On February 1, 2016, Lumber Liquidators, Inc. (“Lumber Liquidators”) was sentenced to pay over $13 million in criminal fines and penalties, and placed on a scrutinizing five-year term of probation for violating the Lacey Act.  This crime arose from importing hardwood flooring from China made of illegally-sourced timber.  This is the first felony conviction related to the import of illegal timber and the largest ever financial penalty for timber trafficking under the Lacey Act.  This sentence clearly demonstrates the serious consequences of violating the Lacey Act, and provides a number of useful lessons for companies who are regulated generally, as well as those who import materials subject to the Act’s requirements.

I. The Legal & Factual Background

Before distilling the key lessons offered from this important environmental criminal prosecution, we first discuss the basic background of the Lacey Act, the plea agreement, and the sentence imposed.

A. The Lacey Act.

In a nutshell, the Lacey Act prohibits the importation and/or sale of any illegally-harvested wood and wood products in the United States.  For a certain subset of wood products, importers are required to complete a Plant and Plant Product Declaration, also known as an “Import Declaration.”  The Import Declaration requires a description of the timber species, the amount of the timber, and the source of the timber.  The Lacey Act is intended to curb U.S. trade in illegally-sourced wood and wood products by requiring those who buy and sell these products (wherever their position in the supply chain – importer, distributor, or retailers) to ask questions about the source and legal harvest of the of the wood and to avoid transacting in illegally-sourced wood.  Due diligence is a key component of the law.  Under the Lacey Act due care standard, a person or organization may not avoid responsibility by overlooking or being “willfully blind” to indications of a potential problem.

B. The Plea.

On October 22, 2015, Lumber Liquidators pled guilty to importing illegally harvested timber and making false declarations under the Lacey Act related to the timber’s species and country of origin.  From 2011 to 2013, Lumber Liquidators imported wood flooring products manufactured by Chinese suppliers from timber originally harvested in Russia and Myanmar, some of which was illegal.  Forests in regions such as the Russian Far East are known for rampant illegal-logging operations.  Lumber Liquidators was aware of the compliance risks of sourcing materials from these sensitive regions, but the company relied on questionable claims from its suppliers and continued to source timber from suppliers that failed to provide documentation of legal harvest. 

In the plea agreement's statement of facts, the U.S. Department of Justice (“DOJ”) describes in painstaking detail how Lumber Liquidators failed to implement, enforce, and follow its own policies and procedures.  In 2010, Lumber Liquidators developed a compliance manual for the Lacey Act and instituted internal compliance procedures, but the company failed to widely distribute the manual or follow its own policies.  Lumber Liquidators’ procedures were intended to evaluate compliance risks and flag high-risk regions and suppliers.  The company’s policy identified oak from the Russian Far East, in particular, as a red flag.  Nevertheless, the company ignored these warning signs and continued to import timber from this region, even in the absence of documentation of legal harvest from the suppliers.  According to the plea agreement, Lumber Liquidators did not take the necessary steps, as outlined in its own procedures, to ensure that its declarations under the Lacey Act were truthful before submitting them. 

In one instance, Lumber Liquidators purchased and imported hardwood flooring from suppliers that claimed the product was made of Mongolian oak harvested in Germany.  Lumber Liquidators employees later discovered that Mongolian oak is not actually found in Germany, and is often sourced from the Russian Far East. Despite this, the company continued to knowingly rely on false assertions from its supplier and import questionable timber products. 

C. The Punishment.

Lumber Liquidators was sentenced to $13.15 million in fines and penalties for these violations, which included: $7.8 million in criminal fines; $969,175 in criminal forfeiture; $3.15 million in civil forfeitures; and $1.23 million in community service payments to conservation organizations.  Lumber Liquidators was also sentenced to serve a five year term of probation, and must develop and implement an acceptable environmental compliance plan within three months, or cease its importation of hardwood flooring until the plan has been approved.  The company must also fund three independent environmental audits over the next five years to verify its conformance with the environmental compliance plan and the Lacey Act.       

II. Lessons Learned From the Lumber Liquidators Case

A. “You Are Judged By the Company You Keep.”  Don’t Rely on Third Parties – Do Your Due Diligence Correctly.

As one of the largest financial penalties ever imposed under the Lacey Act, this sentence highlights the significant risk of sourcing materials from questionable suppliers operating in high-risk regions of the world.  This verdict also demonstrates the importance of exercising due diligence in the global supply chain.  Companies cannot ignore warning signs and blindly rely on claims from suppliers.  You should take affirmative steps to ensure that not only your company, but your company’s suppliers, are in compliance with the law. 

B. “Do What You Say.”  Follow Your Own Internal Policies and Respond to Red Flags.

Companies must take steps to ensure that employees adhere to internal compliance procedures and policies.  Even though Lumber Liquidators developed and maintained a robust set of policies and procedures to comply with the Lacey Act, it failed to properly monitor and failed to act when it discovered irregularities and concerns (i.e., “red flags”).  In the end, DOJ used Lumber Liquidators’ own internal policies and procedures against the company, leading to the multi-million dollar verdict.

C. “Beware of False Statements.”

Apart from the underlying substantive crimes, the United States also charged the company with making false statements on the Lacey Act declarations.  According to the Government, these statements helped to conceal or hide the true species and source of the imported timber.  As with any environmental investigation, when false statements exist, they immediately transform the case into a criminal matter – which requires proof of some “knowledge” or “intent.”  In short, these false statements are powerful tools for the government investigator since they:  (1) help to prove intent; (2) make the case more difficult to defend; and (3) increase the punishment imposed.