Consequences of Non-Compliance – Lacey Act Enforcement

One particular area where U.S. companies have failed to comply with stringent import laws, knowingly or unknowingly, involves wildlife and natural products. The Lacey Act, 16 USC 3371, is one of the primary federal statutes employed to combat the illicit trafficking of products within these categories. Initially enacted to protect animal species, the Act was amended in 2008 to more broadly include plant species. Specifically, the Act now prohibits the U.S. importation of illegally-harvested timber, meaning it is unlawful to trade in any plant that is taken, possessed, transported or sold in violation of the laws of any U.S. state, Indian Tribe, or any foreign law that protects plants. The Lacey Act does not impose U.S. law on other countries. “Illegally sourced” is defined by the content of a sovereign nation’s own laws. In addition, it is unlawful to falsify or submit falsified documents, accounts or records of any plant covered by the Lacey Act.

Violations of the Lacey Act carry serious penalties for companies and individuals. In addition to civil fines and forfeiture of goods, criminal penalties may also attach to the companies and individuals found to have knowingly violated the Act. A misdemeanor violation of the Lacey Act is punishable by up to one year in prison and a fine of $200,000.00 for companies and $100,000.00 for an individual. Felony culpability is punishable by up to five years in prison and a $500,000.00 fine per violation for a company and $250,000.00 for an individual.

Two Lacey Act enforcement agreements that demonstrate the severity of violations and highlight the importance of companies having compliance infrastructure that properly functions to avoid such violations are the Gibson Guitar Corporation Settlement and the Lumber Liquidators Settlement.

Gibson Guitar Corporation (“Gibson”) came under federal scrutiny not once but twice, first in 2009 and again in 2011 for violations of the Lacey Act. Gibson is headquartered in Nashville, Tennessee and manufactures a variety of musical instruments, most notably guitars. The violations involved parts of the guitar called fretboards. The imports at issue were orders of Madagascar ebony fingerboards (used to make fretboards) from a supplier called T.N. GMBH (“TN”), located in Hamburg, Germany. Gibson failed to verify that TN was sourcing its wood legally from Madagascar, and it turned out that it was illegally sourced. In addition, Gibson knowingly ignored red flags that the wood TN was providing was illegally obtained. For example, TN’s failed to provide documentation to Gibson evidencing that the ebony sourced from Madagascar was harvested lawfully. Madagascar law states that all ebony harvested after a specific date was illegal unless it was considered “finished wood” or had received “exceptional authority” from the government.

In addition, prior to purchasing the wood, Gibson had sent a specialist to Madagascar to assess the potential for supporting sustainable forestry. During his investigation, the specialist obtained the Madagascar Order regarding the particularities about finished and unfinished wood and in his report highlighted that this would be an issue for Gibson. Despite this knowledge, Gibson continued to purchase wood from TN.

These violations resulted in the finding of a Lacey Act misdemeanor violation with a fine of $300,000.00 plus a $50,000.00 community service payment to the National Fish and Wildlife Foundation. In addition to the monetary fines, Gibson also was required to strengthen its compliance program.

Gibson established a new compliance program that clearly stated the objectives of maintaining compliance with relevant laws and in particular the Lacey Act. The new program provided the history and applicable penalties for the Lacey Act, listed the due care standard that it would apply to its processes to assure compliance with applicable law, and then listed the internal checks and balances that would be implemented to demonstrate the satisfaction of this duty. The compliance program also stressed Gibson’s commitment to developing policies and procedures for the procurement of wood and for verifying that all necessary foreign licenses and/or certifications are obtained prior to approval of a purchase. The compliance program listed resources to obtain current applicable law and stated a commitment to an annual audit of its wood purchasing processes, a commitment to training its employees, and plans for retaining adequate records.

The compliance program created by Gibson emphasizes the necessary steps required under the Lacey Act to specifically detail the unique company processes and procedures created to effectuate compliance and satisfy reasonable care in conducting imports.

The second settlement involved Lumber Liquidators (“LL”). LL is a Virginia-based flooring retailer that was sentenced to pay a total of $13.15 million for five counts of Lacey Act violations. The fines included 7.8 million in criminal fines, $969,175.00 in criminal forfeitures, $1.23 million in community service payments, and 3.15 million in civil forfeitures. They were also sentenced to a five-year probationary term during which they were to create an Environmental Compliance Plan and engage an outside accounting and environmental consulting firm. The $13.5 million dollar penalty constitutes the largest financial penalty ever for illegal trafficking in timber under the Lacey Act.

The retailer pleaded guilty to one felony count of importing goods through false statements and four misdemeanor violations of the Lacey Act. The charges stated that Lumber Liquidators was using timber that was illegally logged in Far East Russia and had submitted false Lacey Act declarations that obfuscated the true species and the source of the timber. Although, LL had a compliance program in place that identified this activity, it ignored the red flags and continued to purchase the timber.

