Panalpina perseveres
Compliance takes center stage in global forwarder's commercial operations.
By Chris Gillis
At Swiss freight forwarding giant Panalpina, corporate governance and regulatory compliance are just as important as earning a profit.
This change in mindset evolved within Panalpina during the past five years as the company weathered the unwelcomed publicity and regulatory scrutiny resulting from several significant compliance breakdowns.
'I would not say we lost control,' said Monika Ribar, Panalpina Group's chief executive officer, in a recent interview. 'The world has changed and this company has been growing. I believe it was a problem of not reacting fast enough to the changes.'
Ribar, a 20-year veteran of Panalpina, stepped up to CEO in October 2006 after briefly serving as chief financial officer. From 2000 to 2005, she was chief information officer for the group. Prior to her ascension to the top spot, former CEO Bruno Sidler resigned from the company after the discovery of a widely reported case of booking fraud by a manager at Panalpina's air freight division.
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| Monika Ribar chief executive officer, Paqnalpina Group |
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| 'I would not say we lost control. The world has changed and this company has been growing. I believe it was a problem of not reacting fast enough to the changes.' | |
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However, the company's woes were far from over. In 2007, Panalpina unceremoniously suspended part of its service offering in Nigeria, including its revenue-generating import service for the oil and gas sector, while U.S. authorities conducted a bribery probe based on allegations of improper payments to Nigerian officials to secure preferential customs treatment, a violation of the Foreign Corrupt Practices Act (FCPA). By the end of 2008, Panalpina withdrew from Nigeria altogether.
In October 2007, Panalpina, along with a handful of other large forwarders, had its head offices raided by the U.S. Justice Department, European Union and Swiss Competition Commission investigators based on allegations of price fixing specifically related to the imposition, level, timing and application of various surcharges.
The Justice Department also alleged that Panalpina paid kickbacks in the form of meals, drinks, tickets to sports events and golf outings to employees of Kellogg Brown & Root's transportation department to gain favorable treatment on subcontracts under the U.S. military's Logistics Civil Augmentation Program. Under the LOGCAP III contract, KBR was to provide logistical support for U.S. military operations abroad.
Despite the severity of the allegations and potential penalties, Ribar directed Panalpina to maintain a policy of 'openness, honesty and transparency' in dealing with the investigators and the company's shareholders and customers.
Regulatory agencies often weigh a company's cooperation during an investigation when setting penalty amounts. In the case of the alleged KBR kickbacks, Panalpina this summer paid a $375,000 fine to the U.S. government. Eagle Global Logistics paid more than $5 million in penalties to settle claims under the Justice Department's investigation.
Panalpina said in a July 30 statement to the media that the settlement amount reflects the company's 'cooperation, its strong compliance program, and the fact that the alleged activities involved former employees, without the knowledge, approval or involvement of present management. After learning of the allegations, Panalpina conducted an internal investigation and concluded that any persons allegedly involved in any improper activity were no longer employed by the company.'
The company also anticipated the conclusion of the U.S. government's FCPA and antitrust investigations this fall. Panalpina reserved 120 million Swiss francs ($110.7 million) to cover those fines, and other penalties and legal expenses related to those settlements.
On Sept. 30, Panalpina agreed to pay criminal penalties of $11.95 million, its share of a total $50.27 million in fines assessed against six international forwarders charged by the Justice Department with allegedly conspiring to fix fees and charges for air cargo shipments.
Panalpina, which entered guilty pleas to three counts, said the agreement 'releases the company from further prosecution for any conduct related to the sale of international air freight forwarding services, and for conduct related to the imposition of certain enumerated surcharges in connection with the sale of international ocean freight forwarding services.
'It is Panalpina's position, which is supported by economic evidence, that the infringements likely did not affect prices paid by Panalpina's customers,' the company said.
Administrative proceedings related to such conduct are still ongoing in the European Union, Switzerland and New Zealand. Brazilian authorities in August announced preliminary investigations against the forwarding industry. Related cases in Canada and Australia have been dropped.
Personally Engaged. Ribar told American Shipper she spent the past three-and-a-half years personally engaged in the investigations, often joining Panalpina's lawyers in meetings with regulatory officials. 'I cannot change the past, but I can influence the future,' she said.
