the voyage, the loan was paid back along with considerable interest. If the ship was damaged during the voyage or sunk, the loan could then be disbursed to the ship owner for an amount up to the full value of the loan. Such a financial instrument was an essential means of securing the interests of merchants and buyers during the era.
Hegestratos was slated to deliver a large grain shipment to a buyer in Athens. Instead of actually delivering the grain, he devised a plan to place no grain on his ship, secure the bottomry loan, sink the boat to collect on the bottomry, then sell the grain to a new buyer. Shortly after leaving the port, Hegestratos went down into the hold while Zenosthemis distracted everyone on the ship deck. The captain of the ship was on deck talking to Zenosthemis when he thought he heard a noise from the hold. The captain asked Zenosthemis if he heard anything. Zenosthemis stated he did not hear a noise, but the captain was still confident he heard something. The captain, crew members, and passengers entered the hold of the ship to investigate the noise. There they found Hegestratos. The captain asked Hegestratos if he heard the noise, Hegestratos denied hearing anything. The captain looked around but did not see anything to indicate where or what the noise was coming from. The captain began to leave the hold but was stopped by a passenger. The passenger pointed out that Hegestratos was hiding an axe behind him. As the captain looked closer, he discovered that Hegestratos was attempting to cut a hole in the hull of the ship in order to sink the ship.
In a panic, Hegestratos ran from the hold and made his way to the deck of the ship. Once there, he dove in attempting to swim to a small boat the cargo ship was towing. He did not make it and ironically, Hegestratos drowned at sea. A fate he had intended for the crew and passengers of the ship to help hide his deceit, as dead men tell no tales. Unable to sink the ship by himself, Xenothemis had to sail on to the port, at which point the buyer, Protos, wanted to know why his shipload of corn was empty. A legal battle is said to have continued after but the verdict is kept hidden under the wings of history. Zenosthemis was arrested and faced justice in the Athenian courts for his involvement in the scam.
As we understand from the event, ‘bottomry’ was an arrangement in which the master of a ship borrowed money upon the bottom or keel of it, so as to forfeit the ship itself to the creditor, if the money with interest is not paid at the time appointed at the ship’s safe return.This occurs, for example, where the ship needs urgent repairs during the course of its voyage or some other emergency arises and it is not possible for the master to contact the owner to arrange funds, allowing the master to borrow money on the security of the ship or the cargo by executing a bond. Where the ship is hypothecated, the bond is called a bottomry bond. Where both the ship and its cargo are hypothecated, the relationship is called respondentia.By its nature, bottomry was prone to insurance fraud. Taking bottomry against a ship and valuable cargo was the first type of fraud, while setting sail with a cheap cargo and scuttling the ship to keep the loan and the cargo, and pretending that the ship had sunk while it actually hid in a distant port and acquired a new name and crew formed the second type of fraud.
“Demosthenes’s speech against Zenothemis” accuses the titular shipper of the first type of fraud in the 4th century BCE. As Demosthenes had stated during his argument “immediately on getting the money, they sent it home to Massalia, and put nothing on board the ship. The agreement being, as is usual in all such cases, that the money was to be paid back if the ship reached port safely, they laid a plot to sink the ship, that so they might defraud their creditors. Hegestratos, accordingly, when they were two or three days’ voyage from land, went down by night into the hold of the vessel, and began to cut a hole in the ship’s bottom, while Zenothemis, as though knowing nothing about it, remained on deck with the rest of the passengers. When the noise was heard, those on the vessel saw that something wrong was going on in the hold, and rushed down to bear aid”.
Demosthenes was one of the greatest public speakers of antiquity and an eminent statesman of his era, and his writings are a key source of insight into the politics and finance of Greece in the 4th century BC. For a time, Demosthenes made his living as a professional speechwriter (logographer) and a lawyer, writing speeches for use in private legal suits.
Lacritus was a sophist,and native of Phaselis,a town in Bithynia, on the southern coast of Asia Minor is known to us chiefly from the speech of Demosthenes against him.The subject of the speech entails a man named Androcles, who had lent a sum of money to Artemo, the brother of Lacritus.The latter, on the death of his brother, refused to refund the money, though he had become security for his brother, and was his heir. Hence, the suit was instituted against him by Androcles, for whom Demosthenes composed the speech in question.
Demosthenes’ oration 35, “Against Lacritus,” contains the only surviving maritime loan contract from the period. The contract demonstrates the existence of a commercial code that tied together the economic lives of people from all over the Greek world. Athenians and non-Athenians alike came to the port of Piraeus to trade freely: in “Against Lacritus,” the merchants borrowing money for the voyage were from a city on the southern coast of Asia Minor, and the lenders financing the voyage were from a city outside Athens and from another Greek city-state in the northeast, Boethiah.The port of Piraeus served as the point of departure for the voyage, but more importantly, it served as the legal venue in which the parties contracted. When the deal was broken, the ability of the lenders to sue for compensation over events that occurred in the Black Sea–and the power of Lacritus to defend himself using agreed upon rules of evidence–are evidence of the complex infrastructure that made long-distance trade possible.
