Forwarders now liable for export control violations as US tightens shipping security

WASHINGTON, DC — Non-vessel-operating common carriers (NVOs) and forwarders could find themselves facing hundreds of thousands of dollars in fines levied by the US government — and even criminal prosecution — if they fail to report customers exporting illegal components to the likes of Russia and China.

The US Department of Commerce is urging NVOs and forwarders to "know their customer," a steep challenge for co-loaders who bundle multiple shipments for multiple customers into a single container. The Commerce Department's publication of a policy clarification in April on reporting potentially suspicious dual-use components widens that responsibility beyond electronics manufacturers and other shippers to actual transportation providers.

"It's not just the electronics manufactures that we're talking to … We're talking to express carriers and forwarders because we want everyone in the [supply] chain sensitized to this because of the importance of this," Matthew Axelrod, assistant secretary for export enforcement at the Commerce Department, told customs brokers during a conference in Washington on Monday.

The tighter requirements on NVOs and forwarders through Commerce's policy clarification is another example of how the political tensions between Western countries and Russia and China are rippling through the container shipping industry, from ports to shipping exchanges.

Chinese-manufactured cranes face scrutiny from Congress, and from the US Department of Defense, as reported by the Wall Street Journal. Changes to ocean shipping reform, advocated by Reps. John Garamendi (D-Calif.) and Dusty Johnson (R-SD), would require an auditor from the US Department of Transportation to examine the potential influence of the Chinese government on the Shanghai Shipping Exchange. The exchange was founded by Shanghai officials and China's Ministry of Transport in 1996.

Hefty fines and prison time possible

The US government's drive to batten down the hatches on espionage threats, however, can leave transportation providers unaware or unclear on what's required of them. Axelrod told members of the National Customs Brokers Association of America that the Commerce Department would soon issue more guidance on what NVOs and forwarders should be watching out for in customers' shipments that could suggest the exporting of banned components.

The Commerce Department's Bureau of Industry and Security (BIS) can levy civil penalties of as much as $300,000 per violation or twice the value of the transaction, or whichever is greater. Similarly, criminal penalties can be up to 20 years in prison or up to $1 million in fines per violation, or both, according to the BIS website.

The policy clarification on export controls from BIS also incentivizes NVOs and forwarders to report competitors they suspect of supporting illegal shipments, a move aimed at leveling the playing field and rewarding good actors, Axelrod said. There may also be monetary awards to whistleblowers from the Justice and Treasury departments if the tip leads to prosecution.

"We'll consider that extraordinary cooperation. We'll remember it and we'll document it somewhere so that if down the road, you ever get in trouble with us, you'd have a little credit in the bank," he said. "Make no mistake, it's not a [get out of] jail free card or anything like that."

Shift in security focus

Noting the anniversary of the 9/11 terror attacks on the day of his remarks, Axelrod said the government's primary security focus has since shifted from terrorism to preventing adversaries such as China, Russia, Iran and North Korea from getting advanced components and technology for their militaries.

Along with the new policymaking, BIS has ramped up enforcement. Various federal agencies, including BIS, announced on Aug. 31 the arrest of a German-Russian national who officials say transshipped microelectronics through Cypress to a supplier of the Russian military in Saint Petersburg with the help of a Russia-based forwarder.

Authorities say Arthur Petrov falsely claimed his forwarding company was a manufacturer of fire systems, but instead he shipped electrical components used in guided missiles, drones and electronic warfare and communications. Petrov faces 11 criminal counts, with the maximum prison term ranging from five to 20 years.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.