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Discussion

The liquidated damages preamble is provided to give the proper legal terminology to the levies against lines for committing malpractices. An assessment for liquidated damages is collectible in a court of law, whereas a fine requires further adjudication of the basic issues in a court of law.

The recommendation that the initial damages assessment not be limited to a low figure, but that it be subject to the maximum amount, is an important provision. For example, if an investigation conducted by a neutral body were to prove the, payment of a cash rebate, instead of the malpractice being subject to the suggested high cash rebate category of two hundred thousand dollars, the damages assessment might be limited by the self-policing agreement to a relatively minimal amount. The self-policing process is discredited in such a circumstance. This also happens when the amount of the damages is increased automatically with each subsequent violation, irrespective of the seriousness of the malpractice. Here, the conference member can, over a period of years, commit relatively minor malpractices, but will be assessed an amount out of proportion with these malpractices.

Criteria (a) through (g) were mentioned in Part VI, page 51, Volume I. Consideration (h) has been mentioned as being an element in assessment of damages by some neutral bodies and as a separate violation by others. Handling it as an element for damages removes the issue from the entire adjudication process, but still places it in an area where the accused line is notified that the activity has been considered and acted upon.

Revision 2

Distribution of Damages (Part-time Neutral Body)

The conference shall apply all damages received hereunder as follows: first, the funds shall be used to pay the neutral body expenses for investigations over and above those expenses for which lines found guilty of violations have been assessed previously. The balance received shall be used to reduce pro tanto the assessments for the annual audits conducted by the neutral body, less the amount of damages any member has paid during the calendar year. Any remaining

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monies shall be distributed in the same proportion against the members' assessments for maintenance of the conference (see Appendix, Article XI (D)).

Distribution of Damages (Permanent Neutral Body)

Money received from the member lines shall be used initially to defray the costs of the neutral body investigators retained for the purpose of conducting financially-oriented investigations and developing the neutral body's intelligence-gathering capabilities, looking toward deterring and detecting cash rebates and similarly sophisticated malpractices. The balance received shall be used to reduce pro tanto the assessments for the neutral body's compliance audits and investigations. Any balance remaining shall be used to improve conference facilities and services. No member line shill benefit directly from damage payments it has paid to the conference. It is recognized, however, that there is an indirect gain in the suggested formula.

The assessment of damages levied against each member shall be published to the fellow conference members (see Appendix, Article XII, also, Volume I, Part VI, pp. 50-51).

Discussion

The suggested distribution of damages is a thorny issue, but so also is the assessing of member lines for additional costs of implementing more sophisticated investigative techniques, as well as the initial requirement that the lines pay for self-policing services that some members would prefer not to have. Irrespective of how the damages are distributed, there should be no direct payment to the lines. Indirect gain could be tolerated so long as meaningful, effective self-policing were achieved.

On the plus side for the suggested distribution is the consideration that the damages assessed would defray in part the self-policing costs involved. The neutral bodies now having a precedent for damage amounts for specific types of malpractices is an argument against the position that neutral bodies would assess large amounts of damages to perpetuate themselves. Further, the conferences should face up to the realization that they must have effective self-policing and that, regardless of the costs, the lines must pay for it, either directly or indirectly.

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The formula described above would pay the neutral bodies for hiring financially-oriented investigators and, because the projected costs involved here could be less than some damages assessed in the past, funds should be available for other self-policing costs. The investigator-auditor approach to self-policing is an essential improvement if self-policing is to be taken seriously (see Part XI, infra.). The Internal Revenue Service has geared up for slush fund investigations, as should the shipping conferences' neutral bodies. The present permanent neutral bodies should request the conferences to consider implementation of Revision 2 in their agreements.

