Managing Compliance Risk in Your Freight Forwarder
Oct. 2016
TradeSecure

Globalization—particularly changes to foreign investment, global supply chains and production sharing practices—has fundamentally reshaped the multilateral trading system. These changes are not just quantitative, with more freight in circulation, but also structural and operational. It is important to understand how your freight is moving. In this context, freight forwarders play important logistical, economic and security roles in regulating trade flows. Choosing a compliant freight forwarder can bolster your compliance efforts by adding another level of verification and security.

What is a Freight Forwarder?

In order to comply with export documentation and shipping requirements, many exporters use a freight forwarder to act as their shipping agent. An international freight forwarder is an agent for an exporter in moving cargo to an overseas destination. The term freight forwarder is often used interchangeably with ‘non-vessel operating common carrier’ (NVOCC).

Freight forwarders should be familiar with the recipient country’s import rules and regulations, the exporter’s legal requirements, the methods of shipping and the documentation required by foreign trade. Standards for and oversight of the freight forwarding community are established at international and national levels, comprising both public and private entities. In general, despite the international and national variations in licensing and standards, freight forwarders are usually legally liable for the goods and the related transaction while overseeing the transport-related transactions.

freight-forwarders-graphic

Freight forwarders help exporters to prepare price quotations by advising on freight costs, port charges, consular fees, the costs of special documentation, insurance costs and handling fees. They recommend the best packing method to protect the merchandise during transit or can arrange to have the merchandise packed at the port or containerized. After shipment, they can route the documents to the seller, the buyer or to a bank (i.e. supplying the letter of credit). Freight forwarders can also make arrangements with customs brokers overseas to ensure that the goods comply with customs export documentation regulations.

This description of freight forwarder is necessarily general as the goods transport industry, like global trade itself, is undergoing rapid change. Increasingly, the complex needs of the supply chain are being contracted out to third parties. In addition to traditional freight forwarders, exporters are faced with an array of goods transport services from customs brokers to third-party logistics providers (3PL).

Furthermore, freight forwarders are increasingly offering comprehensive supply chain services, which include documentation/licensing, insurance/financing, warehousing and carriage, and their liability exposure is similarly expanding.

What Does My Freight Forwarder Do? Is He Compliant?

The key nodes below should be formalized into the work flow of any freight forwarding operation.

Advance data collection

Prior to each transaction with the exporter, the freight forwarder must obtain complete information about the content, proposed destination and end use or end user of the shipment. For example, the UN Panel of Experts on Iran sanctions noted in its 2014 report that ‘The International Freight Forwarders Association (FIATA) has issued a notice to its members warning about the increased use of counterfeit bills of lading in connection with shipments to and from Iran’.

Vouchsafing the client and identifying restricted parties

As part of their standard due diligence processes, freight forwarders should incorporate restricted party screenings—of whether the proposed carriers participate in various certification schemes such the Authorized Economic Operator programs—and ‘red flag reviews’. It is important to note that the screening process includes both the proposed client and the shipment transaction. Consulting the relevant lists has been greatly facilitated by government and UN efforts to consolidate lists.

Identifying restricted or prohibited goods

Freight forwarders should be able to connect prohibited and restricted goods to various destinations. In some cases, however, mundane items cannot be lawfully transported to certain embargoed destinations or can be shipped only under license. In addition, many dual-use items are difficult to identify as strategic items. Freight forwarders should develop a routine protocol to consult with their clients regarding the controlled status of the shipped items and whether they have been given the appropriate licenses. This capability will become increasingly relevant as freight transport services consolidate.

Whole-of-supply-chain compliance

Contemporary supply chains are enormously complex. One transaction alone might involve multiple partners and jurisdictions. Freight forwarders can increase the signal-to-noise ratio by finding clients and partners that have compliance programs in place. For instance, BIS freight forwarder guidance notes that ‘Building compliance partnerships and sharing compliance strategies with each other and other parties to transactions as part of Standard Operating Procedures will give all involved a competitive edge’. These partnerships should also extend to the public–private realm. Freight forwarders should work proactively with governmental authorities on self-disclosure protocols in the event of inadvertent violations.

Compliance in acquisition

The freight transport industry is undergoing significant change, including the consolidation of discrete functions such as brokering and carrier services. As 3PL, if not fourth party logistics (4PL), becomes the new industry standard for transport, the new firms must include compliance parameters in their due diligence efforts. Consolidation strategies include acquiring new service providers. In the mergers and acquisition context, undiscovered export control violations can be the source of serious liabilities, which can arise years after the transaction. As such, successor liability is applicable to the transport sector as much as to regular industry.

Right-sizing compliance

Depending on the size and depth of the services offered by the freight forwarder, its compliance programs should fit seamlessly into its risk mitigation methodologies. While the basic elements of trade compliance already exist as a set of global good practices—standard operating procedures, record-keeping, audits and training—implementation at the company level is determined by its size and scope.

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