LL imports wood flooring from China and distributes it throughout the U.S. However, the timber used to manufacture the flooring in China was harvested from different countries, two of which were Far East Russia and Myanmar. LL had a compliance program at the time of the violations and, in fact, employees were aware that some of the wood was harvested from Far East Russia and posed a significant compliance risk. In addition, LL had also been conducting employee training discussing the compliance risk of Far East Russia. But despite this information, LL continued to import wood coming from Far East Russia and Myanmar. Thus, although the compliance program was in place, LL failed to uphold the policies in its manual. In addition, LL also submitted inaccurate information on Lacey Act documentation required upon importation.

What these examples illustrate is that the enforcement of U.S. Customs laws, and in particular the Lacey Act, has significant monetary and functional consequences. There is a strict duty to comply imposed on the party conducting the international trade and the responsibility to develop processes to comply with U.S. Customs laws is imposed on both the business and individual level. The penalties go far beyond mere monetary fines, and include forfeitures, corporate governance and operational restrictions.

Furthermore, having a compliance program alone does not protect against violations or mitigate penalties. Compliance programs will be judged on their actual application to relevant internal processes, the effectiveness of their implementation, and their actual capacity to successfully identify and remedy trade violations. Ultimately, the law imposes a corporate responsibility to educate employees and management who oversee trade functions and instruct them on how to effectively remedy identified violations.

What does this mean for the US business? Investing resources into developing a compliance program and implementation is an upfront cost that is absolutely necessary and indirectly required to avoid the significant consequences of violating US Customs laws.

Amber M. Johns

ZTE Agrees to $892 Million Fine and Plead Guilty for Violating US Sanctions

ZTE, a Chinese telecommunications giant, reached a settlement with the U.S. Justice Department, which comes at the end of a 5-year investigation into a series of shipments ZTE has made to Iran in violation of US sanctions. Per the settlement, ZTE will plead guilty and pay the DOJ $430 million, with a fine of $287 million and a criminal forfeiture of $143.5 million. The total dollar figure may ultimately rise to as much as 1.19 billion depending upon whether or not the firm violates the terms of the settlement agreement with BIS (US Department of Commerce’s Bureau of Industry and Security).

According to the Justice Department, ZTE obtained components manufactured in the U.S. that are on the Department of Commerce’s Commerce Control List, incorporated those items into its own equipment, and subsequently shipped the finished products to customers in Iran. In addition, the Justice Department charges that the company continued to ship these items while the investigation was ongoing. Apparently the items were used to fulfill contract projects ZTE had in Iran to install cellular and landline network infrastructure. (The Commerce Department also reports that ZTE shipped controlled items to North Korea as well.)

U.S. Attorney John R. Parker for the Northern District of Texas stated that, “ZTE Corporation then went to great lengths to devise elaborate, corporate-wide schemes to hide its illegal conduct, including lying to its own lawyers.” As much as $32 million dollar’s worth of equipment was shipped to Iran between January 2010 and January 2016; the company was also able to obtain hundreds of millions of dollars in contracts with Iran, the Commerce Department said in a recent press release.

The plea agreement still requires court approval, but if approved, it would subject ZTE to a probationary period of three years during which the firm would be under the eye of an independent compliance monitor as well as a seven-year suspended denial of export privileges, which could be activated if there are further violations. The Justice Department reported that the criminal fine in this case is the largest ever levied in an IEEPA (International Emergency Economic Powers Act) prosecution.

Google Ordered to Turn Over Foreign Emails

Reuters reported that on February 3, 2017, Federal Magistrate Judge Thomas J. Rueter in Philadelphia handed down an opinion ordering Google to comply with a search warrant to provide emails stored outside the United States. Judge Rueter’s decision is at odds with the U.S. Court of Appeals for the 2nd Circuit’s Microsoft Ireland Warrant case which was recently turned down for a rehearing.

According to Judge Rueter’s decision, electronically transferring data from a server in a foreign country to Google’s data center in California did not constitute a “seizure” because there was no meaningful interference with the account holder’s possessory interest in the user data.

The case pertains to two Stored Communication Act (SCA) warrants served on Google regarding the contents of emails. Google did submit emails that it knows were stored in the United States, but refused to provide emails that could be stored outside the country. Apparently, Google routinely breaks up emails and stores them within a network of servers outside the U.S. The company maintains it does not always know where certain emails might be located, and so declined to provide them under the Second Circuit’s Microsoft case.

Back in July of 2016, advocates such as the ACLU and the U.S. Chamber of Commerce had been pleased with the ruling in the Microsoft case (which said the company could not be forced to turn over documents stored on a server in Dublin, Ireland.) Now, eight months later, Rueter’s ruling orders Google to comply with the search warrant it received.

Many technology companies now consider the Stored Communication Act (SCA), a federal law dating to 1986, to be outdated.