Update : Developments in Compliance & Enforcement under the Lacey Act May 18, 2011

1. Update: Developments in Compliance & Enforcement under the Lacey ActMay 18, 2011 A NAMM Webinar Info: MaryL@namm.org

2. Participants • Mary Luehrsen, NAMM Dir. Of Public Affairs and Government Relations • James M. Goldberg, NAMM Government Affairs • Carrie A. Kroll, Venable LLP

3. Roadmap for Today’s Webinar • Review: Lacey Act Basics • Distinguish: What does Lacey Cover? • Update: What’s new under Lacey? • Enforcement: Recent Lacey Cases • Lessons Learned: What can we learn from these cases? • Common “Red Flags” • “Best Practices” and Proactive Measures • Q & A Session

4. The Lacey Act(16 U.S.C. §§ 3371, et. seq.) • History: • 100-year-old law originally designed to protect against illegal “trafficking” in wildlife, fish or plants • 2008 Farm Bill (the Food, Conservation & Energy Act of 2008): Included amendments to Lacey expanding the Act to: • 1) Protect broader range of plants and plant products; • 2) Prevent of illegal logging practices(§ 8204); and • 3) Require Import Declaration for plant products • Purpose: • Prevent trade in illegally harvested timber • Prevent trade in wood products made from illegally harvested timber

5. The 2008 “Lacey” Amendments • Lacey makes it unlawful to: • “Trade” in any plant that is taken possessed, transported, or sold in violation of US law and/or any foreign law that protects plants; • Interstate and Foreign commerce are implicated • “Falsify” or submit falsified documents, accounts or records re: any covered plant; • “Import” certain plant and plant products without an Import Declaration

6. The 2008 “Lacey” Amendments Plain English Prohibitions: • Make sure imports were obtained legally • Make sure shipment documentation/ records are true & accurate • Make sure an import is properly declared

7. Lacey Phase-In Schedule in Effect • All announced “Phases” are now in effect (as of April 1, 2010) • KEY to ensure proper import classification of product under US Harmonized Tariff Schedule (“HTSUS”). Determines: • 1) Whether a Declaration is required and, if so, • 2) Accurate information needed to complete Declaration • HTSUS generally classifies products per “level of processing” • BE AWARE: Same product may be classified under different subheadings depending on state of manufacture: • Subheading 4407 as “sawn wood” or 4408 as a “veneer;” • Subheading 4421 as “finished wood items;” and • Subheading 9201 (“pianos”); 9202 as finished “stringed instrument” • Under Lacey and other US regulations (CITES, etc), HTSUS classification may determine which permits, declarations, etc are required upon import

8. Other Import Declaration Issues • Keep in mind that Declaration requirement is only a small part of Lacey Act • Even if shipment is exempt from Declaration requirement or has been properly declared; if wood was harvested illegally then it may still be in violation of Act • “Due care” re: every import is essential! • NOT Covered under Declaration Requirement • HTS Chapters not specifically listed in Schedule • Plants/plant products used exclusively as packing materials • “Informal” Entries (i.e., most personal shipments; imports valued at less than US $2,500) • FTZ and Warehouse entries; “in-transit” movements; carnet importations • Proper completion of PPQ Form 505 • Don’t Guess! If you are unsure, seek guidance.

9. Distinguish Lacey Act Requirements • Lacey Act Does NOT Regulate: • US FWS “Commercial Wildlife” Permit and Import/ Export Declaration requirements • Endangered Species Act (“ESA”) requirements • Applies to trade within U.S. • If species is listed (e.g., ivory, certain abalone), a permit is required but unlikely to be issued unless product is > 100 yrs. Old • Convention on International Trade in Endangered Species (“CITES”) requirements • Bans trade in certain listed species, e.g., Br. Rosewood • Appendix I, II, and III provide vary degrees of control on trade

10. What’s New Under Lacey? • APHIS Guidance & “Special Use Codes” • Enforcement and Recent “Real World” Case Examples • Evolving Regulations • Recent Comment Period (April 14, 2011) • More changes likely to come re: Declaration requirements

11. Special Use Codes • APHIS issued guidance in Fall 2010 (updated April 2011) re: certain “Special Use Codes” that provide limited exceptions to completion of the Form PPQ 505 • While this “guidance” is in effect, proper use of the Codes on a PPQ 505 that is otherwise in compliance with Act’s requirements fulfills importer’s obligations under Lacey • 3 Main Categories: • “Species Groupings” • “Composite, Recycled, or Reused Plant Materials” • “Other Special Cases”

