Opinion: Higher Bonds Are Not the Answer

By Robert A. Voltmann

President

This Opinion piece appears in the May 13, 2004, print edition of Transport Topics. Click here to subscribe today.

There has been some debate lately about increasing the broker bond from $10,000 — to as much as $500,000 — in order to protect motor carriers and shippers. Increasing the bond, however, will not achieve the results desired by those seeking the increase. Risk is a fact of life.

In any business where one company extends credit to another for a service that cannot be repossessed, risk exists. Brokers, like most motor carriers, are small businesses. Brokerage, like trucking, looks easy from the outside; but also like trucking, doing it successfully is not easy. Motor carriers should check out the companies to whom they are extending credit. They can check on a broker’s bond and license at http://.li-public.fmcsa.dot.gov. 

Carriers can also check to see if a broker is a member of the Transportation Intermediaries Association. TIA is the trade association of ethical brokers and third-party logistics companies.

Brokers assume risk as well. On average, our members report they pay their carriers in 24 days from receipt of documentation, while they report payment from the shippers in 39 days. The result is 15-day faster payment to carriers using brokers than if they billed the same shippers directly. This also means that the broker is paying the carrier 15 days before it is known whether the shipper will pay its bill to the broker.

In 2002 and 2003, our members report that they wrote off more than $65 million in unpaid freight bills from more than 16,000 shippers, yet their carriers still got paid.

Who protects the broker? No one. Fraud exists in both the brokerage and the motor carrier industries, and increasing the bond will have no effect on fraudulent operators.

Those advocating raising the bond assume that a company’s intent on fraudulent activity will nonetheless meet the legal requirement of getting a higher bond. A company starting a new brokerage every Monday, for example, is unlikely to get any bond, let alone one worth $500,000. A company continuing to operate, even though its bond has expired is not suddenly going to get religion and obtain a new $100,000 bond.

It goes back to knowing the company to which you are extending credit. A larger problem occurs when companies take a load as a motor carrier and then re-broker the load without permission, a license or a bond. In this case, the next motor carrier in line does not know that the load is being fraudulently brokered for a second or third time.

We have evidence of loads being re-brokered without permission, and in every case, the first broker — the one hired by the shipper — found out about the unauthorized re-brokering when the carrier that had done the actual transportation called looking to get paid.

We even have documented evidence of individuals who start a new trucking company every week or so, take on loads, and then re-broker them and never pay the performing carrier.

It is simply illegal for a company that is not a licensed broker or freight forwarder to put someone else’s freight on someone else’s truck. Again, if these companies operate illegally, when getting a broker’s license only involves a $300 fee and a $10,000 bond, what makes you think they will get a $100,000 to $500,000 bond? They will not.

So what is the answer? Part of the answer is to check out the company offering the load. Is it a licensed broker or forwarder? What company holds the bond? What is its credit score? How long has it been in business? Is it a member of a recognized trade association?

The answer is to do your homework before you take the load. The government is not here to protect businesses from making bad choices. Another part of the answer is for the Department of Transportation to do its job and enforce the laws. DOT should crack down on fraudulent companies whether they are operating as brokers or carriers. DOT should make it clear that carriers need a broker’s or forwarder’s license and all that such licensure entails to give freight to another carrier.

While the government is not here to protect businesses from making bad choices, it is here to enforce the laws. Finally, if the answer is to raise the bond, then the bond requirement should be extended to shippers and carriers.

As stated earlier, TIA members wrote off more than $65 million in bad debt from more than 16,000 shippers in the last two years. We do not know how much “bad broker debt” reported by motor carriers is really the result of unauthorized re-brokering by motor carriers.

Unfortunately, while extending the bond requirement to shippers and carriers would offer some additional protection, it would offer no protection from companies and individuals intending to commit fraud.

The only way to rid the transportation industry of fraudulent companies and individuals is to report them and try to give business to the legitimate players. That is the answer.

TIA is a national trade association for third-party logistics providers and freight brokers. Its headquarters are in Alexandria, Va.