Can You Rely on Freight Forwarders for Trade Compliance?

Can you rely on freight forwarders for trade compliance?

To answer that question ARC interviewed trade professionals from 12 shipping companies. All of them agreed that you cannot put your fate into the hands of freight forwarders when it comes to compliance. If goods are misclassified, or if shipments go to restricted parties, the shipper is considered the Importer of Record, not the freight forwarder. And it is the Importer of Record that pays the fines and penalties imposed by a governmental authority. The exception is some Latin American countries where there is joint liability between the shipper and the forwarder. For egregious offenders, those penalties can run into the millions of dollars, as was the case for one of the companies we interviewed.

A director of trade compliance at a High Tech company provided the best explanation of why companies need to retain control. He believed that compliance is not high on the list of what forwarders care about, even though they say it is. The forwarders his company works with care about what percent of goods get delivered in a particular time window, because their pay is linked to that metric. He has seen many shipment declarations that he knew contained multiple products with different classifications, but the forwarder declared just one.

How do shippers that work with freight forwarders retain control? In a posting last month, I wrote about how Leggett & Platt’s GTM solution completely automates the information flowing between suppliers, freight forwarders, customs authorities and various internal departments. All the data elements necessary for an Importer Security Filings (ISFs) automatically propagate into the document without the need for rekeying. The solution is so automated that the company has all the information it needs to do self-filings if it wants. Leggett & Platt, however, still prefers to have freight forwarders as a layer between itself and customs. The forwarders provide a second set of eyes for compliance, and if there is a mistake, they provide local representation with foreign customs agencies. John Wainwright, the Vice President of Customs Compliance at Leggett & Platt, thinks the ability for freight forwarders to provide these services makes them worth the money.

But how do shippers without a GTM system control the process? Hu Huang, Director of International Logistics & Customs Compliance at Kichler Lighting, told me she sends their freight forwarder a CD that lists all their items and HTS codes on a quarterly basis. Therefore, any mistakes made at filing are likely due to Kichler, not its partner. Kichler also sends purchase orders to its forwarder via EDI and those POs have unit prices on them. The forwarder verifies the code, quantity, and shipping windows. Thus, Kichler’s partner serves as an important check in the process.

Another company used a process similar to Kichler’s, except it used a portal. Internal folks classify the products and brokers can access this data by entering SKU data into the compliance database on a portal. The system provides the trade classification for the broker. If a product has not been classified, the brokers can contact the company’s trade people and get a classification. Every few months, the company pulls data out of the broker system and checks trade classification and country of origin data. It puts this data in a pivot table and audits the work. The analysis shows that the partner’s work is 99.7 percent accurate. If there are any problems, the company contacts customs and submits a revision. (Customs compliance ownership belongs to the shipper —  i.e.,  the Importer of the Record. This is a responsibility issue, not an automation or system issue. In any event, Customs only looks for the Importer of Record, not the freight forwarder.)

Some of the shippers interviewed believed they could use freight forwarders to help classify goods and still retain a large degree of control. One shipper retained an internal trade staff, yet used two forwarders to augment their staff. They worked with only the largest and most reputable of brokers; they audited a sample of their broker’s classifications, depending on the product category, either every two weeks or monthly; they engaged in extensive co-training exercises when the forwarders were hired; and they continue to bring the two trade staffs together to examine processes and issues on an annual basis. They described this as a two way street where the company and the forwarders learn from each other. In certain areas, the shipper has become better at compliance by interacting with its partners.

In short, the answer to “Can you rely on freight forwarders for trade compliance?” is no, but the methods used by shippers to retain control are very different.

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