John McCaughey

First and foremost, we wish to acknowledge the many competent, ethical, trustworthy, exacting and conscientious professionals in our industry. Our goal here is to provide reassurance and productive solutions. Anyone can be a critic.

However, the reality exists that the yacht refitting and refurbishing industry, synonymous with luxury and opulence, is increasingly becoming a hotbed for sophisticated frauds, thefts and scams, leaving many yacht owners navigating through the treacherous waters of financial loss and betrayal.

The allure of the high seas comes with its own set of perils, not all of which are natural. Among these, the menace of fraud in yacht surveying, refurbishing and refitting is particularly insidious, preying on the trust and lack of specific technical knowledge of yacht owners. There exist regional maritime-related “corruption corridors” in the US and abroad.

There are several factors driving the unethical behaviour and/or substandard services in our industry, including:

· The tremendous growth of our industry, and number of vessels, particularly vessels in excess of 30 metres in length, outpacing the number of qualified service contractors, shipyards and qualified shipyard personnel.

· Lack of, or inadequate, regulations governing the yacht refit and repair industry.

· Immigration laws that restrict the movements of craftsmen to and from the United States.

· Lack of marine industry-related vocational training, particularly in the United States.

· Limited quantity of experienced, yacht-industry-knowledgeable and ethical project managers.

· A proliferation of unethical and dishonest individuals, without integrity or character.

This article sheds light on murky aspects of our glamorous industry. We explore the various avenues through which fraudsters are making waves, while offering measures to mitigate and eliminate unethical and criminal behaviour, preserving your investment and peace of mind.

Surveying
At the onset of a yacht purchase process, the brokers involved should suggest a thorough inspection of the vessel by one of x (three) independent yacht surveyors. While it is beyond the scope of this article to address the myriad of circumstances influencing the scope of such an inspection, suffice to say, there exists, all too often, an inadequate scope of the inspection and, consequently, omitted information regarding specific aspects and conditions of the yacht, which may translate into a significantly higher refitting price tag and ultimately higher purchase price.

As an example, while aluminium has a good strength-to-weight ratio versus steel, an aluminium hull must be de-scaled on the hull bottom as well as within interior bilges, holding tanks and cofferdams to facilitate visual inspection for structural integrity-compromising corrosive pitting. You cannot rely upon ultrasonic transducers (UT) to detect the corrosion. Such an inspection would include all sea valves hull penetrations stub-ins and flanges, propellor shafts stern tubes, roll stabilisers actuators hull sleeves, rudders posts hull sleeves, sea chests and related manifolds and piping, bilge suction related manifolds and piping, fuel-transfer-related manifold and piping, and fire water piping.

Another prevalent scam is the hiring of ghost crews or subcontractors. Owners are billed for the wages of workers who either do not exist or were never involved in the project.

 Overcharging and phantom services
A common scheme involves overcharging for services, equipment and materials, and billing for work never performed. Yacht refitting projects, known for their complexity and the bespoke nature of the tasks involved, offer fertile ground for unscrupulous service providers to inflate prices or charge for high-end materials while installing substandard alternatives. Owners, especially those who might not be present during the refurbishment, can find it difficult to verify the authenticity of the work cited on their hefty invoices.

The ghost crew con
Another prevalent scam is the hiring of ghost crews or subcontractors. Owners are billed for the wages of workers who either do not exist or were never involved in the project. This type of fraud not only inflates the project cost but also delays the completion timeline, as the actual workforce is significantly smaller than that paid for.

Warranty woes
Fraudsters have also been known to offer extended warranties for work performed or parts replaced, charging a premium for this assurance. However, when the time comes to claim these warranties, owners often find that the service provider is unreachable or out of business, or the warranty terms were so narrowly defined that they offer no real protection against defects or failures.

A sophisticated method of defrauding owners involves the use of shell companies.

Counterfeit parts and materials
The use of counterfeit parts and materials is a particularly dangerous form of fraud. These substandard components can not only affect the performance and aesthetics of the yacht but also pose serious safety risks. From fake branded engines to low-quality teak wood masquerading as high-grade material, the range of counterfeit items being used is vast and often difficult to detect until it’s too late.

The shell company shuffle
A sophisticated method of defrauding owners involves the use of shell companies. After securing a contract, a service provider might funnel funds through various shell companies, complicating the financial trail. In many cases, these entities declare bankruptcy or dissolve before the project is completed, leaving the owner with no recourse for recovering their investments.

Non-existent document version control
Upon request to submit written estimates, bids or quotes towards specific tasks and/or scopes of work, vendors submit untitled or ambiguously file-named documents. If the estimate, bid or quote is approved, and an invoice of retainer or deposit is requested, another untitled or ambiguously file-named document is submitted. This document may, or may not, denote the deposit amount or reflect a new balance due.

This is repeated throughout the project, to address change orders, labour and materials overruns, and ultimately final billing. No two documents share the same file name, file names provide no indication as to the content of the document. The documents may contain repeated dialogue run-ons regarding services and labour hours provided; this dialogue can be redundant and overlap other dialogue in unrelated documents.

Low number of tradesmen licensing and certifications
The yachting refit and repair industry has no governing body that requires and ensures trade and technical competency of workers that service, repair or modify luxury motoryachts. Some vendors do in fact enrol employees in courses created and conducted by maritime-related training entities. However, an individual with no previous experience can enrol in and pass such certification courses, which are typically three to five days in length.

