The U.S. government is stepping up its enforcement efforts to hold logistics companies, such as freight forwarders, accountable for their role in helping export sensitive items into Russia following its invasion of Ukraine.
What are freight forwarders? A freight forwarder offers a variety of services; however, its primary role is arranging and managing the transportation of goods. The freight forwarder acts as a representative of the exporter, according to the Bureau of Industry and Security (BIS).
In July, the U.S. Department of Justice indicted the president of a freight forwarding company for allegedly shipping sensitive goods to Russia without a license.
According to the indictment, in 2023, the defendant allegedly lied about shipping a sensitive research item to Uzbekistan when it was actually destined for Russia, violating export control restrictions.
“Freight forwarders play an outsized role in the export of items overseas and, accordingly, are expected to help uphold the law rather than subvert it,” said Matthew Axelrod who serves as the Assistant Secretary for Export Enforcement at the U.S. Department of Commerce's Bureau of Industry and Security.
“Here, [the defendant] is alleged to have willfully evaded restrictions designed to degrade the Russian war machine by obfuscating the value and ultimate destination of a mass spectrometer,” Axelrod added.
The defendant was arrested in June and was charged with three counts. He could face up to 20 years in prison.
According to the indictment, in 2023, the defendant allegedly lied about shipping a sensitive research item to Uzbekistan when it was actually destined for Russia, violating export control restrictions.
“Freight forwarders play an outsized role in the export of items overseas and, accordingly, are expected to help uphold the law rather than subvert it,” said Matthew Axelrod who serves as the Assistant Secretary for Export Enforcement at the U.S. Department of Commerce's Bureau of Industry and Security.
“Here, [the defendant] is alleged to have willfully evaded restrictions designed to degrade the Russian war machine by obfuscating the value and ultimate destination of a mass spectrometer,” Axelrod added.
The defendant was arrested in June and was charged with three counts. He could face up to 20 years in prison.
International trade often relies on intermediaries, like freight forwarders, to facilitate the movement of goods, making them vulnerable to sanctions evasion and export controls violations, especially if they lack a robust compliance program.
U.S. Urges Tighter Compliance Programs
Last year, the government issued advisories recommending that entities that act as middlemen in the transportation industry, including freight forwarders, implement or strengthen their compliance programs to prevent bad actors from evading sanctions and export controls.
In December, the U.S. agencies released “know your cargo” guidance geared towards those in the industry. The advisory listed a number of red flags that they should be on the lookout for as indicators of illicit activities, including:
• Falsifying cargo and vessel documents
• Voyage irregularities and use of abnormal shipping routes
• Frequent registration changes
• Ship-to-ship transfers
• Complex ownership or management
It also highlighted steps they should take to identify regulatory evasion efforts, including:
• Implementing sanctions and export control compliance programs
• Screening customers
• Exercising supply chain due diligence
• Establishing location monitoring best practices and contractual requirements
• Industry information sharing
These advisories convey to freight forwarders that they have a responsibility to know who they’re in business with.
“To help avoid liability in a transaction, agents and exporters must decide whether any aspect of the transaction raises red flags, inquire about those red flags, and ensure that suspicious circumstances are not ignored,” the December advisory noted, adding that “failure to do so may result in penalties.”
This was not the first time the U.S. government delivered this warning. In March 2023, the Department of Commerce, Department of the Treasury, and Department of Justice issued a tri-seal compliance note urging freight forwarders and other sectors to “exercise heightened caution and conduct additional due diligence if they detect warning signs of potential sanctions or export violations.”
In 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed a $6 million fine on an Australian freight forwarding and logistics company that failed to follow its compliance program.
OFAC said the company, Toll Holdings Limited, used the U.S. financial system to receive payments from sanctioned persons and jurisdictions, including North Korea, Iran and Syria.
The agency also determined that the company “acted with reckless disregard for U.S. economic sanctions laws when, over the period of six years, it caused at least 2,958 payments involving shipments from, to, or through sanctioned jurisdictions.”
It noted that Toll continued to engage in these risky activities despite having an existing compliance policy, and in spite of receiving several warnings from a U.S. financial institution regarding its sanctions compliance risks.
“While Toll had a sanctions compliance policy in place, its compliance program, personnel, and associated controls failed to keep up with the pace and complexity of its growing operations.”
The market size of the freight forwarding industry is estimated at $176 billion and is expected to grow in the coming years, according to market research firm Statista. As the industry continues to expand and face more enforcement actions, companies will need to be more vigilant to ensure they don’t violate sanctions and export control restrictions.
Last year, the government issued advisories recommending that entities that act as middlemen in the transportation industry, including freight forwarders, implement or strengthen their compliance programs to prevent bad actors from evading sanctions and export controls.
In December, the U.S. agencies released “know your cargo” guidance geared towards those in the industry. The advisory listed a number of red flags that they should be on the lookout for as indicators of illicit activities, including:
• Falsifying cargo and vessel documents
• Voyage irregularities and use of abnormal shipping routes
• Frequent registration changes
• Ship-to-ship transfers
• Complex ownership or management
It also highlighted steps they should take to identify regulatory evasion efforts, including:
• Implementing sanctions and export control compliance programs
• Screening customers
• Exercising supply chain due diligence
• Establishing location monitoring best practices and contractual requirements
• Industry information sharing
These advisories convey to freight forwarders that they have a responsibility to know who they’re in business with.
“To help avoid liability in a transaction, agents and exporters must decide whether any aspect of the transaction raises red flags, inquire about those red flags, and ensure that suspicious circumstances are not ignored,” the December advisory noted, adding that “failure to do so may result in penalties.”
This was not the first time the U.S. government delivered this warning. In March 2023, the Department of Commerce, Department of the Treasury, and Department of Justice issued a tri-seal compliance note urging freight forwarders and other sectors to “exercise heightened caution and conduct additional due diligence if they detect warning signs of potential sanctions or export violations.”
In 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed a $6 million fine on an Australian freight forwarding and logistics company that failed to follow its compliance program.
OFAC said the company, Toll Holdings Limited, used the U.S. financial system to receive payments from sanctioned persons and jurisdictions, including North Korea, Iran and Syria.
The agency also determined that the company “acted with reckless disregard for U.S. economic sanctions laws when, over the period of six years, it caused at least 2,958 payments involving shipments from, to, or through sanctioned jurisdictions.”
It noted that Toll continued to engage in these risky activities despite having an existing compliance policy, and in spite of receiving several warnings from a U.S. financial institution regarding its sanctions compliance risks.
“While Toll had a sanctions compliance policy in place, its compliance program, personnel, and associated controls failed to keep up with the pace and complexity of its growing operations.”
The market size of the freight forwarding industry is estimated at $176 billion and is expected to grow in the coming years, according to market research firm Statista. As the industry continues to expand and face more enforcement actions, companies will need to be more vigilant to ensure they don’t violate sanctions and export control restrictions.
