By Michael A. Moore
Vetting is probably the oldest form of risk management. As long as one person has hired another, background checks for competency and performance have been part of the process. In the case of vetting a ship, a captain or any other supplier/partner in a cargo move, vetting not only helps assess risk, it is also rapidly evolving and diversified.
Originally a horse-racing term referring to the process in which a veterinarian checks an animal’s health and soundness before a race, today’s strict vetting policies and practices used in cargo transportation and logistics have evolved substantially in the last dozen years post-9/11.
“Ten or 15 years ago, vetting used to be about the financial strength of a company, its quality, safety record, and how all that could support the contract work,” said Kathy Canaan, Global Director of Trade compliance at Fluor Corp. “In the last four to five years, vetting has evolved. Vetting for safety continues rising; but in the last few years, compliance has taken a more significant role. “Vetting is rarely black and white,” Ms. Canaan said. “It’s an interpretation that depends on what kind of industry you are in. When it’s a global services company, it gets complicated.” The global complications of compliance to which Ms. Canaan refers include: export policies and procedures, safety record, geopolitical factors, security challenges, and trade sanctions, to name a few. Fluor’s commitment to the highest standards of integrity when it comes to business practices such as vetting is rooted in the company’s code of conduct posted on its website (www.fluor.com/sitecollectiondocuments/HR700.pdf).
So where does a good vetting program begin?
“Transparency International has a list of countries that is a great starting point when figuring out how much diligence is needed,” Ms. Canaan said. “Due diligence is based on a risk profile. For a Fluor Canada project executed with primarily regional suppliers, the export control risks may not be as high as risks related to financial performance and quality. Vetting a subcontractor depends on the complexity and magnitude of the contract and can take weeks to months.
“The first thing you have to do is look at the geography of the project, then look at the client, the subcontractors in that region,” Ms. Canaan said. “It’s important to understand what kind of influence the region has on the supply chain – for services as well as materials. “For example, if we are working on a project in the Middle East, the likelihood of services from Iran entering the supply chain is far higher than if the project was in Saskatchewan,” she said. “In the case of the Middle East project, we might have to do more work training personnel, supplement our requirements for making suppliers compliant, and significantly ramp up our diligence to support our sourcing strategy.”
Fluor’s vetting process impacts shipping companies and logistics services providers; the company’s engineering, procurement and construction management (EPCM) divisions are often prime decision-makers for their mining, power and other industrial clients. Fluor Mining and Minerals is a major EPCM subsidiary based in Vancouver, and is responsible for vetting and choosing shipping lines, logistics services providers and other contractors for projects in some of the most corrupt and non-transparent corners of the world.
Fluor wants to make sure there are no skeletons in the extended histories of project partners and suppliers, a concern that is based in its commitment to ethical business conduct and complicated by the global nature of Fluor’s business.
“Vetting is tricky for us.” Ms. Canaan said. “We are a U.S. company with wholly-owned subsidiaries in other countries. We have to look at the company name and in some cases owners, officers and directors, people who have control of any third party with whom we will conduct business. “It’s called entity screening – we screen the name of a potential bidder by the company or person’s name against public lists of barred parties of sanctioned/designated entities or whole countries blocked because of embargoes,” she said.
From the perspective of a shipping company, carriers such as Fednav deal daily with tough vetting procedures and criteria that often extend beyond compliance and the usual financial and performance reviews. “It’s mainly the cargo owners who insist on vetting.” said Sherill Swail, Senior Chartering Manager of time charter at Fednav. “Early on, the condition of the vessel was the main object of (vetting) procedures, but now there is a new focus on the environment.”
The emphasis on environmental vetting has become increasingly more important in the past five years. “Vetting in 2000 was about the quality of the ship and the shipowner,” said Marc Gagnon, Director of Government Affairs and Regulatory Compliance at Fednav. “Whereas now, cargo owners are pushing for environmental vetting. Many shippers want to be certain that the ships carrying their cargo cause the least environmental impact. We, as shipowners and charterers, are committed to complying.” “Environmental vetting does not come from us,” he said. “We have no problem complying. It comes from cargo owners. Many shippers want to make sure the ships that carry their cargo are respectful of the environment.”
Environmental vetting is not related to Emissions Control Areas (ECA), Gagnon explained. “Vetting goes beyond regulations. It is a decision from the cargo owner to take the best ship to lessen the risk of having a problem.
The traditional vetting process usually involves questionnaires for logistics providers to complete. Some companies handle their own vetting, while others contract with third-party specialists. “There are different vetting companies,” Ms. Swail said. “They want to know how many accidents the ship has had, who the owner and operators are, and how many accidents across the owners’ and operators’ fleet have occurred. They also look at how the ship is built. When you have a new ship, all that information comes from the shipyard. Afterwards, the ship’s manager provides all the information.”
As the vetting process has expanded, third-party vetting companies have emerged, creating big databases that rate ships and shipowners on marine safety standards, as well as environmental policies and procedures. The leader in this sea change in the vetting process is RightShip Pty Ltd., a boutique joint venture of BHP Billiton Freight Trading & Logistics, Cargill, and Rio Tinto Shipping.
“Our vetting functions act as decision-support and barrier-control mechanisms to prevent high-risk vessels from entering a supply chain and from gaining an unfair advantage over quality vessels in an industry that is so competitive,” said Anuj Chopra, Vice-President of RightShip Americas. ”Our mission is clear; to reduce our customers’ marine risk by providing accurate and reliable assessments on vessels, owners and managers.” “We vet each ship for each voyage,” Mr. Chopra said. “We have all the data on ships from the time they were built.”
RightShip teamed up with IBM in June to adapt its SPSS predictive analytics software for data-driven risk management and vetting. “This gives us a tool to look at past data to predict high-risk areas going forward,” he said. “It allows ship management to focus on those areas to improve the risk profile of every ship in their fleet.”
RightShip may have to work hard to overcome the ingrained caution of companies such as Fluor when it comes to outsourcing vetting. “There are times when we may decide to have someone investigate a company,” Fluor’s Canaan said. “If there was a globally agreed, public clearinghouse where everybody agrees to submit all the information, it could make sense.”
“But as Fluor, how could we trust it? In any regulatory scenario, we would be responsible for our own diligence,” she said. “In the event of a violation, it would come back on us. So it might not work for us. And as to the risk of a violation, the financial penalties are one thing, but the brand damage is also there, and that has to be a consideration.”