Avoiding criminal penalties under the Lacey Act: A word of warning for retailers on environmental regulation

When it comes to environmental compliance, U.S. businesses -- including retailers -- have traditionally relied on the largely domestic orientation of American laws. Thus, to comply with U.S. environmental requirements, companies have primarily focused, for example, on whether air emissions here in the United States comply with the Clean Air Act or water discharges in the United States comply with the Clean Water Act, or waste disposals comply with laws in that area. But one recent change to federal environmental laws is now bringing a significant international dimension to environmental compliance and could even lead to criminal or civil-enforcement actions against retailers based on overseas activity, including overseas activity of the retailer’s suppliers.

That change is Congress’ recent amendment of the Lacey Act (16 U.S.C. § 3371 et seq.). In sum, the changes, which have already taken effect, provide potential felony criminal liability for any person or company that knowingly imports or sells in interstate commerce products made of wood if the wood was illegally harvested in its country of origin. Moreover, even if a company did not know its product contained illegally harvested wood, but imported or sold the product without exercising “due care” to avoid importing or selling it, the company is subject to criminal misdemeanor penalties. Thus, to avoid criminal exposure, a company must now exercise “due care” as to its product sourcing and it must insure that if it develops corporate knowledge that a product does have an illegal source, it must avoid trading in that product or risk felony prosecution. In addition, the Lacey Act contains other civil penalties imposed on a strict liability basis and forfeiture provisions, allowing the government to seize products that contain illegally harvested wood, and contains “bounty-hunter” provisions rewarding those who provide tips on illegal activity.

While this may seem an “exotic, niche change” in the law with little practical consequence, stop for a moment and look around the room in which you sit -- if you are in an office, chances are you will quickly spot a desk, a ruler, or a picture frame, all made of wood, and each potentially incorporating timber harvested overseas. Do you sell tools? Many hammers and brooms have a wood handle. Are you at home? What are your flooring, your cabinetry, and your bowls and dishes made of, much less the framing in your house, hidden behind the walls? And how are you reading this -- via traditional paper, a wood-based product? In short, wood products are ubiquitous in our economy. And many of those products, with total value in the tens of billions of dollars every year, originate from overseas processing locations, such as China, and are made from wood that has been harvested in foreign locations. These countries, in turn, have a variety of laws, similar to those in the United States, that require payment of “stumpage fees,” prohibit logging in national parks, or provide other restrictions on timber harvesting. But these countries have mixed enforcement effectiveness, resulting in illegal wood getting into product chains with some frequency.

Yet under the recent Lacey Act change, it is not just the original harvester, but also the importers and sellers further down the U.S. supply chain -- extending all the way to the final retailer -- that now face potential criminal and civil liability if their product contains illegally harvested wood. Moreover, this U.S. legal change may soon not stand alone -- the European Union is well-along in making a similar change to its laws.

Thus, businesses and individuals who sell, buy or trade timber and wood products need to familiarize themselves with the amendments to the Lacey Act and, at a minimum, take steps to review their current product mix and establish appropriate supply chain due diligence. Failure to do so could lead to significant civil and criminal penalties, as well as substantial financial loss if the government seizes what it now deems to be contraband.

For many companies, the most difficult piece of Lacey Act compliance will be identifying the steps necessary to exercise “due care.” And there is likely no single answer. The legislative history indicates that “due care” is “the degree of care which a reasonably prudent person would exercise under the same or similar circumstances.” That suggests the steps required will vary according to “circumstances,” preventing a “one size fits all” answer. But it is possible to offer a few generalizations.

First, and at a minimum, due care likely requires a company to be aware of the products in its supply chain that may be covered under the Lacey Act’s new provisions. Second, companies will need to assess the likelihood that any covered products could have originated from an illegal source -- considering, for example, the wood species involved and the likely source country for such product.

If a company receives product from a country or region where illegal harvesting is more common, it may also need documentation from the importer of record in the United States, the manufacturer or processor overseas, or the entity that has originally harvested or brought the raw timber into the commercial market. In the most extreme case, the company may need to arrange some level of on-site inspection, auditing, or other demonstrations from suppliers about their internal control procedures. In short, there is probably more than one option, and the options selected will have to match the identified risk, which in turn may be a function of what is known about those earlier in the supply chain.

Finally, companies face questions about who should undertake this review for them. Whether your company chooses to create its own system or to introduce a reputable third-party auditor into the process, ignoring the new the Lacey Act (particularly in an age where consumers are paying more and more attention to “green” issues) may come with a high price -- one that could include jail time.

Ronald J. Tenpas is a partner in the environmental practice at Morgan, Lewis & Bockius LLP -- a leading law firm whose clients include many of the world’s largest retailers, and is co-leader of the environmental practice at the firm, resident in its Washington, D.C., office (morganlewis.com.). He was formerly the Assistant Attorney General for the Environment and Natural Resources Division at the Justice Department. He can be reached at  rtenpas@morganlewis.com.