due diligence for sourcing legal timber
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Due Diligence for
Sourcing Legal TimberANS LTDD 1.0 2015 The American National Consensus Benchmark
Presentation by Kip Howlett, President, Hardwood Plywood and Veneer Association
August 10, 2016
What is due diligence?
Let’s start with the Lacey Act and other international laws impacting illegal
timber
U.S. Justice Department’s update on the elements of due diligence
Review of how ANS LTDD 1.0 matches the Justice Department guidance
What does an ANS LTDD management system look like?
Key resources to make your management system work (risk assessment
capability, assessing country of harvest of timber, corrective actions)
Self-audit vs. 3rd party?
Please- ask questions during this presentation
HANDOUTS
ANS LTDD 1.0 2015 Risk Assessment Framework and Due Diligence Matrix
U.S. DOJ Materials
Side by Side Comparison of DOJ Due Diligence Program and the ANS LTDD
1,0 Management System
Laws on Illegal Timber
Lacey Act
European Union Timber Regulation
Australian Illegal Timber Act
Japanese Clean Wood Act
China
Are they enforced? It depends.
ANS LTDD 1.0 2015
This is not a forest certification of sustainability standard
This is not a legal verification standard
This is not a chain of custody standard back to the stump
This is not a labeling standard
This is a management system for conducting due diligence
ANS LTDD 1.0 2015
Due diligence is a legal performance standard – financial due diligence
and environmental before completing a transaction (merger or purchase)
Reasonable and prudent man in same and similar circumstances in tort law
For illegal timber in the value chain, it is not defined at all in the law: it is a
prescription “Thou shall conduct due diligence”
Justice Department gave some guidance in the Gibson Guitar case
(Appendix A.6, page 30)
After ANS LTDD 1.0 2015 was accepted as an American national consensus
standard, the Lumber Liquidators case provided detailed specifics on due
diligence for timber in the supply chain
Lumber Liquidators (LL)Case
DOJ received information from the Environmental Investigation Agency (EIA)
that LL was bringing in timber products that were:
Illegally harvested in the Russian Far East;
Transported to China for manufacturing;
Falsely declared upon import into the U.S.
The Russian Far East is:
Mixed broadleaf forests of Korean pine (CITES-III) and Mongolian oak (CITES-
III)
Extremely remote
Known for illegal logging
Environmental Concerns
The Russian Far East is also home to:
The last 450 wild Siberian tigers (CITES-I), and
The last 47 Amur leopards (CITES-I)
Both cats are dependent on Mongolian oak and Korean pine forests for
hunting & prey species (boar, red deer rely on pine nuts & acorns)
Greatest threat to the cats’ survival is illegal logging
Methods of Illegality
The case involved two common methods of timber crimes:
1) Falsely declaring species and/or harvest country to cover up true
product
2) Using a legitimate permit to launder illegally harvested timber
Outcome
One felony violation, four misdemeanor violations
•First felony conviction under Lacey Act timber amendments
•Largest Lacey Act criminal penalty ever
•$7.8 million criminal fine
•$1.2 million community service payments
•$4.5 million in forfeiture
Detailed factual statement
Environmental Compliance Plan
Annual auditing and reporting to the court
5 years probation
Environmental Compliance Plan
Court-enforced measures to ensure that LL knows what they import and
who they are import it from.
LL compliance decision-making process will be centralized, documented
and audited.
KEEP IN MIND: This represents only the minimum required for the company
Environmental Compliance Plan: Oversight
The CCO (Chief Compliance Officer) shall be responsible
The Lacey team shall coordinate with other business functions to the Lacey
Act requirements
Onsite inspections shall be conducted no less than quarterly for medium and high risk suppliers and low risk suppliers of medium risk products
The onsite inspectors are:
Internal employee who reports to CCO (full or project basis)
3rd party auditor with industry expertise, or
Appropriate certification body
Environmental Compliance Plan: Risk
Use a risk based approach
If considered a high risk product, then the supplier is deemed high risk
If a supplier is medium or high risk, then the CCO must give initial approval and make a written record of the decision-making process
Environmental Compliance Plan :
Vendor Validation
Establish a 3rd Party due diligence process aimed at not engaging non-
compliant 3rd parties in the first place (A black list)
The Lacey team must memorialize the steps below, CCO provide written
authorization to conduct business with a new supplier, and authorization
include consideration of the factors listed below:
A risk assessment process
A sample purchase order evaluation
In—person audit
Procurement language skills to assess submitted documents
Environmental Compliance Plan :
Document Review
Lacey team create and implement a risk based approach to ensure PO’s
comply with the Lacey Act.
Establish an unbroken and verified chain of custody from you to the
product’s source using documentation down to the forest level
PO’s from medium and high risk suppliers or medium or high risk products
shall be reviewed and analyzed as above and requires clearance before importation which must have CCO or CCO’s designee sign off
If no documentation within a reasonable time, then product will not be
imported
Impact
Compliance expectations are heightened
Status quo not acceptable
Knowledge pool
Modes of illegality
Locations of illegality
Complacency
NGO cooperation
What does an ANS Management
System look like?
