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Freight forwarders debarred leaving the defence industry scrambling

The U.S. Department of Justice’s antitrust investigation of the freight forwarding industry has caught some big fish in recent years, and has consequently rattled the global defence industry. Six freight forwarding companies pleaded guilty to criminal price fixing charges in 2010 and have agreed to pay over $50 million USD in criminal fines for their roles in air cargo price fixing schemes between 2002 and 2007. The sordid details can be read in the Department of Justice’s press release here.

Although price fixing does not seem to be unusual for the freight forwarding industry,the consequences of their actions has led to the Air Force debarring the following  widely – used freight forwarders from government contracting on 16 February:

  • Bax Global Inc.
  • Kuhne and Nagel International AG
  • Panalpina Welttransport (holding) AG
  • Panalpina Inc
  • Schenker AG

DDTC issued guidance, and later revised guidance on 27 February, stating that the above listed freight forwarders “are ineligible to contract with an agency of the U.S. government, and therefore generally ineligible in accordance with ITAR 120.1.” The result is that companies wishing to use the services of these freight forwarders to ship USML listed defence articles must have a written authorisation (license) from the DDTC.

If one had such authorisation granted prior to 24 February, they are free to use the services of the authorised freight forwarder. Authorisation requests that are ‘pending’ with the DDTC as of 24 February must have lodged a transaction exception request by close of business on 27 February through DTrade2 in order to be eligible for review. Going forward, authorisation requests sent to DDTC to use these freight forwarders must include a transaction exception request, or they will be Returned Without Action.

It will be interesting to see if any authorisation requests are approved going forward as one would have to make the tough argument to the DDTC that their company can only use that particular debarred freight forwarder to ship their defence articles. Presumably, the DDTC would deny the request and instruct the applicant to use a freight forwarder that has not been debarred by the Air Force; case closed. It seems they are seeking to take a hard line, at least for now, to make an example out of these freight forwarders. However, the DDTC may be disregarding the additional cost and compliance burden their actions are putting on the defence industry.

It will also be interesting to see if pressure from the defence industry will result in further guidance and/or a relaxation of these new authorisation requirements for some of the largest freight forwarders in the world. After all, the freight forwarders pleaded guilty to engaging in criminal price fixing, which does not have much to do with transhipment or otherwise violating the ITAR. However, by virtue of being listed on the EPLS, these companies become ‘generally ineligible’ parties under ITAR 120.1(c), thus giving DDTC the ability to debar them.

Many working in the defence industry will assert that it is not only difficult to find a competent freight forwarder, but that it is rare to find one with substantial ITAR experience. It seems unusual that DDTC would take this stance with companies that violated anti-trust legislation and not the ITAR or Arms Export Control Act. The coming weeks will no doubt generate a lot of discussion of DDTC’s authority to debar at their discretion. Perhaps this is an area that will need to be examined as part of the current export reforms under way in the United States.

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