The agreement taken from theoration of Demosthenes against Lacritus is here given in full for the reader’s understanding and reference to the “Demosthenes against Zenothemis”:-
Androcles of Sphettus and Nausicrates of Carystus, have lent to Artemo and Apollodorus, both of Phaselis, 3000 drachms in silver from Athens to Mende or Scione, and thence to Bosporus, or, if they please, on the left coast as far as the Borysthenes, and back to Athens, at an interest sum of 225 drachms for the thousand. But in case, if they sail out of Pontus to Hierum after the rising of Arcturus, they pay the sum at an interest of 300 drachms for the thousand, on the security of three thousand casks of Mandaean wine, which shall be conveyed from Mende or Scione in the twenty-oared vessel of which Hyblesius is the owner.They hypothecate these goods, not owing upon them any money to any other person, nor will they borrow anything further upon them. And they shall bring back to Athens in the same vessel all the goods which they purchase in Pontus for the return-cargo. And, if the goods are brought safe to Athens, the borrowers shall pay to the lenders the money accruing due according to the agreement within twenty days after their arrival at Athens, without any abatement, except for jettison, which the passengers have made by common resolution, or for payments made to enemies, but no deduction shall be allowed in respect of any other loss; and they shall deliver the security entire to the lenders, to be under their absolute control until they have paid the sum due under the agreement. And, if they do not pay it in the stipulated time, it shall be lawful for the lenders to pledge or to sell the security for such price as can be obtained; and, if there is any deficiency in the money which is due to the lenders under the agreement, it shall be lawful for the lenders, both or either of them, to levy the amount by execution against Artemo and Apollodorus, and against all their property, whether on land or sea, wheresoever they may be, in the same manner as if a judgment had been recovered against them and they had committed default in payment. And if they do not enter Pontus, but stay ten days after the rising of the dog-star in the Hellespont, and discharge their cargo in some place where the Athenians have no right of reprisals, and thence return home to Athens, they shall pay the interest inserted for the previous year in the agreement. And, if the ship in which the goods are conveyed should meet with any irretrievable disaster, the security shall be saved, if possible, and whatever is recovered shall be the joint property of the creditors. And touching these matters nothing shall have greater effect than the agreement.
We are interested in the insurance features of this agreement.
It is to be noted, first of all, that the contract expressly provides that all of the property of Artemo and Apollodorus, as well as the return cargo, to be purchased by them, is made liable for the repayment of their loan. The agreement provides that if the security for the loan, when sold by the creditors, shall prove deficient to meet the obligations, then the creditors are empowered to seize any other of the debtor’s property, wherever it may be found, in the same manner as if a judgment had been recovered. These features are concerned with the loan and security therefore.
Our interest centers upon the clause that provides as a condition precedent to repayment of the loan and interest, (the money accruing due according to the agreement) the safe arrival of the goods at Athens. This feature of the agreement introduces the insurance element. If the goods offered as security for the advance are lost on the voyage, the lender loses his money.
But if it arrives safely at the point of destination agreed upon at the time the advance is made, then the amount of the loan is to be re-paid together with the interest agreed upon by the parties. Only in the event of the safe arrival of the cargo pledged as security, do the creditors have a right to levy against the debtors, and seize their property in execution after a sale of the security fails to satisfy the claim. In other words the debtors are insured to the full amount of their loan. In the event that the security fails to arrive safely at the agreed destination, the entire loss rests upon the lender, who is, as a matter of fact, the insurer.
The hazardous nature of the undertaking, from the point of view of the lender, seems to have been fully recognized by the Greeks, particularly in such a commercial center as Athens. Because the loss of the property hypothecated carried with it both loss of principle and interest, the yield on such loans was very much higher than could ordinarily be obtained in the ordinary course of lending money. Such contracts, in which the creditor did not undertake the risk, were prohibited by the Rhodian laws.
In the ‘bottomry’ contract of ancient Greece, while “Jettison” is specifically mentioned as a reason for abatement in the repayment of the loan, the borrower must comply with conditions specified in the contract. Certain formalities are ordinarily required before goods may be jettisoned, even today. In the contract we are considering, if that jettison might be the grounds for a claim on the part of the debtor against the creditor, it was necessary that the property be sacrificed, only after the adoption of a common resolution by all on board. Whether this reference to an abatement in the event of jettison extended to the sacrifice of property, other than that offered as security for the loan, is not clear.
Whether the custom of general average, was known to the Greeks is a point upon which we have no knowledge, but the fact that all on board shall vote to throw over, for the common good, all or part of the goods of any one of the owners, would seem to imply a liability on their part to compensate for the benefit secured. It would be an interesting point to determine whether jettison during the course of a voyage, in no way affected the physical value of the security, but involved a claim for general average, was contemplated as a ground for abatement in the Greek contract of bottomry.
In reference to modern insurance practice, it is the custom of the underwriter to include in his contract an express agreement to indemnify the insured for losses arising out of general average.
Scams are nothing new and the basics have not changed. The scam by Hegestratos and Zenosthemis is the same as insurance scams being perpetrated today. Almost everyone has heard of business owners setting their business on fire, or other destructive measures, to claim the insurance funds.History is littered with other examples of fraud and scams – from the early Romans to the more recent insurance scams in the shipping industry.
Over the centuries, fraud has gone hand in hand with money. From the smallest of opportunistic scams to bigger, more organised groups working towards the same fraudulent goal. Where there have been opportunities to make money, there have been fraudsters planning their execution.
Today, marine insurance frauds have become more organised and sophisticated, and often involves falsifying documents and creating false narratives to support the insurance claim. To make their claims seem more legitimate, fraudsters may also orchestrate accidents or thefts. They may intentionally harm or dispose of the cargo and then claim it was lost at sea due to an unforeseen event like a storm. Alternatively, they may work with insiders such as port officials or crew members to manipulate the cargo manifests and claim that more valuable cargo was lost.
The consequences of marine insurance fraud can be severe for the shipping industry, leading to increased insurance premiums, lower profit margins, and damage to credibility. Industry estimates indicate that marine insurance fraud costs billions of dollars each year. Furthermore, the potential for fraud can discourage investment in the maritime sector and disrupt international trade.