Key Elements – ANS LTDD Specified
Quality Management System
Purchasing policy
Qualified management personnel
Infrastructure and control systems
Evaluation and determination of legality
Document control program
Primary Goal of ANS LTDD:
Only Purchase & Trade Legal Timber
Systematically Eliminate Illegal Sources from Supply Chain
Exclude Noncompliant, Uncooperative suppliers
Maintain a database of Risk Assessments
Stay Informed of Global Supply Developments
Document Purchases and Red Flags in Supply Chain
Apply Risk Reduction Measures as Appropriate
Report System Performance to Senior Management
Risk Categories
Overall risk inherent to the supply chain must be determined to assess the
level of due diligence required
Coordinator performs due diligence risk evaluation
Determine quadrant that most represents the assessed area of risk.
Preliminary Risk Evaluation
□ Quadrant A Negligible Risk
□ Quadrant B Additional Due Diligence required - Risk associated with Species
□ Quadrant C Additional Due Diligence required - Risk with Country of Harvest
□ Quadrant D High Level of Due Diligence required - Risk with Species and Country
□ Not Determined (may require additional consultation to determine)
Risk Characterization
estimate of risk characterization
based on volume of timber procurement in each
assessed area of risk.
A B C D
8/17/2016
23Species-Related Restrictions? (See 5.2)
No Yes
Hig
h R
isk
Co
un
try?
(Se
e 5
.1)
No
• Products traced to Country of Harvest*
• Supplier uses standard business
documentation for level in supply chain
• Supplier doesn’t raise red flags
• Optional: products third-party certified
w/certified sourcing or chain of custody
(See 6.1) A
• Products traced to Country of Harvest*
• Supplier has necessary species-related permits
• Supplier uses standard business documentation
for level in supply chain
• Supplier doesn’t raise red flags
• Optional: products third-party certified w/ chain
of custody
B (See 6.2)
Yes
(See 6.3) C• Products traced to Forest Management
Area
• Pass-through contracts with suppliers or
products third-party certified w/chain of
custody
• Supplier doesn’t raise red flags
D (See 6.4)
• Products traced to Forest Management Area
• Supplier has necessary species-related permits
• Pass-through contracts with suppliers or products
third-party certified w/chain of custody
• Supplier doesn’t raise red flags
Validation of Annual Reports
LTDD requires annual reports of the Company’s (Entity)
and Suppliers progress
Internal Audits – periodic internal documentation of
review and operation Utilizing Corrective Actions to
address deficiencies
Third-Party Audits – conducted by knowledgeable third-parties.
Expertise in forest certification and/or chain-of-
custody systems
Accredited Third-Party Audits – audits conducted by
accredited third-party bodies operating ISO/IEC
17065 certification programs
Third Party Certification
inspections designed to reasonably assure that timber harvested, used, or
consumed was done so legally
ensure system meets the requirements of the ANS LTDD 1.0 2015 and normative
appendixes
spot check of procurement systems as employed
performance check on the means which the Operator uses
observation, investigation, and report on operations
certification mark, certificates, listing programs
Operator Responsibility
Third Party Assessment
Preliminary evaluation of QMS
Review entities self-evaluation based on the requirements of the standard
Evaluation performed using a checklist of items
Determines systems conformance with standard
Spot checks on performance in accordance with QMS
Audit Reports
Audit report issued to communicate findings to the client
Comment: recommendation for improvement
Concern: potential weakness in the QMS
Corrective Action Request (CAR): A direct violation of
requirements.
Formal corrective action responses are required.
HPVA Laboratories Process
Application Review
Risk Categories - Species Mix and Country of Harvest
Risk Characterization
Audit Preparation – Entity internal auditing
Preliminary QMS Review
Scoping Meeting
Assessment Visit
Audit Report
Certification - Getting Started
Setting up a system
Getting operational
Third party provides outsider perspective
Accountability, Experts in legal timber
HPVA’s audit team is led by Bob Simpson
For Further Discussion
Individual Experiences
Management Systems in Place
Risk reduction Measures
Procurement Challenges
Supplier Evaluations
Improvements
COMPARISON: The Justice Department Due Diligence
Program Requirements for Lumber Liquidators with ANS
LTDD 1.0 2015
DOJ RequirementReference in
DOJ/LL ANS LTDD 1.0 2015Reference in
ANS LTDD 1.0
Statement of the compliance objectives Section 1 Procurement Policy Statement
Sect. 4.2 (pg.6)
and Appendix
A.1 Policy
Statement
committed to being a good “corporate citizen” and
abiding by the applicable laws, rules and regulations
wherever we do business.