12. Special Use Codes • By using the Codes, importer is representing “that is not possible through the exercise of due care to determine the genus, species, and/or country of harvest of plant materials contained in the item” • Must “properly” (defined “truthfully, accurately, completely & appropriately”) use Codes in lieu of specific Genus/ Species info • Country of Harvest: Even if a Code may be properly used; if a Country of Harvest is known, it mustbe provided • If Country of Harvest is unknown, each country from which plant material may have been taken must be listed (§ 3372(f)(2)(B)) • If list would include > 10 countries, use Special Use Code “**” (two asterisks)

13. Special Use Codes • Species Groupings: SPF (Spruce Pine Fur) • Use of “shorthand” for common trade groupings of species that stand for a specific list of species • Declaration: Genus (“Special”)/ Species (“SPF”) • Composite, Recycled, or Reused Plant Materials • MDF (Medium Density Fiberboard), Particle Board, Paper/Paperboard, Recycled, Reused, Reclaimed • Declaration: Genus (“Special”)/Species (Depends on type of material) • Other Special Cases • (A) Manufactured Prior to May 22, 2008 • Declaration: Genus (“Special”)/Species (“PreAmendment”) • (B) No Plant Material Present • Declaration: Genus (“Special”)/Species (“None”)

14. Recent Enforcement of Lacey Act • First, a few basics… • Who Enforces Lacey? • US FWS, ICE, CBP, APHIS (the lead agency), USDA OIG, FBI and USFS • Coordinated effort! • Enforcement and Investigation. • US Government will use “facts” obtained from various sources: foreign govts, NGOs, “tips” (whistleblowers/private citizens), Import Declarations (and other entry documentation), Agents at border

15. Lacey Act “Adopts” Foreign LawsFor Products in Trade in the U.S. • Foreign laws can be source of “underlying” violations • Laws that generally “protects plants:” • Theft of plants; • Taking of plants from a park, forest reserve, or other officially protected area; • Taking of plants from an officially designated area; or • Taking of plants without, or contrary to, required authorization • Failure to pay appropriate royalties, taxes, or stumpage fees • Laws governing the export or transshipment of plants. • Underlying foreign law violation does not have to be a criminal violation, nor one actively enforced in foreign country • Underlying violation need not be committed by person charged with violating Act – a 3rd party might have taken product illegally • Underlying foreign law can be “interpreted” by US Courts

16. Penalties Under Lacey Act • Civil Forfeiture – Strict Liability • Strict Liability: US Govt is not required to prove a claimant’s intent to violate the law • Forfeiture possible even if no knowledge of underlying violation (e.g., that timber was harvested illegally) • No “innocent owner defense” • But US Govt must still show that a plant or plant product was imported/received in violation of a State or Foreign law or Reg. • Civil Administrative Penalties • Declaration Requirements: Except for knowing violators, any person who commits: • A marking offense or violates the Declaration Requirement may be assessed: • A civil administrative penalty of $250; and • Forfeiture of plant or plant product at issue

17. Penalties Under Lacey Act • Civil Administrative Penalties (cont) • If defendant actually knew, or in exercise of due care should have known, of illegal nature of plant or wildlife in question; or who knowlingly commits a false labeling offense or knowingly violates the Declaration requirements • Civil penalty up to $10,000 per violation • Penalty amount will depend on nature, circumstances, extent, gravity of prohibited act • Criminal Violations and Penalties • For certain violations, criminal penalties may also be assessed – depending on Defendant’s knowledge of the underlying illegality of product at issue • May be a Misdemeanor or Felony

18. Penalties Under Lacey Act • Criminal Violations and Penalties • Misdemeanors: If, in exercise of due care, personshould have known that plant was illegally taken, possessed, transported or sold (or plant value was < $350): • Penalties of up to $100,000 fine ($200,000 for organizations); and/or • Up to one (1) year imprisonment • Applicable only to “substantive violations” • Felony: If person “knew” or was “generally aware” of illegal nature of plant, fish, or wildlife (although not necessarily specific law violated) requires proof Defendant “knowingly engaged” in illegal trafficking (and plant value is > $350): • Penalties of up to $250,000 fine ($500,000 for organizations); and/or • Up to 5 years imprisonment

19. Recent Lacey Enforcement • U.S. Dept. of Interior v. Three Pallets of Tropical Hardwood & H. Crouch, II (June 2010):US FWS detained a shipment of various species of tropical hardwood from Peru b/c of an 1) improper import declaration, & 2) alleged violations of Peruvian law (operating a business without a permit; using stolen/forged docs) • Declaration violation: Incorrect HTS classification (Wood classified under subheading 4421 and should’ve been 4407 – wood “sawn or chipped lengthwise” • Strict Liability! Broker entered incorrect HTS Code BUT Importer “should have known” • Underlying violation of law: Claimant was “advised” that seller had gone out of business; “Forms used were questionable;” Wood was “probably stolen” • Result: Petition for Remission DENIED • Claimant “did not do all he could within his power to comply with regulations & ensure that shipment [was properly authorized/declared].”

