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Their initial duties of analyzing rebate problems, potentials and controls would require a vast and complicated study fully justifying the estimated needs. Ideally, each line would cooperate with the teams to determine how best to implement internal financial controls and monitoring systems. Hopefully, the present, apparently low incidence of cash rebates, due in part to the campaign of the present Chairman of the Commission, would continue until such time as the investigator-auditor concept becomes an effective deterrent to any consideration for renewed rebating.

One final point must be made relating to the staffing of neutral bodies. Professional investigators must be hired. Many officials volunteered this observation. The talents and experience of such professionals merit wages comparable to those of their counterparts in the federal government and private industry. To take the "bargain basement" route would be a waste of time and money,

f. Intelligence Gathering Standards

There is a lengthy discussion in Part XI(C), below, on the value of a competent intelligence gathering function. The recomendation flowing from the cited Part is that one investigator should be assigned by each neutral body exclusively to obtain intelligence data for all the conferences under the neutral body's jurisdiction. If the conferences agree to the concept of improving the neutral bodies' capabilities, the recommendation should be adopted.

If the improvements proposed in the financial analyses area are adopted, there will be a considerable investment in manpower. The feedback on the effectiveness of the financial analyses approach should come from an efficient, competent intelligence unit. In much the same manner as the investigators are asking themselves how they could have proved past rebates, the intelligence unit will be asking themselves what techniques should be adopted to uncover suspicions and rumors of rebates, in order to go on from there to establish the factual existence of rebates.

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A. Need for Sophisticated Investigative Approach

Two considerations lead one to conclude that neutral bodies must develop more sophisticated investigative approaches. The first is the general rule that, as the techniques for detecting violations are improved, methods for committing them will also be improved.

Illustrative of this is the experience of the neutral body for the North Atlantic trades. There was no selfpolicing worthy of the name prior to formation of the neutral body. For the carriers to give their shippers an advantage, sophisticated malpractices were not needed. Misdeclarations on the bills of lading were easy to accomplish because there was no deterrent to such a practice. It should be stated that, historically, cash rebates also were prevalent, but this practice was stopped voluntarily to a large extent by the owners upon the advent of the neutral body because they finally realized they were on a self-destruct course. with the implementation of an effective cargo and document inspection program, the carriers' schemes to malpractice by alluding with the shippers on misdeclarations of cargo were defused.

Because of the presence of the neutral body, carriers could not safely conspire to commit malpractices with the shippers. The cargo and document inspection procedures became a revenue-producing item for the North Atlantic carriers. Cargo inspection is now principally a deterrent to carriers and shippers, and a carrier service to catch shippers who still want to cheat. Document inspection continues to produce revenue for the carriers, while it remains a method to detect malpractices.

The above inspections closed off the misdeclaration and misrating avenues for carrier malpractices in the North Atlantic. But, needless to say, the above procedures must remain in place as a deterrent to both the carriers and the shippers, especially because of the carriers' proclivity for recidivism.


In light of the fact that some carriers will always malpractice, the neutral body has turned its attention to the lines' offices for proof of the more devious types of


malpractice. The response of the neutral bodies to such
malpractices is the self-initiated investigation, as well
as adoption of the compliance investigatory audit approach,
both of which are described in Part X(C) (2), above.
However, just as misdeclarations on bills of lading have
been removed from offending carriers' arsenals, eventually
so will the more devious types that can be manipulated
within a line's offices but which can be detected within
its required record-keeping systems. Consequently, these
investigative procedures will compel the carriers who want
to gain the competitive edge at any cost to graduate to
more sophisticated types of malpractices.

In summation, the premise that some carriers will move on to more sophisticated types of malpractices as a result of the closing off of known avenues of malpractice is one reason for the need to adopt more sophisticated investigative approaches. A second reason is the long-time practice in the industry of cash rebating, which problem has not been seriously attacked. In order to uncover these sophisticated malpractices, the expertise of the financially-oriented investigator and a well-developed plan of attack will be required. Cash rebates should be the primary target of this approach, although detecting other avenues of major malpractices must be explored. As stated in the initial report, selfpolicing in the shipping industry is a developing art. Methods of detecting sources of slush funds and ways of distributing rebates must become a neutral body's area of expertise. Parenthetically, it may be stated that the long-established Internal Revenue Service also is a relative newcomer to the art of uncovering corporate slush funds and the siphoning off of the monies for illicit payments.

