Legal Advice for Forwarders

1. Legal Advice for Forwarders Presented by: Keith E. Sanchez Divisional Vice President West Coast WESCCON Conference 2006

2. Legal Environment: Industry Trends • Increasingly Forwarders are holding themselves out as comprehensive logistics providers • As forwarder expand and grow you handle a wider range of new commodities and trade lanes • Competition is fierce, compelling forwarders to do more • Expands scope of expected responsibility • Increases legal liability exposure • Rules and Regulations are increasing at the same time

3. Industry Expectations • Customers expect more • Customers assume you to know all the requirements to move their products overseas • Many assume you have your own international offices overseas where you oversee their work • Most assume you know all the risks involved in the move and have made certain their shipment will arrive at final destination safe and sound • Assume their shipment is covered for any loss or damage • You will make good on their financial losses • Your sales and marketing message may create this expectation

4. Regulatory Exposure • The Government expects more • With the events of September 11th and the increase of terrorism, U.S. Governing Agencies are watching everyone in the international trade community closely • Relevant agencies include • Federal Maritime Commission (FMC) • Customs & Border Protection (CBP) • Transportation Security Administration (TSA) • Bureau of Industry and Security (BIS) • Department of Commerce (DOC) • As we become “partners” in International trade, forwarders are now required to be knowledgeable on a wide array of export regulations • With this, the smallest of mistakes can result in large fines

5. Regulatory Exposure • FMC Requirements • All OTI (FF & NVOCC) to be licensed • Same name companies with separately incorporated branches need to be licensed individually • Domestic and Foreign NVOCCs • Published Tariff • Evidence of financial responsibility • Surety Bond • Penalties • $5,000 - $5,500 per day • $25,000 - $27,500 for willful acts

6. Regulatory Exposure • CBP Requirements • Ocean • 24 Hour Rule • AMS requires C3 bond • “In Transit” moves require C2 bond • Truck • AMS • 1 hour prior to arrival • FAST is 30 minutes • Bonded carriage requires C2 bond • Penalties • LD & Civil • $5,000 – full value

7. Regulatory Exposure • TSA Requirements • Penalties began January 25, 2003 • Aviation security rules • Inspections • Homogenous policy • No bonding requirements • Penalties • Air Carriers • $10,000 - $25,000 • Indirect Air Carriers • $1,000 - $10,000

8. Regulatory Exposure • Census Requirements • Shipper’s Export Declaration • Preparation, signature and filing requirements • No bonding requirement • Penalties • $1,000 per violation

9. Regulatory Exposure • EAR Requirements • Controls on exporting • Regulations regarding client selection • Chemical Weapons Convention • Export Administration Act • Penalties • $10,000 - $1,000,000

10. Regulatory Exposure • OFAC Requirements • Awareness of economic sanctions • Embargoed countries • Penalties • Criminal and civil • $1,075 - $1,000,000

11. Claim Scenario 1: OFAC • OFAC Related Claim • 30 units of electrical generators delivered to Iraq • Iraq is a OFAC country with export and insuring restrictions • Cargo Insurance was requested from U.S. company but was declined because of OFAC • Overseas agent arranged for cargo insurance which required the goods to move via convoy • Employee failed to arrange a convoy and did not obtain the proper export licenses • In transit in Iraq, 12 units were hijacked • Remaining 18 seized upon notification of the hijacking due to improper paper work and licensing

12. Claim Scenario 1: OFAC (continued) • OFAC Related Claim • Claim was submitted to cargo insurer and declined on insuring conditions and seizure • Forwarder was sued for $7 million dollars • Professional Liability policy settled for $3.1 million exhausting their policy limit • Forwarder had to pay any expense over and above their limit

13. Claim Scenario 2:DOC • DOC Related Claim • Forwarder in CA aided and abetted the unlicensed exportation of items to organizations in India • Indian organization was on the DOC’s Entity List • The Entity List is a compilation of end users that have been determined to present an unacceptable risk for development of weapons of mass destruction • Exports to end-users appearing on the Entity require licenses for the DOC • Forwarder did not obtain the proper license approval and received a $49,500 civil penalty for violating EAR • Direct fines and penalties often excluded/sublimited

14. Claim Scenario 3:FMC • FMC Related Claim • OTI conducted business as both FF and NVOCC • Same company name • Accessed service contracts of an unlawful foreign NVOCC • Misrepresented shipper and consignee on master b/l • Thousands of non-U.S. OTIs exist and are unregistered and not licensed • Also allowed non-related entities to use is license • Penalty of $100,000 issue and paid

15. Challenges • Multiple Functions, Multiple Agencies • Comprehensive knowledge is critical • Evaluate what functions you are undertaking • Determine what your operation should and shouldn’t do • Establish formal, written, policy • Communicate throughout organization • Issues • Effective policy implementation will reduce exposure • Claims are still a possibility • Strength of defense is improved

16. Risk Management Considerations • Proper Insurance is Critical • In addition to regulatory parameters, policy wording must be considered • Do you have any customer contracts outside of standard trading terms that have not been approved by the insurance company? • Do you have any excluded commodities? • Do you have any exclusions for certain areas of the world? • Do you have coverage for suits filed internationally? • Are you covered for fines or penalties from regulatory agencies?

17. Thank You Keith E. Sanchez Divisional Vice President West Coast WESCONN Conference 2006