How can companies avoid the challenges and risks that this type of fraud creates?
Supply chain issues, shortages of employees and inflationary challenges in the transportation industry have created an environment ripe for fraud. One of the more recent fraud schemes in the transportation industry is double brokering fraud.
Double brokering fraud typically involves a fraudulent broker posing as a legitimate freight broker or carrier who then offers to arrange shipping services for a customer at a discounted rate. The fraudulent broker then subcontracts the job to another carrier or broker, often without the customer's knowledge, and pockets the difference between the rate they charged the customer and the rate they paid the subcontractor. Essentially, the broker is acting as a middleman and selling the shipment to two different carriers for more money than they can deliver it for and keeping the difference as profit. In this scenario, the broker does not have their own equipment or drivers to transport the goods, and instead, they take advantage of the market demand and supply freight services by sub-contracting the work to another carrier, who will typically provide the service at a lower price.
This practice can cause various problems, including delays in delivery, damaged goods, or loss of the shipment, which can lead to disputes between the involved parties. It is important for shippers to ensure that the broker they are working with has the proper licensing and insurance to ensure the safety and security of their goods during transport. This type of fraud also artificially inflates the cost of transportation services.
Double brokering fraud creates significant risks for companies in the transportation industry. The following are examples of double brokering fraud and the associated risks:
- Shipment not delivered: A broker accepts payment from a shipper for a shipment, but instead of hiring a carrier to transport the goods, they double-broker the shipment to another broker who is not able to fulfill the delivery. This can result in the shipment being delayed or lost, causing significant financial losses for the shipper.
- Carrier not paid: A broker subcontracts a shipment to a carrier and accepts payment from the shipper but fails to pay the carrier for the services provided. This can lead to legal action being taken by the carrier against the broker for breach of contract.
- Inflated rates: A broker accepts payment from a shipper for a shipment, but instead of hiring a carrier at a reasonable rate, they double-broker the shipment to another carrier for a much higher rate. The broker keeps the difference between the two rates as profit, causing the shipper to pay more than they should have for the transportation services.
- Damaged goods: A broker subcontracts a shipment to a carrier who is not qualified or equipped to handle the goods properly, resulting in damage to the shipment. The broker may attempt to conceal this by double-brokering the shipment to another carrier, but the damage to the goods is ultimately discovered. This can cause significant financial losses for the shipper.
These are just a few examples of the types of double brokering fraud that can occur in the transportation industry. It is important for shippers to be vigilant and take steps to mitigate the risk of fraud when working with brokers and carriers.
When double brokering occurs and damages are incurred, litigation follows. There are several well publicized litigation matters related to double brokering fraud over the past ten years. A few examples of these matters are as follows:
- United States v. Madany: In 2016, a Michigan-based freight broker was sentenced to prison for double brokering fraud. The broker was found guilty of accepting payments from customers for shipments but failing to pay the carriers who transported the goods. The broker was ordered to pay $743,000 in restitution to the victims.
- Federal Trade Commission v. Apex Freight Services: In 2018, the Federal Trade Commission (FTC) charged a California-based freight broker with engaging in double brokering fraud. The broker was accused of accepting payments from shippers but failing to deliver the goods or pay the carriers who transported them. The broker agreed to pay $500,000 to settle the charges.
- Schneider National Carriers Inc. v. Fowler: In 2020, a trucking company filed a lawsuit against a broker for double brokering fraud. The broker was accused of accepting payments from the trucking company for a shipment but failing to pay the carrier who transported the goods. The lawsuit sought damages and legal fees.
To avoid double brokering fraud, companies can implement various best practices and controls, including:
- Fraud risk and culture assessment: Performing fraud risk assessments of your organization can help to determine where risk may occur in the shipping process. Evaluating the culture of your organization and making improvements can contribute to good behavior and mitigating future risks.
- Due diligence: Conduct thorough research and background checks on potential brokers before working with them. This includes verifying their license and insurance, checking their reputation in the industry, and reviewing their past performance.
- Well-crafted contractual agreements: Ensure that there is a clear contractual agreement in place that outlines the broker's responsibilities and obligations, as well as the consequences of any breach of contract.
- Payment verification: Verify the payment arrangements between the broker and carrier to ensure that the broker is not accepting payment from the shipper and then failing to pay the carrier.
- Communication: Maintain regular communication with the carrier and shipper throughout the transportation process to ensure that everyone is aware of the progress of the shipment and any issues that may arise.
- Quality assurance: Implement quality assurance measures to ensure that the goods are transported safely and securely, and that the carrier has the necessary equipment and expertise to handle the shipment.
- Audit and review: Conduct regular audits and reviews of the transportation process to identify any potential issues or fraud and take appropriate action to prevent or remediate it.
Overall, by implementing these best practices and controls, companies can mitigate the risk of double brokering fraud and ensure that their goods are transported safely and securely by reputable brokers and carriers.
Our Forensic Advisory professionals have experience helping clients tackle the challenges presented by double brokering fraud. We would welcome the opportunity to speak to you further to ensure that your organization is positioned to prevent this type of fraud.
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