Running afoul of the Lacey Act

The Lacey Act, which was originally designed to protect US wildlife and habitats, six years ago, was expanded to the importation of illegally harvested lumber. The legislation now is one of the most complex and potentially hazardous for US buyers of forest products – just ask Lumber Liquidators.

Last September, federal Homeland Security officials, search warrant in hand, swept into the Virginia headquarters of Lumber Liquidators and a nearby retail outlet. The headlines-making raid knocked the flooring retailer on its heels. Its stock price plunged. Angry investors filed class-action suits. While Lumber Liquidators has yet to be charged with specifics, the raid followed a detailed report by an environmental activist group accusing the retailer of illegally importing wood from the Russian Far East via a Chinese supplier, which, in effect, laundered the wood to hide its origin and its species.  Lumber Liquidators “emerged as the strongest example of a US company whose indiscriminate sourcing practices link US consumers to the destruction of critically endangered tiger habitat and forests in the Russian Far East,” charged the London-based Environmental Investigation Agency, which chronicled a corrupt supply chain from Russia to a particular factory in China. Environmental Investigation Agency calls China “the black box for illegal timber and forest products and singled out Lumber Liquidators for taking advantage of this trade. “Lumber liquidators has turned a blind eye as its purchases have fueled rampant illegal logging in the region.” By all accounts, Lumber Liquidators has run afoul of the Lacey Act, a 1900 legislation designed to protect US wildlife. Six years back, the act was amended to include the importation of illegally logged wood. The raid on Lumber Liquidators wasn’t without precedence. The Department of Justice (DOJ) accused Gibson Guitar Corp. of illegally purchasing and importing ebony wood from Madagascar and India and rosewood from India. In 2012, Gibson agreed to pay a $300,000 fine, donate $50,000 to the National Fish and Wildlife Foundation and forfeit seized lumber. That wood had a value of $260,000, which has nervous Lumber Liquidators investors worried about the possibility of a much larger financial hit.  The Lumber Liquidators case is significant and not just because it shows that the government remains interested in enforcing the Lacey Act, says Laura Duncan, an environmental lawyer with Beveridge & Diamond P.C., based in San Francisco. “It shows that a company does not need to be dealing in exotic or endangered hardwoods to be at risk of Lacey Act enforcement,” and she adds, “it illustrates that not having a Lacey Act compliance program, including due diligence, can create significant risks for a company,” which include negative PR and shareholder lawsuits.   With high-profile cases like Lumber Liquidators and Gibson Guitar in mind, those along the supply chain are wondering about their liability as well. That’s because the Lacey Act can penalize violators even if they aren’t aware that the wood was harvested or exported illegally, but failed to take adequate precautions to prevent such wood from being imported into the US. Penalties for even unknowingly engaging in prohibited conduct include fines, a possible prison sentence and forfeiture of goods. In theory, the law applies to those transporting the goods. “If a common carrier is picking up loads of raw wood from a geographic region where illegal logging is rampant, then it should know to ask some questions about the legal origins of the wood even though trading in wood may not be part of its core knowledge or business,” says Duncan. “It comes down to whether the contract carrier knew, or in the exercise of due care should have known.” So Far Importers the Target The good news is that so far, at least, officials are targeting the importers themselves, not those who transport the wood.  “I am not aware of any case where the government charged a carrier or transporter with a Lacey Act violation unless the person doing the transporting – say across state lines – was the same person trying to buy or sell the illegal good,” says environmental lawyer and litigator Carson Bowler, with Schwabe, Williamson & Wyatt, based in Portland, Ore. “Based on the cases and prosecutions brought to date, enforcement efforts focus on parties that have actual knowledge that they are breaking the law, or are unjustifiably careless or sloppy in trying to comply with the Lacey Act.” Bowler cites as significant another recent legal decision. In December, the Eighth Circuit Court of Appeals affirmed a lower court decision that overturned a $38 million fine levied against Union Pacific Railroad by Homeland Security for violating another old piece of legislation, the 1930 Tariff Act. The railroad unwittingly transported drugs that had been secreted on Mexican trains, cars that were passed off to Union Pacific at the US-Mexican border. Union Pacific makes real efforts, the court noted, to detect drugs. The border patrol argued that Union Pacific was liable because it owned or had a financial stake in the railcars, even if it had no control over the shipment.  The Court disagreed. It ruled the government could not punish “morally innocent” individuals in violation of the Fifth Amendment to the Constitution, which insures due process. Tellingly, it noted that Union Pacific could not be found liable for goods shipped even in UP railcars under Mexican railway control unless it was negligent in entrusting that control. Bowler stresses that while the two acts aren’t the same, the Union Pacific decision may be of value to transporters taking adequate precautions. He quickly adds, however, “this does not mean that transporters under the Lacey Act should let down their guard,” because transporting illegal goods is “technically still impermissible under the Lacey Act.” Knowledge of the Act is critical. For example, the Lacey Act requires importers to declare “country of harvest” for the wood being imported. That’s different from the commonly used term “country of origin” used in importing goods.  Warnings Should be Red Flags The Gibson Guitar case showed that importers can’t afford to ignore warnings about dubious logging practices, even if they come from politically motivated groups. The Department of Justice noted that a non-profit group attempted to educate a Gibson Guitar official in 2008 about a 2006 ban on ebony harvest and export during a trip to Madagascar and even visited Gibson’s supplier accused of contravening the ban. Those findings were passed up the corporate chain, the DOJ asserted, but no action was taken and Gibson continued to import ebony fingerboards from the Madagascar supplier. A number of freight forwarders are informing their customers about the Lacey Act and providing appropriate documentation necessary for compliance. Denver-based Charles M Schayer & Co., for example, serves a number of furniture manufacturers. Its Web site prominently displays the Lacey Act and offers both information and assistance. Clients “are going to know their products much better than we do, [but] they appreciate that we do things very thoroughly and very correctly,” says a company representative. “We want them to be aware of their liabilities, cross all the i’s and dot all the t’s and then down the road, they’re not going to have any problems at all.”