Panalpina's compliance program was adopted at the board level and pushed through the entire organization, she explained. Panalpina has 'zero tolerance' for any deviation from its Code of Conduct, an eight-page document made available to all employees.
The company's dedicated compliance team works independently within the company and is split into geographic responsibilities based on the specific needs of the area. Markus Heyer, corporate compliance officer, leads the team and reports directly to the board's legal committee and Ribar.
The compliance team also works closely with human resources and the corporate audit and legal teams. Further support may be obtained from outside resources, including legal counsel and the Basel Institute on Governance, which advised Panalpina on developing its compliance program.
Still, ensuring compliance is no easy task for a forwarder the size of Panalpina, with about 14,000 employees in 500 branches across more than 80 countries. Thus Panalpina has designed a compliance training program that includes onsite management sessions, as well as e-learning modules on the different topics of the compliance program, including the Code of Conduct, anticorruption, free competition and trade regulations. The e-learning sessions are translated into many languages to reach all employees. They include tests and certifications for all participants.
Ribar is no exception. 'I do the normal in-house training like everyone else,' she said.
Managers in Panalpina must also sign a letter stating they're responsible for the compliance oversight of their staffs and provide guidance to employees who raise questions or concerns.
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'We tell our employees that bad news is better than no news when they identify potential errors or wrongdoing,' said Lucas E. Kuehner, Panalpina's managing director for the United States. 'With these details, we can then proactively engage the authorities and that's the best thing we can do.'
Panalpina recognizes some countries either have no rules to prevent corruption or hesitate to enforce them. In these cases, the company requires self-regulation, which can be addressed by following the International Chamber of Commerce's Rules of Conduct and Recommendations to Combat Extortion and Bribery and the Business Principles for Countering Bribery, published by Transparency International and Social Accountability International.
No matter where in the world Panalpina's employees are, the policy is clear that there is 'zero tolerance' for the use of facilitation payments to secure favorable treatment from government officials. The company also makes no political contributions, and any gifts or entertainment expenses are carefully scrutinized.
Panalpina even requires its overseas partners, suppliers and sub-contractors to commit to the same level of compliance standards as its own employees. The company has put in place a due-diligence program, which includes a certification of all partners, assessments, questionnaires and interviews. Partners also have access to a version of Panalpina's anticorruption e-learning program. Violations of these compliance standards may result in termination of business between Panalpina and its partners.
In addition, Ribar travels extensively, meeting with as many employees, partners and customers as possible throughout the year to speak about Panalpina's strategy, including its heightened emphasis on compliance. 'This is now the right way and this is where we want to go,' she said.
Better Company. Years ago, Kuehner recalled that most forwarders were less concerned about compliance.
Today, Panalpina believes compliance not only improves its operational efficiency, but also creates a corporate culture that contributes to protecting customers, partners, suppliers and the company itself from costly lawsuits, compensation claims and damage to reputation.
More global shippers are demanding proof that their forwarders have solid compliance programs in place. 'We are aware that compliance is becoming increasingly important when tendering for any type of business,' Ribar said.
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'The bottom line is if a shipper is in violation, they're ability to import or export may be severely impacted,' said Richard Jordon, Panalpina's area head of supply chain management in the United States. 'We've spent an enormous amount of time conveying to them the need for having strong compliance programs.'
Compliance aside, the global economic recession took its toll on the forwarding industry and Panalpina was no exception. The company reported a consolidated profit of 10 million Swiss francs ($9.3 million) in 2009 compared to 114 million francs in 2008, although revenue fell to 7.3 billion francs ($6.8 billion) in 2009 compared to 10.6 billion francs in 2008. Gross profit declined to 1.4 billion francs ($1.3 billion) compared to 1.7 billion francs in 2008.
Overall, Panalpina transported 731,000 tons of air freight, 19 percent less than in 2008, and 1.1 million TEUs of ocean freight, down 14 percent.
'2009 could hardly have been a more turbulent and challenging year, both for the forwarding and logistics industry as well as for Panalpina,' Ribar said. 'Although we reacted quickly on the cost side and increased productivity, the measures taken could not compensate for the sharp fall in volumes and a rapid increase in buying rates in the second half of the year.
'However, we have taken appropriate actions on the procurement and sales side as well as on the organizational structure of the company, which will positively influence our performance in 2010. We are confident to grow at least at market level this year,' she said.