Perspectives in Responsible Sourcing

Combating the Illegal Timber Trade

Negative externalities associated with illegal logging go well beyond environmental degradation; they also divert billions of dollars in trade from government revenue to illegal syndicates. Up until a few years ago, NGOs and governments alike have been battling the illegal timber trade with limited success. Now, the two largest consumers of illegally traded wood, the U.S. and EU, have put forth policies requiring verification of legal origin.

U.S. Lacey Act and E.U. Ban on Illegal Timber

In 2006, the U.S. Congress amended the Lacey Act (originally dating back to 1900), which bars Americans from breaking foreign and domestic rules when hunting, fishing, and now, felling timber. Any product with a wooden component is subject to this law. Although the amendment was effective in 2008, it was agreed to phase in categories of products up until the summer of 2010.

Under the Lacey Act, importers of many products that are or include plant materials are required to complete a declaration identifying the botanical genus and species being imported and to certify that the plant materials were harvested and exported legally.  Although the responsibility may appear to be on the importer, the Lacey Act puts the onus on the end user.  Penalties for violations of the Lacey Act range from a simple forfeiture of goods to fines of up to $500,000 and prison time if the company or individual is found to have knowingly engaged in the trade of illegally sourced wood. In late 2009, Gibson Guitar became the first U.S. Company to come under investigation under the Lacey Act for illegally importing rosewood from Madagascar. 

For instance, should one purchase and install wooden flooring made of an illegally traded timber species, federal agents of the Fish and Wildlife Service have the right to confiscate the flooring and impose heavy fines, regardless of the end user’s knowledge.

The Lacey Act calls for importers to use due diligence or due care when sourcing products. While the use of  “certified” wood (FESC, PEPC, etc.) is considered a positive step towards ensuring compliance with Lacey Act, there is currently no government approved legality verification program, and is appears that documents that prove legality from country of harvesting will not suffice on their own. Ultimately, it is the importers responsibility to know their supply chain so well that they can trace wood back to its stump.

On the other side of the Atlantic, the EU Parliament recently voted overwhelmingly in support of similar measures within the EU. The new legislation bans the sale of illegally sourced wood and will reinforce the EU’s Forest Law, Governance and Trade Program (FLEGT). Although this is a large victory for governments and the environment, penalties for importing illegal timber will vary from one member-country to the next.

Key Points of U.S. Lacey Act

•   Amended U.S. Lacey Act in effect from 2008

·         Lacey Act does not have clear requirements or guidelines for how companies can verify the legal origin of the wood the purchase. Importers are expected use due diligence when sourcing products.

·         Penalties for violating the Lacey Act are confiscation of the illegally imported product with the possibility of fines between $250K and $500K.

 Key Points of EU Ban on Illegal Timber

·         EU Ban on Illegal Timber in effect in 2012.

·         EU FLEGT works directly with governments of wood producing countries to protect and manage forests.

·         Each EU member state will determine penalties based on the value of the timber, the tax revenue that was lost, and the impact of the damage done by illegal logging to the environment.

Supply Chain

From a corporate compliance perspective, monitoring the supply chain can be challenging because the direct supplier often will not know the origin or legal status of the wood it purchased. This fact points to a need on behalf of importers to set up a tracking system to follow the chain of custody of wood to its origin.

In July, 2010, the Chatham House, a UK-based think tank (formerly known as the Royal Institute of International Affairs) released a thorough and updated report on the status of the illegal timber trade. The report highlights remarkable progress over the past decade in reducing the trade of illegal timber by between 50 and 75 per cent from its peak in 2004. 17 million hectares have been protected resulting in curbing 1.2 billion tons of CO2 emissions. This report examines twelve producer, processing, and consumer countries illustrating both public and private efforts to reduce illegal felling.

According to this report, Brazil was rated as showing the most effective efforts to curb illegal logging when compared against Ghana, Malaysia, Indonesia, and Cameroon.  The report revealed that these producer countries could not have made such progress in combating illegal logging had it not been for institutional programs such as the FLEGT. Programs vary from monitoring and tracking systems, creating and enforcing laws, collecting penalties, and even raising public awareness.