This of course does not qualify them to perform technically related tasks, nor charge $150.00 or more per hour, as is presently common and accepted practice. As an example, very few maritime industry electricians know how to establish an Electrically Safe Working Condition (ESWC) per (NFPA 70E). Apprenticeships preceding the recognition as a journeyman tradesman, through trade unions such as the IBEW (International Brotherhood of Electrical Workers), can be two or more years in duration.

Non-existent graduated labour rates
Vendors in the yachting industry typically charge a flat labour rate for every worker that is assigned to your yacht, irrespective of whether they are in fact tradesman or have tradesman experience, licensing and certifications. These rates can range from $75.00 to $250.00 per hour.

There exist ship and repair yards that service yachts to which they overcharge for services rendered and charge exorbitant surcharges against outside contractor’s invoicing.

Tax-exemption scheme
Captains and/or ‘project managers’ (PMs) establish business entities such as a limited liability company (LLC) or corporation, then recommend the yacht owner fund the project through this entity, avoiding taxation against a significant portion of the project costs. This can include acquiring a tax-exempt resale certificate for a yacht owner’s domestically established LLC or corporation.

These individuals will then submit funding requests in advance of on-boarding vendors, reconciling the funding with vendors’ estimates, deposits requests and milestone payments invoicing. These deposits requests and invoices can be fraudulently created and/or modified to reflect higher costs than the original quotes and invoices. Alternatively, the ‘PM’, upon receipt of a vendor’s estimate, instructs the vendor to resubmit the estimate with a higher quote, paying the ‘PM’ the difference.

Shipyard complicity
There exist ship and repair yards that service yachts to which they overcharge for services rendered and charge exorbitant surcharges against outside contractor’s invoicing.

There are ship and repair yards that service, build and rebuild yachts and other vessels with decades-long histories of substandard and/or incomplete projects, grossly late delivery dates, with outrageous costs over-runs totalling tens and millions of dollars, abandoning their obligations to good faith and fair dealing, and fiduciary duty.

These same yards will secure, on behalf of the vessel’s owner, the services of an outside contractor, charge exorbitant surcharges against said outside contractor’s invoicing, while knowingly observing the contractor also abandoning their obligations to good faith and fair dealing, and fiduciary duty.

Upon lawsuits filed against them by the owners of these yachts and other vessels, they declare bankruptcy and continue the same behaviour towards other unsuspecting customers.

Maintain an on-site presence through trusted representatives or invest in third-party oversight during the refurbishment process.

Mitigation measures
Protecting oneself from these fraudulent practices involves a combination of diligence, education and professional assistance. Yacht owners and/or representatives are advised to:

· Interview and vet PM candidates through fellow yacht owners or their representatives, conducting background checks on them, and vendors, with references.

· Ask the candidate if PM software that provides transparency is utilised.

· Establish accounting methodology and weekly reporting for petty cash, charge cards and invoicing.

· Maintain an on-site presence through trusted representatives or invest in third-party oversight during the refurbishment process.

· Establish document version control: utilise document file name and change orders file name methodologies.

· Demand that contracts, service, purchase and change orders from shipyards and outside contractors include language requiring:
– Negotiable surcharges for sub and outside contractors, based upon volume of work and ratio of work awarded to shipyard versus the vessel’s preferred outside contractors.
– Detailed scope of works.
– Specifications for all materials and OEM manuals for all equipment.
– Technical drawings for proposed and approved systems.
– Installations meet applicable safety and quality standards (for example NEC, IEEE).
– Defined start and completion dates, and daily allocation of manpower,
– Graduated labour rates: labourers/apprentices/journeyman/tradesman (does the shipyard or contractor have an apprenticeship training programme?).
– Documentation of all work performed, including itemised materials and equipment billing.
– Progressive photographic evidence of all work performed: prior to commencement of work, stage by stage and completion.
– Requirement for inspection by PM and/or owner representative and Class surveyors (vessels in or desiring Class status) prior to release of progress/milestone and final payments.
– Invest in independent inspections, or a full-time QA/QC officer, to verify equipment and materials used, ensuring compliance with applicable standards, regulations, contractual agreements.

· Require work history and certifications of tradesmen.

· Require vendors to have state contractor trade licensing.

· Utilise skilled day labour force to offset costs and reliance upon contractors and shipyards. Daily time and completed assigned tasks cards must be documented and verified.

The yacht refitting and refurbishing industry, with its high-value transactions and bespoke services, will always be an attractive target for fraudsters. However, by taking informed and measured steps, yacht owners can navigate these murky waters safely, ensuring their floating paradises are professionally and beautifully appointed and maintained.

Again, we wish to acknowledge the many competent, trustworthy, ethical, exacting and conscientious professionals in our industry.

We are inviting collective and collaborative efforts to uphold industry values and integrity, ensuring that our clients – yacht owners worldwide – fulfil their dreams of relaxation, intimacy and adventure with the privacy and security that is becoming scarcer in our increasingly intrusive society.

Any views, thoughts and opinions expressed here are those of the author and are not intended to malign any particular individual or organisation, and may not reflect the views, opinions, policies or positions of The Superyacht Group.

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