Revision 3

In instances where clerical error is the member line's sole defense in a malpractice charge, and where the neutral body has no proof to rebut the defense, the line shall be assessed damages representing the difference between the freight revenue as appearing on the bill(s) of lading and that amount which the shipper should be billed. Discussion

Much dissatisfaction has been expressed by both the lines and the neutral bodies in regard to clerical error. It is a defense that is raised often and is most difficult to rebut. To allow the lines to use this defense successfully on every occasion eventually will erode the neutral body process. On the other hand, for the neutral body to exert its prerogative and adjudicate against the lines in every instance causes it to be considered as arbitrary and to lose credibility as a fair and impartial adjudicator.

This dilemma seems to have been resolved successfully by the Neutral Enforcement Authority with the application of the above principle. The lines involved have agreed to the plan because, along with other reasons, it results in recovery of lost income. Also, there is an indirect benefit in that such revenues are applied against the carriers' assessments for self-policing. The neutral body is served well by the approach because there will be no charge of the neutral body being "Mickey Mouse" in its approach. Further, the neutral body need not expend investigative time in a sometimes hopeless quest to prove the existence of a malpractice. Of course, if other proof is available, the neutral body will pursue it and consider it in the assessment of damages.

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Those conferences that agree with the principle should incorporate Revision 3 into the self-policing agreement (see Appendix) under Article XI (B).

B. ADDITIONAL RECOMMENDATIONS

Recommendation 11

Pursuant to Recommendations 1 and 2, each self-policing agreement should provide that the self-policing function be performed by a neutral body. Additionally, it is recommended here that the agreement set forth specific, minimum selfpolicing standards. For those conferences falling under the criteria of Recommendation 1, the conference and the neutral body should allot, at their own discretion, a pre-determined number of personnel to perform, or delegate to others, the functions of cargo and document inspection. This requirement need not be contained in the agreement. However, the neutral body should be required to allot a pre-determined number of its investigative personnel to conduct at least one compliance audit per line each year and a second audit for one-fourth of the members of the conference. As deemed necessary by the neutral body, it shall investigate carrier complaints and initiate investigations. · Finally, permanent neutral bodies should allot the manpower to conduct financially-oriented analyses and investigations, as well as intelligence gathering. Manpower and budget requirements for each of the above three categories should be stated separately in the agreement.

There should be no downward revision of manpower and budget requirements without prior Commission approval.

Those conferences coming under Recommendation 2 should spell out in the agreement the compliance audit requirement and the neutral body's investigative authority (see Appendix, Article IV (A) (1) to (3), incl.).

Discussion

Part XI, below, setting forth in detail why standards for self-policing are necessary, defines the terms just mentioned, and recommends standards to be applied to a neutral body contracting to provide service on either a part- or full-time basis. These standards should appear in the self-policing agreement filed with the Commission. They would serve in part as the initial basis for Commission

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determination of the adequacy of a conference's self-
policing, with an improved oversight mechanism following
up to determine if the standards are in place and are
effective (see Recommendation 12 and Part XII, below).
If the specific standards are not met, the Commission would
have the basis for revoking approval of the self-policing
agreement.

Often, a conference accepts self-policing only when circumstances are so debilitating to its structure that the conference stands on the brink of collapse. The necessary evil (the neutral body) is then brought in. However, as soon as the condition is rectified, the conference starts looking toward weakening the neutral body or eliminating it completely. To save the conferences from themselves, they should be placed in the position of having to justify to the Commission any reduction in a neutral body's self-policing budget or manpower requirement.

Recommendation 12

The oversight responsibilities for determining the adequacy of a conference's self-policing mechanism should be placed with the Commission's Bureau of Enforcement.

Discussion

The basis for this recommendation is detailed in Part XII, below. The requirements for standards of self-policing, along with suggested improvement in the reporting procedures, are starting points for effective oversight. By placing responsibility for determining the adequacy of self-policing in an area where the concern over it is strongest, the information is most complete, and the expertise is most refined, the Commission's history of pro forma acceptance of negative self-policing reports and pretenses of self-policing should be a thing of the past. The difficulties encountered because of alleged confidentiality of the neutral bodies' files have been discussed in Part IX (A) under Recommendation 5, and are also addr ed in Parts ((C) and XII (C) (4).

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