20. Recent Lacey Enforcement: Three Pallets of Tropical Hardwood (con’t) • What more could Claimant Have Done? What “mitigating circumstances” was the US Govt looking for? • Mitigating Circumstances- Govt looks to: • Claimant demonstrated “honest and good faith intent to comply w/ law” • Whether facts point to lack of negligence of moral culpability for failure or mistake involved in non-compliance • Whether non-compliance was “minor” • Whether claimant had “control or ability to prevent” non-compliance • Exercise of “Due Care” – Govt looks to whether claimant: • Requested genus/species information from foreign supplier prior to completing the transaction and preparing paperwork; • Contacted Foreign (Peruvian) government to ensure he was doing business with a legitimate company; • Considered “red flag” re: payment request via money order to individual and not a company; • Confirmed Broker’s classification and/or contacted USDA/APHIS for guidance re: HTS classification

21. Recent Lacey Enforcement • U.S. v. Ebony Wood in Various Forms (initiated August 2010):US civil in rem action for forfeiture of wood materials allegedly “imported or brought into US contrary to law” • No assertion that imported wood violated US law, but that products were illegally removed from foreign country in violation of laws of that country • Supply chain examined closely • No violation of Import Declaration requirements appears cited • Recent cases signal general increase in enforcement of Lacey Act provisions • Cases focus on several enforcement “trends”

22. Lessons Learned • Lacey Act is a Strict Liability Statute • Focus on Violations of Foreign Law • Focus on “Due Care” in Executing Import Declarations; meaning of “due care” • Due Care is Different Depending on Level of Knowledge and Expertise • Evidence of good faith attempt to comply/exercise due care is mitigating circumstance where forfeiture or alleged violation occurs

23. Lessons Learned • Due Care: Meaning and Import of “exercise of Due Care” in complying with Lacey Act requirements • “Due care simply requires that a person facing a particular set of circumstances undertakes certain steps which a reasonable man would take to do his best to insure that is not violating the law.”

24. Lessons Learned • KEY: Standard of Due Care is applied differently to different categories of persons with varying degrees of knowledge and responsibility.” • Eg: Commercial wood importer v. Airline Co. shipping the wood: Knowledge/expertise of commercial importer re: certain wildlife is expected to be greater • Eg: USG in Three Pallets held neither Broker nor Claimant Company had not exercised due care re: incorrect HTS classification: • Broker “specializes in facilitating shipment of imports [&] should be aware of relevant laws and implementation dates of such laws.” • Company “specializes in international shipments should be well-versed in applicable laws that govern transactions… and [amendments to laws].”

25. Common “Red Flags” • Lack of reliable or publicly available information about foreign Supplier • Unusual payment terms or payment requests • Goods significantly below going market rate; “Lower price” for goods without paperwork • Recognition of Supplier/Company from descriptions of past illegal transactions discussed in trade/industry publications • Paperwork facially invalid or incomplete • Lack of familiarity of Supplier with routine industry inquiries or requests for information • Unusual sales methods or practices

26. “Best Practices” and Proactive Measures • Ask Questions! • Request Genus/species information from overseas Suppliers • Request Required paperwork upfront • Beware of deals “too good to be true” • Use Publicly Available Resources (US & Foreign Govt websites): • Confirm applicable plant protection laws in Country of Harvest • Check with Foreign Governments re: source company’s credentials • APHIS website and botanical resources • Recordkeeping: Put it in Writing! • Record efforts to obtain documentation; Supplier correspondence • Maintain records of required Export/Import Permits & Declarations • Written supplier contracts/agreements expressly stating compliance • Implement Internal Compliance Plan/Procedures. • Stay abreast of changes in Guidance/Regulations: Makes good business sense and compliance sense. • Do not confuse declaration requirements with legality issues.

27. What if a Violation Arises? • Remedial Measures. • For potential violations, it is critical to: • Undertake remedial measures, • Review your company’s compliance structure, and • Ensure that issues do not recur. • An organization's response must be swift: • Stop conduct in question and mitigate risks; • Retain counsel; • Preserve all electronic/hard copies of data & documents; and • Conduct a thorough inquiry. • Before you take any action, seek advice of counsel experienced with these U.S. laws.

28. What is NAMM Doing? • Working with industry coalition to identify problem areas and suggest “fixes” • Working with governmental interagency task force • Submission of Comments represent remaining industry issues (April 2011) • Formation of a Wood import/export task force to meet at Summer NAMM, Nashville; email importexport@namm.org to participate

29. Questions? • For further information contact MaryL@namm.org Thank you!