Double Brokering in the Transportation Industry: A Brief Examination of its Implications, Variations and Countermeasures

Double brokering has become a more frequent risk for stakeholders in the transportation industry, including factors. David Jencks takes a look at the permutations of this type of fraud and how factors and their clients can protect themselves.

BY DAVID J. JENCKS, JENCKS LAW, P.C.

The transportation industry plays a crucial role in global commerce, facilitating the movement of goods and connecting businesses across the world. It also makes up almost 10% of the U.S.’s gross domestic product. To ensure the smooth functioning of this complex network, intermediaries, known as freight brokers, facilitate the coordination between shippers and receivers of freight. However, a contract violative, unethical and illegal practice known as double brokering has re-emerged with frequency because of the abysmal state of the freight market in 2023. In this article, we will examine the concept of double brokering, discuss its implications and, importantly, its variations, and examine countermeasures to mitigate its negative effects.

Understanding Double Brokering

Double brokering occurs when a freight broker, or carrier posing as a freight broker, accepts a load from a shipper but instead of directly assigning it to a carrier, re-broker the load to another broker without the shipper, and more importantly, the initial broker’s knowledge or consent. This deceptive practice allows unscrupulous brokers, carriers and so-called dispatchers or agents to exploit the transportation system by defrauding the legitimate freight broker and actual motor carrier for monetary gain. An important and primary aspect of double brokering is that the initial freight broker, and actual carrier, do not know the double broker stands in between them. The initial broker believes the double broker is actually hauling the load and the actual carrier believes the double broker to be the initial and only broker.

Implications of Double Brokering

  • Financial Losses. Double brokering can lead to financial losses for both shippers, carriers and carriers’ factors. Shippers may pay higher rates to brokers, assuming they are dealing directly with the carrier, while carriers may face non-payment or delayed payments due to the involvement of multiple brokers.

  • Reduced Accountability and Legal Disputes. Double brokering introduces additional layers of intermediaries, making it challenging to hold anyone accountable for potential issues, such as cargo claims, delivery delays, or contract violations. This lack of transparency leads to disputes and legal complexities involving freight payment liability, priority to freight charges and insurance disputes.

  • Diminished Service Quality. With multiple intermediaries involved, the chances of miscommunication and errors increase. The quality of service may suffer, as brokers may lack the necessary information or authority to address issues promptly.

  • Reputation Damage. Double brokering tarnishes the reputation of the transportation industry as a whole. When shippers, brokers, or carriers fall victim to this fraudulent practice, they may become reluctant to engage in future business dealings, damaging the trust and credibility within the industry.

Countermeasures against Double Brokering and Its Variations

  • Due Diligence. Shippers should conduct thorough research before engaging with a broker. Verifying a broker's license, validating Department of Transportation credentials, checking a broker’s history from credit and information co-ops and seeking recommendations from trusted sources can help identify reliable and trustworthy partners. The same review applies to brokers vis-à-vis carriers.

  • Transparent Contracts. Shippers should insist on clear and comprehensive contracts that outline the obligations of all parties involved. Including clauses that explicitly forbid double brokering can act as a deterrent and provide some modest level of legal protection if breaches occur.

  • Technology and Data Aggregation Adoption. Embracing technology solutions, such as freight management systems and digital platforms, can enhance transparency and streamline communication between all parties involved in the transportation chain.

  • Regulatory Oversight. Regulatory bodies and industry associations should work to actively enforce and clarify regulations pertaining to brokering practices. Primarily, the Federal Carrier Motor Safety Administration (FMCSA) must reconcile conflicting and vague regulations regarding dispatching and agents. The FMCSA and DOT must gain clarity in their regulations, specifically that 49 C.F.R. 371.2(b) does not allow bona fide agents to arrange for the transportation of freight for any party other than the carrier by whom they are engaged and at that carrier’s direction. At this time, the FMCSA has passed on the opportunity to take on these measures. Recently the FMCSA has tacitly condoned shadow tendering by issuing so-called “guidance” that was really no guidance at all. The FMCSA has said in rulemaking hearings that determining whether an entity representing more than one motor carrier is a broker or bona fide agent is “highly fact specific and will entail determining whether the person or company is engaged in the allocation of traffic between motor carriers.”

  • Old fashioned trip documentation review. Factors and brokers would be well served to increase their percentage of trip documentation auditing, whether it be manually or with the adoption of technology. Anomalies in freight rates or paperwork with anomalous names still create an environment where more good questions early lead to answers to stop and mitigate fraudulent behavior.

The Twist of Shadow Tendering

In double brokering, the actual carrier believes the party from whom it secured the load is a legitimate broker and has authority to broker. In “shadow tendering,” the actual carrier knows the transaction in which they are involved contains some form of quasi brokering, leasing, or sub-contracting. Ultimately, the actual carrier knows it should look and act like the party from whom it received the freight which includes using the initial carrier’s name and keeping all load documentation in the name of the originating carrier. Shadow tendering looks very similar to double brokering. It involves a shipper, sometimes a broker and most importantly, a party who is acting as some combination of a carrier, broker, agent and/or dispatcher, and then the carrier actually hauling and delivering the load. There is payment collection risk to factors if the factor’s client is either arranging for the sub-contracted end carriers due to the broker’s refusal to pay or the initial carrier’s failure to pay the actual carrier.

Shadow tendering may be harder to catch than double brokering, as at least two of the parties are working together to feel like and look like one entity to the broker. The parties purposefully keep the paperwork cleaner than many double brokers do. And it is important to note that shadow tendering sometimes lacks the fraudulent intent to deprive some party in the transportation chain payment for their services. The practice exists to allow some carriers to grow rapidly and other carriers to access more freight at lower operational cost.

The single best countermeasure to catch a shadow tendering transaction or series of transactions is internal data aggregation and use. Factors should be able to determine from the DOT regarding the number of power units a carrier has and internal data, such as historical monthly invoice purchase volume and sudden and significant changes in purchase volume.

Takeaways

Double brokering in the transportation industry undermines supply chain trust, increases risks in the chain, and results in financial losses for shippers, brokers and carriers. By understanding the implications of the practice and implementing appropriate countermeasures, industry stakeholders can protect themselves and promote a more reliable and transparent transportation network. Collaboration, due diligence and technological advancements will play vital roles in combating double brokering and ensuring the continued growth and efficiency of the industry.

Shadow tendering may be less insidious and immediately damaging than double brokering, at least until the initial carrier/agent fails to pay its shadow carriers. However, factors should be aware that investment grade brokers in particular are keenly focused on combating shadow tendering from insurance, risk and cargo loss perspectives, and many are putting payments on hold to carriers (and their factors) first and asking questions about whether the cessation of payments was proper much later.

There is no sure way for the factor to protect itself from double brokering or shadow tendering no matter what you may have been told. However, if a factor is attempting to focus on the most immediate alert to possible double brokering (or shadow tendering), high priced freight for standard loads in this freight market should be an immediate red flag. Furthermore, reviewing paperwork for unknown names or atypical load numbers (for that broker), verifying email domains, monitoring historical purchase volumes and reviewing DOT power unit data will all assist in rooting out the practice.

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