The Indispensable Importance of Shipper Verification in Global Trade

Banks and other financial entities that provide trade finance are incredibly vulnerable to Trade-Based Money Laundering (TBML). These organizations need to verify shippers to ensure that the underlying trade transactions are legitimate and not merely a cover for moving illicit funds.

Some of the known key authorities and registries that issue licenses to shippers include: 

• Federal Motor Carrier Safety Administration(FMCSA)
• Companies House 
• European Maritime Safety Agency(EMSA)
• UK Ship Register(UKSR) 

These authorities are located in different parts of the world. But having a license or a registration number doesn’t always tell the whole story. Businesses also come across this question: “Do enterprises truly know whether the shipper is legitimate or a risk, or who the entities are behind it?”

This is the core of shipper verification, a process far more critical than just checking a name on a business registry. 

The concept of shipper verification refers to the process of ensuring that the entity or business involved in shipments is legitimate and safe to work with.

Sophisticated fraud, stringent regulations, and complicated & hidden ownership hierarchies are some of the reasons that make shipper verification necessary. It is the foundation of secure, compliant, and sustainable international trade.

The Alarming Risk of Unverified Shippers 

• Trade-Based Money Laundering(TBML) and Sanction Evasion 

Fraud entities often exploit trading as it offers them a legitimate front for moving dirty money. An unverified shipper entity can be a shell company, UBO, shareholder, or any nominee director set up specifically to facilitate fraudulent schemes.

Let’s explore this with a real-case scenario.

Formation House UK – A Factory for Fake Companies

Formation House is a UK-based company that helps set up businesses on paper. However, many of these businesses were shell companies. Over the years, Formation House registered more than 450,000 in distinct regions, especially in tax havens.

They used fake and nominee directors to conceal the identity of the real owners. Back in 2019,  a huge data leak called the #29Leaks revealed how Formation House helped entities in violating anti-money laundering (AML)laws. 

How Shell Companies and Nominee Directors Can Fuel TBML Risks for Financial Institutions

Financial institutions that provide trade finance services face a significant challenge, as they rely on trust in the companies and the nominee directors they finance, including exporters, importers, and shipping companies. These businesses are also involved in cross-border trade.

Many of the fake or paper-only businesses created by Formations House were used to pose as “legitimate” importers, exporters, or trade entities. But behind the scenes, these were often fronts for money laundering operations. 

Therefore, if financial sector businesses fail to conduct proper due diligence on shippers and trade partners associated with a history of shell companies, they risk becoming part of a TBML scheme without realizing it.

Additionally, unverified shippers can be fronts for sanctioned entities, concealing the actual origins of shipments or the ownership of them. Involving themselves with such entities can cause businesses severe penalties.

• Smuggling Contraband

An unverified shipper can be involved in illegal shipments that appear legitimate. These may include illegal drugs, weapons, or even dangerous wildlife products. Therefore, if a business is found to have unknowingly facilitated illegal activities due to inadequate shipping verification, the reputation fallout can be catastrophic.

• Legal Penalties

A famous press release by the US. Treasury was released back in July 2024, stating that the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has sanctioned a dozen individuals and vessels linked to the Houthis in Yemen, who are financing destabilizing activities. 

This includes entities that facilitated illicit shipments and money laundering for the network. The network, led by Sa’id al-Jamal, generates millions through illicit shipments of Iranian commodities, like oil, funding the Houthis’ attacks in the Red Sea.

OFAC’s actions target clients, facilitators, and associated companies, aiming to disrupt the Houthis’ financial support. This follows sanctions against Sa’id al-Jamal, an individual with ties to Iran’s IRGC-QF. The actions also affected entities like Ascent General Insurance and Fornacis Energy Trading, which supported Sa’id al-Jamal’s operations.

Therefore, partnering with a shipping business whose associated entities, or any business, is subject to sanctions, watchlist, or regulatory enforcement can lead the business to face severe penalties. This also includes non-compliance with Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) laws.

• Compromised Supply Chain Integrity

Unvetted third-party shipments introduce vulnerabilities and put the entire supply chain at risk of being tricked and damaged on purpose. Moreover, repeated failure in due diligence will eventually lead to the suspension of the operating license, shutting down the business.

However, comprehensive due diligence to verify shipper can protect businesses from the risk associated with unverified entities. 

How the USGoBuy Case Highlights the Need for Shipper Verification?

The U.S. government has banned Oregon-based freight forwarder USGoBuy from exporting goods for three years because the company failed to follow export control laws, despite a 2021 settlement that provided an opportunity to address its compliance issues. 

USGoBuy had previously sent restricted items like riflescopes to countries such as China and the UAE. A later audit revealed over 170 violations, and the company continued to make mistakes even after being warned. 

In one test, government agents sent a clearly labeled restricted package, and USGoBuy still sent it to China the same day. This move by the Commerce Department sends a warning to other businesses about the importance of adhering to U.S. export rules, particularly for sensitive technologies.

This case highlights that shippers and freight company verification involves more than just basic checks. Beyond basic business verification, The KYB also checks entities against warnings and regulatory enforcements and flags if there has been a violation by the business. 

This helps financial institutions(FIs) and other companies see if the business has a history of breaking rules. Hence, they can make smarter decisions about whether to work with or onboard that company, helping them avoid risks like the one seen in the USGoBuy case.

Challenges of the Shipper Verification Process 

Verifying shippers is tricky in some countries, as they are licensed and regulated by separate authorities. However, in other cases, the shipper registration data is part of the general UBO or business verification registry.

Despite the clear imperative, implementing adequate shipper verification online is a challenge for many industries, including financial institutions, RegTech, FinTech, and the supply chain sector. Some of the challenges are highlighted below:

1. Data Incompleteness and Inconsistency

Obtaining accurate, up-to-date, and consistent data on shippers, especially those operating across multiple jurisdictions, is a crucial task. Discrepancies in legal names, addresses, registration numbers, and ownership information are common, which hinder the verification process.

2. Opaque Ownership Structures

Criminal entities frequently employ complex, multi-layered ownership structures, shell companies, and nominees to conceal the actual Ultimate Beneficial Owners (UBOs) of a shipping entity. Therefore, uncovering all these layers to identify the real individuals behind the business is a significant challenge.

3. Jurisdictional Complexity and Regulatory Arbitrage

Different countries have varying standards for business registration and transparency. Entities often leverage jurisdictions with weaker regulatory oversight or less stringent KYB requirements to establish front companies. Therefore, the global challenges of regulations add more complexity to the verification process.

4. Lack of Standardization

There is no universal standard for shipper identification or a centralized global database. This forces financial institutions to rely on disparate data sources, which serves as a barrier to operational efficiency and real-time risk management, making the verification more complicated.  

How The KYB’s Due Diligence Helps with the Shipper Verification Process

Not all shippers pose the same level of risk; therefore, they may be classified based on their industry’s geographical location and ownership structure.

Platforms like The KYB, become indispensable tools for businesses that are looking for effective shipper verification, pulling data from official business registries and thousands of disparate sources globally. It consolidates all the necessary information about a shipper into a single, unified view, eliminating the need for manual searching and data fragmentation.

With modular APIs and comprehensive data points, The KYB with integrated AML screening feature screens shippers against constantly updated PEP, watchlist, and regulatory enforcement. 

Moreover, comprehensive adverse media monitoring provides crucial insights into reputational risk that might not appear in official registries. Contact our team or book a demo from the website.