B. Implementation of Sophisticated Investigative Approach

1. The combined Investigator-Auditor Concept

The investigative procedures presently used by the industry to uncover malpractices can be related to the approach that many federal agencies have used in the past in their oversight responsibilities for program frauds. This purely investigative approach has been found wanting, with the result that some Departments have already implemented the Inspector General concept, wherein the investigative and auditing functions are combined under one authority with broad oversight respons ibilities. Under the combined investigative-audit approach, auditors can no longer go


mechanically through a series of checklists while conducting their audits, but will be held to a standard of inquisitiveness and alertness to irregularities in the programs their Departments are administering. They will be aware of fraud areas, and will work in concert with other investigators to detect and prove fraud.

The Congress presently has under study a bill requiring the remaining Departments to adopt this concept while strengthening the entire approach. The recommendation here is that the neutral bodies also utilize this concept by adding the interplay of the techniques both of the investigator and the auditor to their present investigative procedures. If this suggestion is adopted, once the neutral bodies have the investigative-audit procedures in place, there should be a continuing program of review and evaluation of the concept's efficiency in order to convince both the neutral body and the lines that there is no circumvention.

While there still is leeway within a line's operating costs for illicit payoffs, the overall pricing structure of the shipping industry will remain subject to attack. On the other hand, if the industry can assure its detractors that rebates are a thing of the past, and can point to the implementation of oversight techniques to prove this rather than resorting to defensive rhetoric then there will be a firm basis for claiming that the pricing structure of the industry is not built on sand. 2. Strategy and Tactics of the Investigator-Auditor

Approach to Shipping Malpractices

The neutral bodies should implement specific auditing procedures and related tests so that potential slush fund schemes can be detected and deterred. But first their present investigative procedures should be refined to complement the investigative-audit approach.

It must be neutral body policy that, if during the course of conducting compliance audits and self-initiated investigations, neutral body investigators detect circumstances that lead them to suspect the existence of a rebate scheme, they should continue to develop evidence to confirm their suspicions. At that point where an investigator believes or strongly suspects a sophisticated malpractice exists which requires in-depth analysis of corporate records, the matter should be referred to the investigator-auditor.

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Lines that have indulged in cash rebating have not tabled their schemes with the neutral bodies. However, all lines that want clean trades should voluntarily reveal to auditor-investigators details of past rebate schemes so that oversight auditing techniques may be improvised to deter lines that admit to rebating, as well as their peers, who might be inclined to emulate successful malpractice schemes. Added to this reservoir of experience would be cash rebate schemes uncovered previously by neutral bodies and the Commission.

The new staff would also devote its expertise to analyzing carriers' profit and loss structure, concentrating on essential items for the profitability of a single voyage. A projected loss for a carrier's operations over a period of time in a specific trade must be explained or else should be considered an area requiring more intense investigation because of the potential for rebates.

Most carriers would prefer to operate without resorting to malpractices. However, the industry suffers from the pressure of worldwide competition among multinational corporations; thus, a climate conducive to rebating is created. The neutral bodies should recognize that shippers are subject to the same pressures and also would prefer that rebating be abolished. Therefore, the neutral bodies should solicit from the shippers information as to ongoing rebates. Additionally, their assistance should be sought in analyzing the profit structure of various industries so that export shipments and the potential for rebate schemes can be explored. It is well-known that in some areas the profit margin for the shipper is so low that the success of a business venture rests solely upon the freight costs the shipper can negotiate with the carrier. The end result of such negotiations should be reflected in the tariff, and should not be a cash rebate or other type of malpractice.

Some shippers are notorious for demanding rebates. They shop from one carrier to another looking for a better deal. They operate with relative impunity. This would seldom be the case if a carrier, following notification to the responsible neutral body, were to agree to accept conditions solicited or demanded by the shipper, without offering voluntarily or suggesting said conditions. If such agreements were then reported to the Bureau of Enforcement, unscrupulous shippers would be less likely to demand rebates. Also, as mentioned in (C) (2) below, a conference-approved policy should

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