Sanctions compliance: a fresh warning for the air cargo industry
Recent news that a Maersk company carried arms components from North Korea to Egypt - in violation of international sanctions - acts as a fresh warning for those facilitating global trade to be diligent in monitoring and reporting suspicious activity. The transportation of electrical components by a Maersk subsidiary, which had the potential to be used for military purposes, highlights the growing need for vigilance across the cargo industry.
The Maersk example highlights what appears to be a lack of due diligence, as screening should have taken place to verify the legitimacy of the parties involved in the transaction, the goods being transported, and their destination. With regulation on the increase in 2018 and fines and penalties continuing to grow at pace, this is a stark reminder for cargo firms to ensure they have robust compliance solutions in place, to avoid any involvement in enabling illegal trade.
Since air cargo is the fastest way to transport goods around the world, the industry is increasingly relied upon to facilitate global trade at speed. It accounts for 35% of trade value and last year demand for air cargo, measured in freight tonne kilometres, grew by 9.0%. This was more than double the 3.6% annual growth recorded in 2016. The industry’s unique selling point is a clear differentiator to competitors within the shipping industry. However, with a series of high profile sanctions breaches hitting the news and regulations ever-increasing, can the industry fulfil its compliance obligations whilst maintaining speed as a competitive advantage?
Air cargo has become a target for money laundering as well as the transportation of goods for terrorist purposes and, as a result, it has become subject to new levels of compliance regulation. Air cargo companies are currently required to check Airway Bills (AWBs) against sanctions and dual-use goods watch lists. If found to be non-compliant, organisations can receive large fines and also lose their export/import rights. If caught, non-compliant companies will also experience reputational damage with the prospect of guilty parties facing possible imprisonment.
Before the Maersk issue emerged, air cargo screening lapses had already been in the spotlight. In November 2017, a Dutch court fined U-Freight Holland BV, a transporting company, €50,000 for transiting military items to Russia. The managing director of the company was also prosecuted and faced two months in jail, but was later acquitted.
The Transportation Security Administration (TSA) announced in August 2017 that it was reviewing its screening procedures for cargo flown into and within the United States, in order to identify any potential security vulnerabilities that could be exploited by terrorists. This initiative stemmed in part from a terror plot that was foiled in Australia in July 2017, which involved a senior ISIS commander shipping partially assembled components of a bomb on a commercial cargo plane from Turkey to Australia.
Further, in August 2017, US Shipping firm Blue Sky Blue Sea reached a settlement with the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury for violating Iran sanctions after it was caught transporting used and junked cars from the United States via Iran to Afghanistan on 140 separate occasions. Blue Sky Blue Sea was fined $518,063 USD and suffered damage to its reputation. The company received the fine despite having some OFAC compliance processes in place, which suggests its processes may have been manual and ineffective.
OFAC has wide-ranging powers at its disposal. As a US regulatory body it is able to impose fines and penalties on companies including those which are not owned or registered in the US. In the past, penalties have been issued to non-US companies which traded sanctioned goods in dollars or exported goods manufactured with US components.
The air cargo industry faces the risk of losing its speed advantage due to the burden of compliance regulation and because most compliance processes in the industry are manual and antiquated. The International Air Transport Association (IATA) announced in its July 2017 Air Cargo Strategy Report that one of its top ten industry priorities is ‘facilitating trade’. IATA believes that if increased regulations are not managed efficiently then costs will increase and transit will slow down, damaging the air cargo industry’s unique selling point.
In addition to this, new threats from agile market entrants such as Amazon Prime provide evidence that the industry is facing disruption. So how can the air cargo industry evolve?
Automated and digital screening solutions where airway bills (AWBs) are checked against comprehensive sanctions and dual-use goods watch lists with speed and accuracy must be the way forward. Currently, around 50% of AWBs globally are still processed on paper rather than electronically (e-AWBs). IATA is pushing to change this towards a state of digital sophistication, but much of the industry is still reliant on old processes that have been used for years. When it comes to screening AWBs, companies that still use paper-based processes are immediately at a disadvantage and the compliance process will take longer than those on the e-AWB scheme. A great first step forward is to transition to an e-AWB system, particularly if companies are still having to perform manual checks.
Some air cargo companies try to get around this by outsourcing compliance responsibilities to third parties, to perform the checks on their behalf. However, they too often use manual processes, so it can take them days to perform all necessary checks before transit. Together with time inefficiencies, ultimate liability for non-compliance against regulations sits with the carrier, whether or not any outsourcing arrangements have been agreed with third parties. With the aforementioned recent news and a brighter regulator spotlight now shining on cargo companies, many are now realising they face significant risks as they cannot rely on third parties to complete their checks with speed and accuracy.
One example of an air cargo business blazing a trail for best practice in compliance is Lufthansa Cargo. Realising the increasing importance of complying with international sanctions regulations, and understanding the consequences of non-compliance, over the past few years Lufthansa Cargo has taken steps to overhaul its compliance vetting capability.
Since one Lufthansa Cargo aircraft can easily carry 150 shipments from 150 consignees and involve 150 types of goods, manually checking the paperwork in a reasonable timeframe is practically impossible. The business has therefore implemented a digital sanctions and dual-use goods screening engine that automatically checks cargo documentation to detect any irregularities that could pose a risk. For example, the technology scans goods descriptions to detect whether they could potentially have a military purpose, and checks origin and destination locations to ensure the cargo is not moving to or from a sanctioned territory.
This compliance solution, which is more commonly used by banks to uncover sanctions risks in trade finance transactions, now enables Lufthansa Cargo to check over 47 million records in real time, and is entirely invisible to its customers and shipping staff. In modernising its process, Lufthansa Cargo has effectively mitigated risk and increased efficiency, as well as improving the speed of its service to customers.
In today’s cargo industry, automation and digitisation of processes are not goals to strive towards – they’re expected and indeed necessary for meeting compliance obligations. With the series of high profile scandals hitting the headlines in recent months, it is clear that cargo organisations must evolve to meet the progressively complicated regulatory requirements and ultimately, to play their part in enforcing global security.
This article was written by Byron McKinney on 29 May 2018. Visit his blog: https://accuity.com/author/mckinneyb/
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