Consequences of Non-Compliance – Lacey Act Enforcement

One particular area where U.S. companies have failed to comply with stringent import laws, knowingly or unknowingly, involves wildlife and natural products. The Lacey Act, 16 USC 3371, is one of the primary federal statutes employed to combat the illicit trafficking of products within these categories. Initially enacted to protect animal species, the Act was amended in 2008 to more broadly include plant species. Specifically, the Act now prohibits the U.S. importation of illegally-harvested timber, meaning it is unlawful to trade in any plant that is taken, possessed, transported or sold in violation of the laws of any U.S. state, Indian Tribe, or any foreign law that protects plants. The Lacey Act does not impose U.S. law on other countries. “Illegally sourced” is defined by the content of a sovereign nation’s own laws. In addition, it is unlawful to falsify or submit falsified documents, accounts or records of any plant covered by the Lacey Act.

Violations of the Lacey Act carry serious penalties for companies and individuals. In addition to civil fines and forfeiture of goods, criminal penalties may also attach to the companies and individuals found to have knowingly violated the Act. A misdemeanor violation of the Lacey Act is punishable by up to one year in prison and a fine of $200,000.00 for companies and $100,000.00 for an individual. Felony culpability is punishable by up to five years in prison and a $500,000.00 fine per violation for a company and $250,000.00 for an individual.

Two Lacey Act enforcement agreements that demonstrate the severity of violations and highlight the importance of companies having compliance infrastructure that properly functions to avoid such violations are the Gibson Guitar Corporation Settlement and the Lumber Liquidators Settlement.

Gibson Guitar Corporation (“Gibson”) came under federal scrutiny not once but twice, first in 2009 and again in 2011 for violations of the Lacey Act. Gibson is headquartered in Nashville, Tennessee and manufactures a variety of musical instruments, most notably guitars. The violations involved parts of the guitar called fretboards. The imports at issue were orders of Madagascar ebony fingerboards (used to make fretboards) from a supplier called T.N. GMBH (“TN”), located in Hamburg, Germany. Gibson failed to verify that TN was sourcing its wood legally from Madagascar, and it turned out that it was illegally sourced. In addition, Gibson knowingly ignored red flags that the wood TN was providing was illegally obtained. For example, TN’s failed to provide documentation to Gibson evidencing that the ebony sourced from Madagascar was harvested lawfully. Madagascar law states that all ebony harvested after a specific date was illegal unless it was considered “finished wood” or had received “exceptional authority” from the government.

In addition, prior to purchasing the wood, Gibson had sent a specialist to Madagascar to assess the potential for supporting sustainable forestry. During his investigation, the specialist obtained the Madagascar Order regarding the particularities about finished and unfinished wood and in his report highlighted that this would be an issue for Gibson. Despite this knowledge, Gibson continued to purchase wood from TN.

These violations resulted in the finding of a Lacey Act misdemeanor violation with a fine of $300,000.00 plus a $50,000.00 community service payment to the National Fish and Wildlife Foundation. In addition to the monetary fines, Gibson also was required to strengthen its compliance program.

Gibson established a new compliance program that clearly stated the objectives of maintaining compliance with relevant laws and in particular the Lacey Act. The new program provided the history and applicable penalties for the Lacey Act, listed the due care standard that it would apply to its processes to assure compliance with applicable law, and then listed the internal checks and balances that would be implemented to demonstrate the satisfaction of this duty. The compliance program also stressed Gibson’s commitment to developing policies and procedures for the procurement of wood and for verifying that all necessary foreign licenses and/or certifications are obtained prior to approval of a purchase. The compliance program listed resources to obtain current applicable law and stated a commitment to an annual audit of its wood purchasing processes, a commitment to training its employees, and plans for retaining adequate records.

The compliance program created by Gibson emphasizes the necessary steps required under the Lacey Act to specifically detail the unique company processes and procedures created to effectuate compliance and satisfy reasonable care in conducting imports.

The second settlement involved Lumber Liquidators (“LL”). LL is a Virginia-based flooring retailer that was sentenced to pay a total of $13.15 million for five counts of Lacey Act violations. The fines included 7.8 million in criminal fines, $969,175.00 in criminal forfeitures, $1.23 million in community service payments, and 3.15 million in civil forfeitures. They were also sentenced to a five-year probationary term during which they were to create an Environmental Compliance Plan and engage an outside accounting and environmental consulting firm. The $13.5 million dollar penalty constitutes the largest financial penalty ever for illegal trafficking in timber under the Lacey Act.

