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A. Necessity for Standards

Many conferences that are utilizing the services of a full-time neutral body, and those considering embarking on neutral body self-policing, are concerned about standards and costs of adequate self-policing. Relevant to the issue of cost is the manner in which to finance a self-policing program (see Part IX (A), Recommendation 10, above; also, Part XIV(C), below).

Pursuant to its statutory responsibility, the Commission is concerned about the adequacy of selfpolicing. To assist conferences in implementing self-policing and the Commission in its evaluation of self-policing activity, certain standards should be established to serve as guidelines for both interests. This section of the Report is devoted to that task.

B. Requirement for the Retention of a Neutral Body

As a basic policy, the conferences and the Commission should accept the necessity for self-policing services to be performed by a neutral body, either on a full- or part-time basis. There should be no exceptions to this policy. The conferences in most major trades have already opted for, or are considering, the permanent full-time neutral body concept. Conferences that lean toward a part-time neutral body on retainer must meet the criteria set out in Recommendation 2, as restated in Part IX (A), above.

C. Definition of Terms

The following definition of terms is required for a ready understanding of the standards to be imposed.

1. Inspection

a. Cargo

A critical viewing of cargo to determine
whether the declaration on the bill of lading
as to description of the commodity, its value,
weight and cube is correct, so that the in-
formation required for determining the proper
tariff is at hand.

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b. Document

A critical review of the bills of lading,
weight tickets, and other documentation
present in a line's offices at the time
of a ship's sailing.

2. Investigation

a. Compliance Audit

A critical review of the above-mentioned
shipping documents including manifests, as
well as a line's office documents maintained
in the conduct of its business. An audit is
conducted of accounts and records such as
office telexes, claims files, expense
accounts of officers and agents, demurrage
billings, rate claims, trucking fees,
salesmen's records, credit department
records, including accounts payable,
internal reading files, agents' fees, con-
ference minutes, and fiscal records, including
bank account transfers, looking towards special
and/or dummy accounts. The review is conducted
by an investigator trained to discern ir-
regularities in the above documents and equally
able to develop evidence leading toward proof
of a malpractice.

b. Compliance Investigation

The examination and inquiry conducted by a
neutral body's investigators in order to
develop the evidence reasonably related to
and probative of a violation (see Appendix,
Article IX) committed by a line.

c. Intelligence Gathering

That activity looking toward the obtaining of information from developed sources who are in a position to testify as to conditions in the trade with respect to the presence of, or potential for, malpractices.

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d. Financial Analyses Investigations

Analyses, audits and investigations conducted
by financially-oriented investigators directed
toward ascertaining the presence of, or
potential for, cash rebates and types of

indirect major rebates.
3. Policing

A combination of the above activities directed
toward deterring malpractices and, through the
adjudication process, establishing evidence of
malpractices that have been detected.

D. Neutral Body Standards

1. Part-Time Retainer Basis

Eligible conferences that decide against having a permanent neutral body can obtain estimates from at least four practicing neutral bodies of projected costs of the required annual in-depth compliance audit of a line's office. Such an audit requires the services of two experienced investigators for a two-week period. The compliance audit is described in (C) (2) (a), above, and is discussed at length in (D) (2) (c), below. The list of records to be reviewed is not all-inclusive, and can extend to whichever documents and areas a neutral body deems appropriate (see Appendix, Article IV (A) (3) (i)).

The write-up of the audit usually requires the time of one investigator for one week. The cost for this type of investigation ranges from three to five thousand dollars per audit. If the conference so desires, its contract could specify that certain areas, such as the credit and claims files, be audited every three months. This would be in addition to the required minimum audit coverage, but it is a measureable service.

The neutral body contracting with the conference would base its estimated costs on the above-described utilization of five weeks of investigators' time, plus the necessary back-up expenses of secretarial services and travel. Any conference not having a full-time neutral body would be required to set out in the agreement filed with the Commission the part-time neutral body's authority to perform the compliance audit.

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The items mentioned above are measureable costs for measureable services. The variables are the costs for compliance investigations required as a result of compliance audits, investigations conducted as a result of a complaint filed by a member, and investigations initiated by a neutral body (see Appendix, Article IV (A) (1) and (2)).

Although the additional costs mentioned above are variables, the services are measureable in investigators' time and related expenses. The benefit is that the conference has a vehicle for the investigation of malpractices, as well as having available an acceptable adjudication process (see Appendix, Article X). Another consideration included in the agreement is the provision that, if a member line has been found guilty of a malpractice, it will pay what would normally be the variable conference cost (see Appendix, Article XII). So, only in instances where a member line is innocent will the conference members be assessed variable costs above the original estimate. However, if there are lines that have been committing malpractices and are continuing to do so, they will be assessed liquidated damages. These damages shall be distributed, first, to offset those investigations in which the accused line was adjudicated as being not guilty and, second, any balance would be applied to reducing the members' assessment for the required compliance audits (see Appendix, Article XI (D)).

It might well be that conference members would want to employ procedures for ongoing inspections of shipping documents and cargo. These inspection procedures do create an atmosphere which gives the impression that business is being conducted pursuant to the conditions required by an agreement (see Appendix, Articles IX and XVII). They are revenue-producing to the lines because they are a deterrent to shippers who would normally tend to cheat on the carriers. Experience has shown that, in addition to the deterrent factor, the costs for these services can be self-sustaining from the revenues the carriers receive as a result of inspection procedures and from the subsequent billings of shippers detected misdeclaring cargo.

The above-suggested neutral body services offer what should be considered practical methods for the smaller conferences to meet the requirement that every conference retain a competent, practicing neutral body. These services represent a continuing deterrent to malpractices, as well as giving

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assurance to owners and to the commission that the conferences are clean. The services described would be similar to those offered by neutral bodies contracting on a permanent full-time basis with a conference. It is understood that, under the described arrangement, there is little likelihood of extensive use of investigative services because, theoretically, the respective conferences are clean. However, conference members should recognize that, if a neutral body experience indicates a conference is not clean, i.c., if numerous malpractices are proven, then the conference does not qualify for the exception to the permanent full-time neutral body requirement. In this situation, a conference would have to make appropriate arrangements for retention of a neutral body on a permanent full-time basis.

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Neutral bodies take two approaches to cargo inspection. As practiced by Freight Conference Services (FCS) in the United States and Far East trades, inspection is done under the control of conferences, contracting out to inspection services. It is not considered a function of the neutral body, which has only a limited liaison with the inspection services.

The inspection process is not one of the main vehicles used by the neutral body for detecting malpractices. The process, in theory, requires that the shippers declare accurate descriptions, weights, measurements, and values of the cargoes. Coincidentally, this requirement precludes carriers from colluding with shippers by rebating through misdeclarations.

The second approach to cargo inspection is similar to the methods employed in the North Atlantic and Mediterranean, where inspections are conducted by neutral bodies. The procedures require immediate notification of a carrier when a container is opened, and prompt billing of a shipper for any under-declaration of cargo. Most cargo inspection organizations proceed in this fashion. If a carrier and shipper had been conspiring to defeat the tariff, this prompt notice that they are under surveillance defeats any possibility of their developing a major malpractice scheme. But, once again, the service cuts off the potential for collusion between carriers and shippers.

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