In October 2015, Department of Justice published conviction and penalty information of Lumber Liquidators Inc.’ criminal activities (also available here). The fine is $13,150,000. According to February 2, 2016 Google Finance report, (holding) company’s market cap is about $354,470,000. This means that Lumber Liquidators Inc.’s criminal activities cost company 3.7 percent of its market cap (attorneys’ fees not included). According to DOJ, it is “the largest financial penalty ever under the Lacey Act.” Now that the Lacey Act criminal precedent is set to cost 3.7% of the corporate market cap, it is a good reason to revisit Lacey Act itself, especially since its has been over four years since LawCustoms published on the topic.
In a nutshell, Lacey Act makes it unlawful to import, export, sell, acquire, or purchase fish, wildlife or plants that are taken, possessed, transported, or sold: 1) in violation of U.S. or Indian law, or 2) in interstate or foreign commerce involving any fish, wildlife, or plants taken possessed or sold in violation of State or foreign law.
Lacey Act requires importer of to submit a declaration – PPQ-505 – stating the description of the imported product. The declaration is a “due diligence” document, which if intentionally made falsely, can subject one to 18 U.S.C. § 542 liability.
In the case of Lumber Liquidators Inc., the company imported wood products through its Shanghai office in China. Id. According to the government, Lumber Liquidators Inc. purchased wood flooring products made from oak harvested in Russia, while knowing the wide-spread illegal oak harvesting activity, where illegally harvested Russian oak is brought for further processing to China. Interestingly, Lumber Liquidators Inc. had a compliance program and the manual outlining “best practices” under Lacey Act. Id. at 6. But, the manual was not widely implemented or enforced. More interestingly, Lacey Act declaration “stated that the flooring consisted of Mongolian oak harvested in Germany.” “In reality, Mongolian oak does not occur in Germany, but is the only type of oak harvested in Far East Russia.” Id. at 8. Government demonstrated that Lumber Liquidators Inc. knew that Mongolian oak does not occur in Germany stating “[i]nformation regarding the distribution of Mongolian oak is readily available on numerous public websites, including the websites provided in LL’s [Lumber Liquidators Inc.] 2010 Manual, which all showed that Mongolian oak does not occur in Germany.” Id. (emphasis added). Further, internal company communication (emails) documented impossibility of Mongolian oak being from Germany. Id. at 9. In addition to Mongolian oak, Lumber Liquidators Inc. declared some shipments to be Welsh oak, which also grows in Europe. Id. at 9. Further, declared import quantities were 800% of the “allowable harvest under the concession permit.” Id. at 12.
While Lumber Liquidators Inc. admits guilt for 18 U.S.C. § 542, the company “did not stipulate that it took any illegal conduct with deliberate or willful intent to violate the law.” Id. at fn. 2. However, the lesson here is not stipulation of willfulness, but a forward looking conduct for other importers. Based on Lumber Liquidators Inc. court adventures, it is safe to outline the following recommendations:
- Maintain documentation showing that legal harvest took place;
- Maintain documentation of harvest geographic location;
- Maintain documentation showing chain-of-custody;
- Make certain that the product of origin corresponds to its geographic locale;
- Ensure that permitted quantities correspond (do not exceed) to imported quantities.
In closing, it is worthy to mention that 18 U.S.C. § 542 carries a two year sentence. Recent DOJ’s memorandum – Individual Accountability for Corporate Wrongdoing – creates a new policy for government prosecutors to pierce a corporate veil and “identify culpable individuals at all levels.” DOJ memorandum came just before the Lumber Liquidators Inc. plea agreement. If DOJ follows through and goes after real people, stakes will become higher.