In a global supply chain it is not possible to retain control over every aspect of the transaction. Hence, it becomes important to carry out due diligence to ensure those to whom you entrust certain elements do so appropriately.
Due diligence is of utmost importance in all business undertakings. A primary objective being to protect your business from non-payment for services or to ensure that the customer you are acting on behalf of is legitimate and not themselves partaking in fraudulent business activities. A prominent risk which has promulgated, particularly in the digital age, is mandate fraud. Implementing effective strategies ordinarily through email correspondence, perpetrators are able to convince an individual or organisation to amend a direct debit, standing order or bank transfer mandate, by purporting to be a legitimate organisation with whom you trade. A less obvious objective is to protect your business from falling victim to fraudulent activity through the appointment of service providers and sub-contractors.
“Due diligence is of utmost importance in all business undertakings.”
Due to the nature of their role freight forwarders have traditionally relied on the services of sub-contractors to facilitate trade, but this is common for all stakeholders in the international supply chain. It is therefore vital that the company you are contracting with is a known entity and adequate due diligence has been undertaken in appraising their ability to act on your behalf.
It is recommended that all stakeholders implement procedures identifying the initial evaluation steps, how the supplier will be approved and what ongoing and periodic monitoring is required to ensure that the expected performance is maintained. There will likely be some elements of sub-contracting that hold greater risk than others and some which could be considered business critical. The procedures surrounding the initial stages of due diligence should seek to identify the extent to which a particular service provider needs to be validated. Essentially a risk assessment should be performed for each service provider considering the following items.
-The activity you wish them to undertake and whether that is or may be business critical
-The potential financial, operational and reputational risks their failure poses to your business
-The values of any cargo you are entrusting them to carry
-The terms and conditions they trade under, including evaluation of exclusions and limitations
-Their competence to perform the activity – consideration of training records, particularly for regulated activities such as handling dangerous goods.
Identifying the correct information is only the first stage. Once the relevant information about a business has been collated there should be an effective escalation process in place to ensure that somebody with sufficient knowledge and authority verifies the data and formally accepts the service provider. Thereafter it is recommended that periodic checks are undertaken with a view to identifying any key changes to a service provider’s business and fully evaluating their performance.
The fundamental purpose of the process is to ensure that the service provider can meet your requirements and expectations and where applicable any national or international regulatory obligations. Secondary benefits to the application of a robust due diligence process will be to reduce incidence of cargo theft, reduce incidence of fraudulent activity and to minimise the likelihood of your business being subjected to fines and other costs.
Where applied, such a process will reduce the likelihood of losses, however may not eliminate them entirely. A primary objective is for the checks to act as a deterrent to a service provider who intends to undertake fraudulent activity or steal a cargo. It will demonstrate that your business is aware of such risks and therefore is not a vulnerable target. This heightens the risk to the fraudster and will likely be sufficient to deter them from using your business to facilitate their activities.
“Where applied, such a process will reduce the likelihood of losses”
Where the risk assessment concludes that the risks to your business are minimal, it may be decided that reduced checks be appropriate. It is often the case that the greatest risk is in connection with one off time sensitive transactions or where you engage with a new service provider. Nevertheless, always be alert to unexpected changes in named contacts, unusual requests and the like. It is always more prudent to check verbally or through trusted third parties than to trust an email exchange, regardless of the apparent delay and disruption that is incurred.
Whilst not exhaustive the below suggested diligence check list should be considered:-
Identify the service provider, including full registered address, details of the Directors, contact details (question service providers who don’t have a website or appear to trade only from free mail accounts and mobile phone numbers). Establish the nature of the ownership of their business – are they part of a larger group? Understand the legal entity (sole trader/ Limited company) and in which country they are domiciled. It may also be possible to check and verify items such as their VAT number which may provide an indication as to the legitimacy of their business.
Commercial checks can also be considered. Have annual accounts been filed, are they accessible and what do they say? Consider the use of a credit rating agency to undertake independent verification of the businesses financial standing. Trade references may be requested as well as evidence to support any associations with trade bodies and accreditations. Details of their relevant insurance cover may also be requested. What jurisdiction does the service provider nominate within their terms and conditions?
The ability to provide the services you require is an obvious practical check, but one which can be overlooked. As far as practicable, ensure that the service provider is capable of meeting your expectations. Do they operate trucks, can they evidence having sufficiently trained staff to handle dangerous goods, do they have expertise in the packing of CTU’s? Where larger volumes of shipments are concerned, do they have sufficient resources to satisfy your expectations? Is the service provider willing to agree to a service level agreement?
Simple – two ‘i’s and a ‘c’ or ‘use two eyes and you see’; look very carefully and do not rely on first impressions. Implementation of a robust due diligence procedure will assist in managing the associated risks and ultimately will serve to increase security through the global supply chain.
Source: TT Club
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