What is the Real Purpose of 49 CFR 49 Part 371.3?
Simply put CFR 49 part 371.3 is a Broker Trust Obligation, Accountability, and Enforcement Tool
Shippers, Freight Brokers, and Motor Carriers, both large and small, recognize the systemic problem of supply chain fraud and are committed to strengthening enforcement at the federal level. Yet the dispute between Carriers and Brokers over the amount of the broker’s commission misses the real point of the Broker Regulations and the reasons behind 49 CFR 371.3.
A Broker is defined as any intermediary which arranges for transportation. Like a real estate agent, stockbroker, or attorney, a broker has a fiduciary obligation to establish a constructive trust. The language that facilitates this is clear. 49 CFR 371.3 establishes recordkeeping requirements which require a shipment-by-shipment accounting showing the consignor, the bill of lading number, the amount of compensation received by the broker, and the amount and date of payment made to the carrier. Each party to a broker transaction has the right to review these records and this accounting must be produced for Federal enforcement officials and upon request where relevant in civil and criminal proceedings.
These regulations were passed 43 years ago and make clear that the broker has a fiduciary obligation to segregate funds and not pledge, hypothecate, or transmit funds earmarked for payment to the carrier. The carrier’s constructive trust rights require separate accounting for brokers engaged in any other business. Section 371.13 states, “Each broker who engages in any other business shall maintain accounts so that the revenue and expenses pertaining to the brokerage portion of the business are segregated from other activities. Expenses that are common shall be allocated on an equitable basis; however, the broker must be prepared to explain the basis for the allocation.”
These regulations are violated when a broker “robs Peter to pay Paul” or tries to cross-collateralize its gross broker receipts to get working capital for an affiliated truck company. Whether the broker is making an egregious markup really isn’t the issue.
The issue is the broker’s accountability for receiving and transmitting payments in trust. It is these very regulations that are essential if the case is to be made that bait and switch scams, double brokerage, and criminal embezzlement cases can be made.
Thus the broker regulations that broker and carrier groups are squabbling over serve two important purposes (1) providing both carriers and shippers with the right to broker transparency and accountability and (2) Clearly placing the burden of proof on the broker and its owners for accounting for any alleged misappropriation of funds.
Remember, MAP-21 contains special authority to pursue co-conspirators who are part of a fraud scheme. To address civil and criminal fraud involving the misappropriation of receivables, enforcement of the constructive trust requirements of Section 371.3 is essential to trace the money and identify the co-conspirators.