due diligence for sourcing legal timber

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


• 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


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


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


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)


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

due diligence for sourcing legal timber

Documents