The world’s primary processing countries, Vietnam and China, were judged to have weak institutional mechanisms to prevent the import of illegal wood. The Chatham House illegal logging indicators country report card reveals that China has difficulty in curbing the import of illegal wood because of “…a lack of necessary skills, a price-focused business culture and an insensitive domestic market.”  However, over the past four years, China and Vietnam have both seen the number of companies with chain-of-custody certification for handling certified-sustainable wood quadruple and double, respectively. Despite the increased number of companies that handle certified-sustainable wood, these firms only represent a small fraction of those that import and process wood.

A considerable challenge exists for companies to obtain proof of legal harvesting of wood, when they purchased finished goods from a processing country, which in turn purchases the raw material from a third country. It is likely that many manufacturers in processing countries will not initially be able to provide proof of legality to US or EU importers, and may face challenges of their own, as many probably purchase wood from agents or wholesalers several stages removed from the harvesting company. Apart from the very largest manufacturers overseas, it follows that it will be some time before legality verification is something that is easily proven by importers.

The nature of illegal logging is perverse with detrimental impacts on the environment, loss of revenue to governments, and the support of illegal syndicates. Governments of wood producing countries do not have the resources to quell illegal felling, which is why both U.S. and EU policies are approaching this problem from the consumer end. 

Submitted by Gregory Freeman, 
STR Responsible Sourcing Intern
MBA Candidate, August 2011
Monterey Institute of International Studies, an Affiliate of Middlebury College

CSR Reporting and the UK Companies Act

Since the passing of the UK's Companies Act in 2006 companies and NGOs have been asking themselves about the implications of directors' duties. In particular, there has been much discussion about s.172's obligation for a director to “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in so doing have regard (amongst other matters) to the impact of the company’s operations on the community and the environment.” What is the required scope of any such enquiry and how does this relate to a company's CSR programme? Whilst NGOs have been exploring opportunities to hold companies accountable on this legal basis there has, in fact, been no judicial guidance to date, although the Government did clarify in 2007:

“The words ‘have regard to’ mean ‘think about’; they are absolutely not about just ticking boxes. If ‘thinking about’ leads to the conclusion, as we believe it will in many cases, that the proper course is to act positively to achieve the objectives in the clause, that will be what the director’s duty is. In other words ‘have regard to’ means ‘give proper consideration to’”.

The story does not end here. Under s. 417 of the Act an annual business review must be given “to inform members of the company and help them assess how the directors have performed their duty under section 172. […] The business review must contain a description of the principal risks and uncertainties facing the company.” For quoted companies the obligation explicitly includes environmental matters and social and community issues “to the extent necessary for an understanding of the development, performance or position of the company’s business.”

More and more companies are producing such reports – often offering well-edited hard- and soft-copy versions full of images displaying the harmony between operations, the environment and the local community. An interesting parallel debate has sprung up amongst CSR experts about the preferred (and possibly required) format of such reports. But much more important than format and form of CSR reports should be their content. In particular, the question must be raised whether a CSR report is providing an accurate account of matters necessary to understand the development, performance or position of the company’s business.

The ongoing allegations against Vedanta and their mining activities in Niyamgiri provide a good example: Vedanta has continuously portrayed itself as concerned about communities and employees affected by their operations and has published CSR reports to this effect. In particular, it has emphasised the importance it gives to stakeholder engagement. But NGO reports tell a completely different story, including allegations that no such engagement has ever been effectively pursued. The report also allegedly fails to address any conflict with communities over the Niyamgiri operations and instead highlights choice projects. News that the Indian government is now further looking into the complaints made against Vedanta and the UK Parliament’s recent motion to condemn the company’s actions as unethical and that plans for mining should be abandoned demonstrate a likely link between the claims made by NGOs and not addressed in Vedanta’s CSR report and the current hostile climate towards the miner’s operations.  

It will be interesting to see whether the UK company is ever legally challenged about the content of its report and the alleged inaccuracies. Admittedly, it’s pretty unlikely. Nevertheless, companies should take this to heart and learn their lessons before they are legally challenged – and possibly publicly exposed.