The freight forwarding industry is a vital component in the facilitation of global trade. Freight forwarders play a key role in the export of goods overseas and, despite having to act on the instructions of another party, they must ensure they have robust processes in place to prevent the transportation of dangerous or dual-use goods to restricted countries.
Recently, we have seen a raft of significant penalties handed out to organizations that have demonstrated a lack of control or lapses in their process for complying with the regulations that govern goods exportation. Now, US officials have brought forward a highly significant case of an export compliance violation, resulting in a fine against one of the world’s leading freight forwarders.
Fuzzy logic failings
In April 2018, the US Department of Commerce’s agency, the Bureau of Industry and Security (BIS), issued a $500,000 penalty to FedEx for an inadequate screening of items on the US Commerce Control list. The goods in question, which included aviation parts and electron microscope manufacturing items, are classified under a series of Export Control Classification Numbers (ECCNs) for anti-terrorism purposes. The delivery of such goods requires a license from the relevant authorities, which was not obtained.
One of the most interesting points raised within the BIS order was a reference to the screening software FedEx used to identify red flags (potentially suspicious elements requiring further investigation) when checking its transaction and trading documents. BIS noted that the recipient or consignee names screened by the software could only trigger a red flag or match by using the full name of the company involved in the transaction. The use of fuzzy logic, synonyms or hyponyms was not part of the software’s functionality.
In one particular case, FedEx was attempting to screen a company called Aerotechnic, which is listed on the BIS Entity List as a restricted party for its role in supporting terrorism and enhancing the military capabilities of Iran. However, the software used could only pick up a match on the company during screening if the search contained its full company name, ‘Aerotechnic SAS’. A check on the simplified company name of just ‘Aerotechnic’ produced no matches and no red flags, which resulted in FedEx transporting goods without obtaining the necessary export licenses.
With such large volumes of goods being transported across the world and many of these being of both civilian and military use, it is clear to see the risks that could affect the wider freight forwarding industry. In 2017, the major container ports across the world saw their trading volumes increased to over 600 million Twenty-Foot Equivalent Units (TEUs), from 550 million in 2016. For airlines, there is a similar pattern, with trading growth increasing by 9% year-on-year in 2017.
The FedEx penalty is not an isolated example. Other freight export companies that have been penalized recently include:
- American Export Lines received a fine of $518,000 for transporting auto parts to Iran and Afghanistan
- Pilot Air Freight distributed restricted goods to a denied Pakistani customer and received a subsequent fine of $175,000 (this was another case in which the screening software had major flaws)
- Access USA Shipping deliberately used vague terms to describe military technology that was on the US Commerce Control List and subject to licensing controls
These latest examples clearly demonstrate the importance of freight forwarding businesses using a robust and dedicated solution when screening commodities, so they can be sure to comply with all relevant export license obligations.
Expectations for export
It is a clear requirement of BIS regulations that all parties involved in an export transaction subject to the Export Administration Regulations (EAR), must comply. There are no shortcuts to the screening of exported goods; the responsibilities of the forwarding agent include screening parties involved in the transaction, checking if export countries are on a restricted list and confirming that destination control is in accordance with the EAR.
The BIS has issued a ‘Role of Freight Forwarders’ training document, which outlines the steps required to maintain compliance. This document raises the following best practices:
- The freight forwarder is responsible for determining and applying for an export license and for any export clearance documentation
- All parties to a transaction must be screened and screening should be undertaken continuously
- Special care must be taken to ensure that exports are not destined for an embargoed country
- Records and audits of all exported goods must be kept for a minimum of 5 years from the date of export
- A destination control statement must be completed for any goods that are exported
- A robust internal compliance program should be in place that allows practitioners to comply with EAR and other global regulations
Is the freight forwarding industry equipped to comply effectively with the relevant legislation? In the context of recent penalty fines, it appears not. In several cases, the lack of sophistication of proprietary software and its use significantly contributed to breaches of regulation.
Digitisation is often promoted as a key benefit for companies that need to screen and manage trading documents for compliance purposes, especially in relation to goods and commodities. However, it seems the freight cargo industry is behind in fully digitizing its operations and needs to advance quickly to keep up with regulatory requirements.
The automated checking of airway bills or bills of lading is a key component of a successful compliance program but it is important to stress that not all digital software solutions offer the same guarantees. Some applications require manual intervention, do not have the sophistication to adapt to fuzzy logic or do not provide the speed and accuracy to be able to cope with the workload of a major organization. It is not simply enough to purchase screening software; the functionality of that software and how it is operated needs careful consideration.
The recent examples of fines issued by BIS should be a wakeup call to the freight forwarding industry that it needs to take its export compliance responsibilities seriously. For many, this will mean ensuring the most appropriate and effective data-enabled software is implemented to facilitate the screening of goods for sanctions and export controls. For those in the industry that already have screening systems in place, stress tests and technical reviews should be conducted regularly to ensure the existing provision is actually up to the job.
OFAC and BIS guidelines on trade compliance are crystal clear; if freight forwarding companies do not have suitable screening applications or robust enough processes in place to capture transgressions, then reputational hazards and financial penalties will continue to grow.