Air cargo companies face a myriad of compliance challenges when it comes to dealing with global supply chains, from adhering to tariffs and customs requirements to ensuring compliance with international sanctions and export controls.
The critical issue is distinguishing between goods that can be shipped and those that cannot, often within very tight timeframes, as the nature of air cargo is built on speed and reliability, with high standards of security and safety.
Some goods, such as those intended for humanitarian aid like soy foods or medical equipment, can still be shipped to sanctioned countries. However, without the ability to quickly and accurately identify these permissible goods, companies risk losing money.
Given these time constraints, compliance checks must often be completed within hours of departure, sometimes as little as four hours. This necessitates a highly efficient and precise compliance process to ensure all regulatory requirements are met without delaying shipments.
“Navigating compliance in the air cargo industry is incredibly challenging due to the immense volume of transactions these companies process,” Aneta Klosek, director of financial crime compliance at LexisNexis Risk Solutions, stated.
“We’re talking about thousands of transactions daily and millions annually. Each transaction involves multiple data points, including the entities involved, descriptions of goods, countries of origin, and shipment routes. This complexity is further exacerbated by recent sanctions on countries like Russia, which vary by nation.
Struggling with sanctions
Falling foul of sanctions can be driven by a mix of factors. It can be intentional, accidental, or due to negligence. Some players within the supply chain might deliberately engage in evasion to earn extra money. Others might unintentionally become violators by not conducting proper checks or failing to identify risky routes, thereby indirectly aiding in evasion. Even without wilful intent, they still violate sanctions.
The complexity of sanction regimes, especially in regions like Asia, with its fragmented landscape and diverse languages, adds to the challenge. Miscommunications and translations can lead to errors. Additionally, frequent changes in regulations and varying degrees of restrictiveness among regulators complicate compliance.
In some countries, regulators provide clear guidelines on whom the regulations apply to and what actions are considered violations. In others, the regulations are broad, leaving companies to interpret whether they apply to their operations.
“The cost of compliance is significant. Last year, the financial services industry in Asia alone spent US$45 billion on compliance. Cargo handlers are required to meet similar standards despite handling far higher volumes of transactions. This escalates compliance costs substantially,” Klosek highlighted.
“To put this into perspective, US$45 billion is equivalent to the GDP of Cambodia or Nepal in the Asia region. This underscores the substantial financial burden that compliance can impose on businesses.”
Rise of speedy shipments
The emergence of e-commerce adds a significant challenge for air cargo companies that are trying to comply with these rules and regulations, as they are now, often, handling an ever-growing number of transactions.
In particular, for cargo companies, e-commerce presents an issue due to the lower quality of data they receive. Exporters are required to declare goods to customs but not directly to air cargo companies, leading to vague descriptions on air waybills, such as generic terms like “textiles.” This lack of detailed information burdens air cargo companies, as they must determine what can and cannot be shipped amidst increasing volumes.
e-commerce transactions are also more numerous and more granular compared to traditional bulk shipments like machinery or industrial equipment. Instead of pallets, they deal with many small packages, often sent as gifts or directly from businesses to consumers.
Additionally, the rise in consumer-to-consumer (C2C) and business-to-consumer (B2C) transactions further complicates the landscape, requiring air cargo companies to handle a diverse array of small, individualised shipments.
“Based on certain regulations, particularly from the EU perspective, the requirements from regulators can be very specific,” Klosek explained.
“They state that those who transport the goods and are involved in the transaction are held accountable for ensuring compliance with sanctions. Legally, ownership of the goods is temporarily transferred to the airline or air cargo company for the duration of the service they fulfil.
“It’s not just the fines or penalties that air cargo companies fear the most.
“While these fines can be significant, the greater risk is becoming sanctioned themselves and ending up on a sanctions list. Additionally, companies may lose licenses to export certain highly lucrative goods, such as dual-use goods, which require higher safety and security standards. These goods typically offer higher margins for air cargo companies, making the potential loss of such licenses a significant business concern.”
Efficient compliance
Technology plays a crucial role in facilitating and speeding up compliance checks in the air cargo industry. Given the industry’s promise of speed and reliability, air cargo companies often charge higher fees for their services. However, the tight timeframes for delivering goods mean there is a very short window to conduct all necessary checks. Manually distinguishing every single transaction to ensure compliance is virtually impossible.
Each air waybill contains multiple data points, including the entities involved, addresses, and potential changes during the shipment process. Criminals often exploit this by providing correct information initially and altering it later, assuming that early checks suffice. Therefore, it is essential to perform checks throughout the shipment lifecycle.
“Technology helps by providing a clearer view of various risks, such as functional risks, export control risks, journey risks, and sanction evasion risks at every transaction level,” Klosek outlined.
“It reduces the risk of human error, offering updated and verified information that aids in making holistic decisions. Moreover, by distinguishing between compliant and non-compliant transactions, technology enables companies to explore new markets and business opportunities, such as delivering humanitarian aid to sanctioned countries.”
