February 27, 2009
Recent enforcement actions have reminded us that bribes paid with briefcases full of cash are not entirely obsolete. Nevertheless, most companies fret more over what their freight forwarders are getting up to than they do over that sort of epic breakdown in their compliance programs.
Lisa Landmeier of Landmeier Legal Counsel provides some very practical advice on this difficult issue.
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“Over the last couple years, since the Vetco settlement and Panalpina investigations, everyone’s been asking what they should do to protect themselves from possible liability for corruption by their freight forwarders and customs brokers. With the level of interest I’ve seen, I wanted to add to prior postings on this subject.
The February 11th posting on wrageblog by Kate Atkinson described a strong compliance procedure for the use of freight forwarders that was implemented by one of her clients. That posting did not identify the client, of course, or the industry, and I’m guessing that it was a relatively high risk industry or that there were other factors that made the situation higher risk. Particularly in the current economic climate, companies may not be able to send personnel or outside counsel to meet with a local contact in every location where they use a freight forwarder, as described in that posting. What should they do then?
I advise companies to focus their procedures and energies on their highest risk businesses, transactions and territories. In some businesses, freight forwarders and customs brokers are not a major risk for liability. In other cases, the risk may vary depending on the type of transaction or other factors. For example, if a manufacturer sells large, expensive products to a couple hundred customers around the world each year and makes a substantial part of its income later selling spare parts to those customers, the manufacturer’s spare parts business will involve many more transactions at much lower values than the original product sales. The spares business probably exposes the manufacturer to a much lower risk for serious corruption overall. On the other hand, the spares shipments may create a significant opportunity for customs officials to demand “grease payments” or other small amounts, particularly if the spare parts are often needed urgently in order to keep a high-value project moving. I’m thinking, for example, of spare parts for construction equipment that may be moved around the world.
I have advised clients to establish basic anti-corruption procedures for all freight forwarders. Those procedures should include due diligence to make sure the client knows who the freight forwarder is and to confirm its expertise and positive reputation. The procedures should also include a contractual agreement that the freight forwarder will comply with anti-corruption and other applicable laws; will contractually require that its personnel, subcontractors and agents do so as well; and will periodically certify such compliance in writing. Before working with a freight forwarder, the client should also provide the freight forwarder with some instruction on global anti-corruption laws, through written materials if nothing else. And throughout the working relationship the client should remind the freight forwarder of these laws and expectations by obtaining annual compliance certifications from the freight forwarder. As Kate mentioned, companies can minimize the work this all takes by cutting down the number of freight forwarders used where possible. I also advise clients to stay alert to press reports or other information that may indicate that one of their freight forwarders is involved in corrupt activities, and immediately to suspend the use of any freight forwarder that appears to be involved in corruption.
Most importantly, company personnel who work with freight forwarders – logistics personnel, spares and shipping, export-import departments, or whatever other designation – must be trained and regularly retrained regarding global anti-corruption laws, recognizing “red flags” that may indicate corruption, and the importance of reporting any red flags to the company’s legal department. In most cases, any problems with freight forwarders will be identified by the company’s personnel working with the freight forwarder, and no amount of due diligence or contractual obligation will replace training and proper reporting and internal review of red flags.
Is that enough? For riskier transactions – shipments to Nigeria, the largest value shipments or other shipments that have characteristics that make them particularly risky – I would advise additional steps, such as those Kate described in her earlier posting. For routine shipments to most of the world, however, effective implementation of these procedures should be enough to protect the company from liability for the actions of its freight forwarders.
Characteristics that might make a transaction more risky would include shipments that require special handling or are not routine for the company for some other reason. Riskier transactions can be identified by considering both how likely it is that they would become targets for corruption, and how likely it is that the company would be held liable for any corruption on the part of the freight forwarder. For example, if a company has regular “internal mail” shipments between its headquarters and regional offices delivered each week by a common carrier such as UPS, those shipments would not appear likely to be targeted for corruption, as they are not likely to require special handling or to be time sensitive. It is also unlikely that the company would learn of any demand by a customs official for a payment in connection with such a shipment, given the volume of such routine business handled by UPS, and because the company would pay a set (perhaps discounted) rate for UPS’s services without reimbursing any additional costs. To the extent that the company would be unlikely to learn of any such corrupt demand, the company should not be held liable even if UPS were to make a payment to satisfy the demand. On the other hand, a complicated shipment of large and delicate equipment that required detailed coordination and planning among the company, the freight forwarder and the buyer would be much more likely to become a target for corruption. Moreover, the freight forwarder would be much more likely to advise the company of any demand for a corrupt payment to secure customs clearance of the equipment. Such a shipment would be higher risk and warrant further steps to ensure no payment would be made to a customs official in connection with the shipment.
For companies that ship to only a few destinations or use only a limited number of freight forwarders, it may be easiest to have one more rigorous procedure for all their freight forwarders. That way, nobody has to decide which are higher risk. For companies that use many freight forwarders, however, procedures that vary depending on the risk of the relevant transactions may be more realistic. Compliance resources are not unlimited, and we must be careful that we don’t focus so much attention on the risk area that happens to be in the news that we neglect areas that are actually of higher risk for a given company.”