Fracht Pays $1.6M on Bonkers Sanctions Case

The U.S. subsidiary of a Swiss freight forwarding business is paying $1.6 million to settle charges that it violated sanctions law by using a Venezuelan airline and an Iranian crew to ship auto parts around Latin America, in an enforcement action that sounds like an episode of ‘Where in the World Is Carmen San Diego?’ 

The U.S. Office of Foreign Assets Control (OFAC) announced the settlement Wednesday afternoon against Fracht FWO, a freight forwarder in Houston that has more than 1,700 logistics employees worldwide and does about $1 billion in annual revenue. Its ultimate owner is the Fracht Group in Switzerland.

As described in OFAC’s settlement documents, our tale begins in May 2022. That’s when a Mexican auto parts manufacturer contacted a Fracht affiliate in Mexico to arrange transport for a large shipment of car parts from Mexico to Argentina on an urgent basis. The Mexican affiliate couldn’t handle the work, so it asked for Fracht’s assistance.

Since Fracht was working under a tight deadline, it scrambled to find a local freight forwarding and logistics broker in Mexico. Well, Fracht’s then-vice president of air freight had recently attended an industry conference, and a contact he met there recommended a logistics broker to the VP. 

Within days, and without performing standard sanctions screening, Fracht entered into a contract with that broker for a flight to pick up the Mexican cargo in early June and deliver the items to Argentina the following day. The contract listed the air carrier as Empresa de Transporte Aéreocargo del Sur, abbreviated as Emtrasur — a freight carrier that happened to be a subsidiary of Conviasa, Venezuela’s national airline, which is on OFAC’s sanctioned entity list.

The Venezuela connections to Emtrasur were clear. Emtrasur listed a Venezuela address on the contract; and the contract included the tail number of the exact airplane to be used, which identified it as a Venezuelan aircraft. The itinerary even included a layover in Venezuela before the flight arrived at its Argentina destination.

Making matters worse, the Emtrasur craft arrived two days later than planned and required additional fees. That led to a flurry of messages among multiple Fracht senior executives, where another Fracht vice president expressly told Fracht’s CEO that Emtrasur was “a subcompany of Conviasa,” the sanctioned Venezuelan airline. Apparently Fracht’s CEO didn’t know that Conviasa and Emtrasur were sanctioned businesses, but by that point, OFAC says, at least two Fracht VPs did.

Then, cranking the cringe factor up to 11, Emtrasur subcontracted the operation of the flight to an Iranian airline, complete with Iranian crew. The airline, Mahan Air, has been on U.S. sanctions lists since 2011. 

Fracht did not know the Iranian angle to this deal until after the fact. At that point, executives understood they were in hot water, self-disclosed the matter to OFAC, and began a hurry-up offense to improve their sanctions compliance program.

Points of Failure

So what mistakes have to happen for a company to find itself in this predicament? We can identify a few right away.

First, the sanctions compliance team did not have enough authority or involvement in the contracting process. This was a lucrative deal that had to be done amid tight deadlines. So the vice president of air freight simply worked his contacts to find a broker who would put the deal together. 

What due diligence or sanctions screening was done on that broker or Emtrasur? According to OFAC, none. Business executives rushed forward to close a deal, turning a blind eye to potential sanctions risk and leaving Fracht’s compliance team (however weak or strong the team was) on the sidelines.

Second, Fracht didn’t have sufficient visibility into its subcontractor risks. Working with a subsidiary of the Venezuela national airline was bad enough; the Venezuelan business then sub-contracting the deal to Iran made matters all the worse — and Fracht didn’t even know that had happened until after the fact. 

Global businesses need a contract management system grounded in strong vendor risk management and compliance practices, so that your contractors can’t subcontract without your knowledge and without you seeing the specific sub-contractor handling your business. You need transparency and visibility all the way down the transaction chain. 

Indeed, here’s a telling statement from OFAC about the significance of this case:

This enforcement action emphasizes the importance for international trade service providers, such as freight forwarders, to know their counterparties and recognize the risks of prioritizing urgent business demands at the expense of compliance. In a complex operating environment, it is critical for all persons subject to U.S. jurisdiction — including senior personnel responding to urgent commercial needs — to understand potential sources of sanctions risk and take appropriate steps to prevent potential violations. 

Amen to that.

Fracht’s Compliance Remediation

As usual, OFAC listed several aggravating and mitigating factors that led the agency to impose its $1.6 million penalty against Fracht. 

Among the aggravating factors, the worst was that Fracht, primarily through the conduct of two of its vice presidents, “demonstrated reckless disregard for U.S. sanctions requirements by foregoing its internal compliance processes and executing a contract using a blocked aircraft from Venezuela without conducting due diligence and failing to respond appropriately to significant red flags.” In other words, the company’s compliance procedures were ignored so that Fracht could close a lucrative deal. 

On the other hand, Fracht had numerous mitigating factors on its side. First, the company didn’t have any previous violations within the last five years. It also fired the VP who contracted with Emtrasur in the first place. 

More relevant to compliance officers, however, are the numerous steps Fracht took to improve its sanctions compliance program and to give that program more input into business decisions:

• Mandating that all contracts from customers and freight providers be subject to legal review and sanctions-focused due diligence prior to execution; 
• Modifying Fracht’s air freight cargo contract templates to include confirmation of compliance with U.S. sanctions; 
• Updating the vendor onboarding procedures to require that all vendors be subject to the compliance function’s approval and sanctions-focused due diligence; 
• Implementing quarterly reporting requirements and recurring compliance training for its employees.

Fracht also beefed up its compliance team to nine employees, and has committed to spending more than $1 million annually on compliance. It also made all the usual promises for better risk assessments, better internal controls, more training, and more testing and auditing. A “senior-level executive” must also certify to OFAC annually that Fracht is adhering to its promised improvements, although the agreement doesn’t specify exactly who that senior-level executive will be.

More broadly, Fracht has made compliance an important theme on its website. The company devotes a whole section of its site to explaining its compliance efforts. That includes separate codes of conduct for Fracht employees and for its suppliers, plus a statement about the company’s quality and safety efforts, plus a link to its whistleblower hotline.

Assuming all this sticks, then Fracht has indeed given its compliance program a more central role in guiding business decisions. That’s what didn’t happen with the Mexico deal. So the compliance failures might have spanned five countries on three continents, but Fracht seems to have arrived at a good destination.