The vast majority of air cargo businesses rely on paper-based processes when managing trade documents. Despite this, new research reveals that cargo managers believe technology is critical to adopt, particularly for sanctions screening.
Nearly eight out of 10 respondents to a new survey by financial compliance software provider Accuity list automation as high priority when it comes to sanctions screening solutions. The implementation of technology to enable a risk-based approach to sanctions screening is important to comb through air cargo, particularly as sanctions issued by the US are at an all-time high – the US Treasury’s Office of Foreign Assets Control (OFAC) has filed a record US$1.3bn of penalties so far this year.
David Loeser, senior director of product strategy at Accuity, tells GTR that “inertia” is the main reason for cargo firms not adopting technology, despite “will” and “intent” to onboard streamlined systems.
The poll of 80 senior managers who work for cargo carriers or freight forwarders across the world, shows the global cargo industry is also aware of the risks of non-compliance; 72% say effectively managing sanctions risk is “somewhat” or “very” important. And the biggest threats that drive this urgency include damage to brand and reputation, fines and potential jail time for staff, and loss of import, export, or forwarding licences and landing rights.
Reasons why cargo carriers manage sanctions risks (%)
“What we have seen is there have been fines around cargo companies shipping things they shouldn’t be shipping, which has a negative impact on the image of those businesses. So, this is a common driver for best practices,” Loeser explains.
Having a bad reputation deters financial institutions and other firms in the supply chain from working with cargo firms that may have previously operated in a sanctioned geography or shipped illegal goods by failing to do proper due diligence on partners. This can result in major negative financial impacts in the form of fines and business lost. “Those that are seen to be either skirting the rules or who are not doing due diligence are punished,” he adds.
The global air cargo industry plays a crucial part in facilitating trade around the world, linking up countries and people with high-value goods. The International Air Transport Association (IATA) estimates that air cargo represents more than 35% of global trade by value, yet only 1% of world trade by volume.
Over the last year there have been numerous examples of sanction-induced trade troubles, such as sanctions issued against air and shipping companies.
Cargo firms are obliged to screen trade documentation to check whether the entities listed as part of a shipment are subject to sanctions and whether the cargo described contains dual-use goods. “If you are shipping tungsten, you need to make sure it is going to a firm that is making wedding rings not bullets, so, if you are shipping or financing the trade of tungsten you have a liability to check that,” head of innovation at Accuity, Neela Das tells GTR. “For example, one of the key ingredients in shampoo can be used to make mustard gas. It is legal to ship out because it’s probably being used to make shampoo, but its destination needs to be checked.”
However, Accuity’s recent research also reveals some of the challenges that cargo carriers and freight forwarders face when trying to achieve comprehensive sanctions compliance: keeping up with changing regulatory requirements, the rising cost of compliance, and repeated checks and manual processes.
Top challenges cargo carriers face when trying to achieve comprehensive sanctions compliance
Loeser explains: “The regulatory scrutiny is expanding beyond financial institutions and there is this reverberating impact on air cargo specifically. The banks are identifying issues in the trade networks, they are then going to the regulators and the regulators are diving deep into the different businesses who are associated with that network.”
For banks financing cargo, it is crucial they screen transactions against sanctions lists, which often extend farther than any government-issued lists. Any entities owned 50% or more by a sanctioned entity must also be blocked according to OFAC’s rules. Entities such as subsidiaries, countries, cities, aliases, alternative addresses, bank branches and routing codes, are also considered within the scope of the regulations, however these are not captured to the degree required in official lists, making screening for sanctions a multifaceted task.