Legal Background Section 2 Applicable Laws and Lacey Act
Definitions
(pgs.2 &4)
General Prohibitions Under Lacey Act Section 2.1 Purpose and Scope (pg.1)
Lacey Act Penalties Section 2.2 Definition: Lacey Act (pg. 4)
Program Authority and Governance Section 3
All employees responsible for compliance Management Program Sect. 4.0 (pg. 6)
Chief Compliance Officer management oversight
responsibility System Personnel Sect. 4.1 (pg. 6)
LL team will manage the due diligence program Control Procedures Sect. 7.3 (pg. 17)
Report to the Board
Improvement Programs and
Management Rreview
Sect. 7.4 (pg.17)
and 4.5 (pg.7)
Due Care and Diligence Section 4 Purpose (pg.1)
COMPARISON: The Justice Department Due Diligence Program
Requirements for Lumber Liquidators with ANS LTDD 1.0 2015Lumber Liquidators will exercise due care and diligence
through the research, review and validation of relevant
information regarding merchandise sold in its stores and
the individuals and organizations with which the
Company conducts business.Scope; Due Care; Due Diligence; Reasonable
Person Standard (pgs. 1, 3 and 5)
Risk Assessment Section 5 Risk Assessment Process
Section 5, (pgs. 7 -
13)
There will be four general steps in the Company’s due
care activities: risk assessment, vendor
validation/evaluation, purchase order (PO) review, and
auditing/monitoring. In addition to those four steps the
Company will exercise due care by providing its
employees with training and tools to report any potential
Lacey Act concerns via secure and anonymous means.
The Company’s procedures to ensure the exercise of due
care shall all be memorialized.
Infrastructure and Control Systems; Risk
Assessment Process; Country of Harvest;
Species identification; Supply Chain; Updates;
Due Diligence Matrix Due
Diligence Risk Evaluation Flow Diagram
(Figure 1)
Sections 4.3;5; 5.1;
5.2; 5.3; 5.4; 5.5.
(Pgs. 6, 7-13)
2 year compliance schedule detailed Note: Page 7
current sources of information on timber legality issues
include: Global Forest
Registry (www.globalforestregistry.org), the Global Forest
Trade Network Guide to Legal and Responsible
Sourcing (http://sourcing.gftn.panda.org/), Keep it Legal
Country Guides, and the Forest Legality Alliance
(http://www.forestlegality.org/)
Supplier Questionnaire and Check List;
Examples of High Risk Supplies; Resources for
Country Risk Assessments; Sustainable Forest
Certification and 3rd Party Legality
Verification Programs
Appendices A3,
A4, A5, and A6.
These appendices
include the 3
Justice
Department
internet references
plus an additional
35 internet based
resources)
Vendor Validation and Evaluation Section 6
Due Diligence Program - Importers and
Manufacturers
Section 6, 6.1, 6.2,
6.3, 6.4
COMPARISON: The Justice Department Due Diligence Program
Requirements for Lumber Liquidators with ANS LTDD 1.0 2015
The CCO shall be responsible for implementing
procedures designed to ensure that Lumber
Liquidators does not conduct business with suppliers
and other vendors whose products or activities may
be in violation of Lacey Act requirements. A critical
element for avoiding business activities with non-
compliant third parties is to establish a third party
due diligence process aimed at not engaging such
vendors in the first place. Due Diligence Matrix Table 1 (pg. 12)
To the extent that those procedures rely on self-
reported information provided by potential vendors,
those supplier audit procedures should be
supplemented by the above items where
appropriate in order to independently verify and
augment the data supplied by the third parties under
review.
Note: This is a program for assessing
risk and exercising due care, largely in
advance of purchases. In all cases,
however, where an Entity discovers
concrete information that a shipment
is illegal or a supplier is engaged in
illegal activities, the transaction shall
be halted and, where appropriate,
authorities and relevant certification
bodies notified, and appropriate and
corrective action taken.
Note: Risk
Assessment
Process (pg. 7)
Purchase Order Review Section 7Document Control Program
Section 7 (pg.
17)
by June 1, 2016, Lumber Liquidators can establish an
unbroken and verified chain of custody from itself
back to the product’s source using documentation
down to the forest level.
Products are traced to Country of
Harvest or to the Forest Management
Area based on risk assessments
Section 6.1,6.2,
6.3,6,4)
Auditing and Monitoring Section 8
Inspection, Verification and Audit
Procedures
Section 8 (pgs.
18-20)
COMPARISON: The Justice Department Due Diligence Program
Requirements for Lumber Liquidators with ANS LTDD 1.0 2015
The Chief Compliance Officer, using either internal or
third-party resources4, shall ensure that appropriate
auditing and monitoring activities are conducted for
Lacey Act compliance. 4 Pursuant to the Plea
Agreement in this case, the Lacey Act compliance
procedures will be audited by a third-party for at least
three of the first four years of probation.
Remediation and Mitigation Section 9
Accredited 3rd Party Audits (ISO 17065
and ISO 17021)
Section 8.3 (pg,
18)
Corrective action plans and verification procedure(s)
shall be used when missteps are detected during audit
monitoring and/or review processes, or otherwise.
Control Procedures and Improvement
Programs
Sections 7.3 and
7.4
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