The distribution, transportation, and logistics industry is a tough environment governed by the laws of distribution. Yet, companies also need to face economic crime or fraud which forces them to navigate the regulatory minefield not only in their home country, but also in every single territory in which they hold operations. The fact is that 45% of transportation and logistics companies have experienced fraud in one form or another over the last two years. Although the damage is not counted in human lives, it remains damaging in many ways and includes substantial financial costs, as well as damaging employee morale, the vendor-supplier relationship, or the company’s competitive edge.
Fraud is most commonly associated with misappropriation and theft. The distribution, transportation, and logistics industry is definitely not protected against this type of crime either. Cargo theft may occur not only in freight-forwarding and storage operations, but also during transportation or in the process of loading and unloading. The risks of cargo theft have been increased by extensive subcontracting and use of owner-drivers. On the other hand, the industry is trying to reduce the risks of petty pilferage through sealed containers and track and trace systems. Up to 73% of the companies operating in the distribution, logistics, and transportation industry have been confronted with this type of fraud in one form or another. As if cargo theft would not cause enough damage, it also includes a diversity of other methods of diverting assets to private use. Cargo theft becomes one of the most prevalent legal issues in this challenging industry, an issue that the laws of distribution cannot protect operators from.
Improper controls can lead to revenue leakage. The distribution, transportation, and logistics industry gives rise to a dynamic, fast growing, and ever-changing economic setting. Focusing on entering new markets or making new acquisitions, companies often neglect the implementation of an effective control system. This lack of control is an opportunity to commit fraud. Revenue leakage is mainly possible for companies that do not connect shipping, revenue recognition, and billing for all of their subsidiaries.
Cooking the Books
The temptation to manipulate financial statements is a very real one in the distribution, logistics, and transportation industry. Laws of distribution stipulate clearly the obligations of operators as far as financial statements, yet the narrow margins make cooking the books more tempting than ever. Perpetrators are driven not only by opportunity but also by motive. And in this industry, the motive is very present. Most companies in all segments of the industry operate on very narrow margins. Achieving profit targets and revenues becomes increasingly more difficult, luring many people towards fraud.
In addition to these three most common legal issues, the distribution, transportation, and logistics industry is also confronted with decentralized structures that lead to fraudulent disbursements, failure to segregate cash receipt and cash application duties that can lead to cash skimming, or commercial bribery and kickbacks. Industrial espionage can threaten chances of winning major contracts, contingency services may not be documented and provide the potential for abuse, and major capital expenditures may increase the likelihood of bribery of public officials. All of these make the distribution, transportation, and logistics industry a tough environment.