The retailer pleaded guilty to one felony count of importing goods through false statements and four misdemeanor violations of the Lacey Act. The charges stated that Lumber Liquidators was using timber that was illegally logged in Far East Russia and had submitted false Lacey Act declarations that obfuscated the true species and the source of the timber. Although, LL had a compliance program in place that identified this activity, it ignored the red flags and continued to purchase the timber.

LL imports wood flooring from China and distributes it throughout the U.S. However, the timber used to manufacture the flooring in China was harvested from different countries, two of which were Far East Russia and Myanmar. LL had a compliance program at the time of the violations and, in fact, employees were aware that some of the wood was harvested from Far East Russia and posed a significant compliance risk. In addition, LL had also been conducting employee training discussing the compliance risk of Far East Russia. But despite this information, LL continued to import wood coming from Far East Russia and Myanmar. Thus, although the compliance program was in place, LL failed to uphold the policies in its manual. In addition, LL also submitted inaccurate information on Lacey Act documentation required upon importation.

What these examples illustrate is that the enforcement of U.S. Customs laws, and in particular the Lacey Act, has significant monetary and functional consequences. There is a strict duty to comply imposed on the party conducting the international trade and the responsibility to develop processes to comply with U.S. Customs laws is imposed on both the business and individual level. The penalties go far beyond mere monetary fines, and include forfeitures, corporate governance and operational restrictions.

Furthermore, having a compliance program alone does not protect against violations or mitigate penalties. Compliance programs will be judged on their actual application to relevant internal processes, the effectiveness of their implementation, and their actual capacity to successfully identify and remedy trade violations. Ultimately, the law imposes a corporate responsibility to educate employees and management who oversee trade functions and instruct them on how to effectively remedy identified violations.

What does this mean for the US business? Investing resources into developing a compliance program and implementation is an upfront cost that is absolutely necessary and indirectly required to avoid the significant consequences of violating US Customs laws.

Amber M. Johns

Limitations of 4th Amendment Border Exceptions: United States v. Kolsuz

The Federal Government has consistently maintained, and been upheld in, the assertion that the border search exception allows it to conduct searches and seizures at international borders without a wrrant or probable cause. While this assertion is generally accepted, the government's stance that electronic devices, such as computers and smartphones, also fall within this exception has been a point of contention. However, a recent 4th Circuit Court of Appeals case, United States v. Kolsuz, is being hailed as a significant victory by civil rights organizations such as the Electronic Frontier Foundation and the American Civil Liberties Union.

    United States v. Kolsuz, deals with the case of Hamza Kolsuz, a Turkish national charged with three counts of violating the Arms Export Control Act. According to court filings, Kolsuz had attempted to smuggle prohibited firearms parts from the U.S. to Turkey on three separate occasions. On the third and most recent attempt, Customs officials were prepared and intercepted Kolsuz at Washington Dulles International Airport. Importantly, after his arrest, Customs agents conducted an immediate manual search of his smartphone and an additional month-long, off-site forensic analysis of the phone. Kolsuz's appeal concerns the suppression of this forensic analysis, which he maintains does not fall under the border search exception. 

    In many ways, this was a case that many likely saw coming. Case law concerning the 4th Amendment and electronic devices has been frequent and in the public eye. The notion that electronic devices may not fall under the border exception first came to the forefront in 2013. United States v. Cotterman, a 9th Circuit decision, held that manual searches of computers at the border fell under the exception, but forensic searches required reasonable suspicion. Prior to this, the governing decision was United States v. Ickes which held that computers were ordinary searches. Then, in 2014, the Supreme Court ruled in Riley v. California. Riley held that a warrant is required to search a cell phone following an arrest. The Supreme Court essentially established differential treatment between digital and physical items due to the sheer amount and sensitivity of personal information that can be stored on cell phones.

    These two cases, among others, caused many to question if Riley might influence Cotterman and also apply to the border. More recently, the Fifth and Eleventh Circuits heard cases on forensic searches but failed to reach a substantive conclusion due to the scope of their cases.

    The Kolsuz decision, citing Riley, affirms that at least reasonable suspicion is required for forensic searches of cell phones seized at the border. Taking Riley into account, the 4th Circuit, using language similar to United States v. Flores-Montano, found that forensic searches of phones are clearly non-routine border searches, but did not challenge Ickes due to the scope of the appeal. Moreover, the court left open the possibility that a standard even higher than reasonable suspicion could be required, but that which standard made no difference to the Kolsuz case. In response to Kolsuz, the Department of Homeland Security now internally requires reasonable suspicion for forensic searches of electronic devices.

    While the outcome of Kolsuz may not have been positive for Kolsuz himself, who was convicted of his export violations, it is being hailed by many as a win. Moreover, it is likely just one of many upcoming cases concerning the Fourth Amendment's application to digital searches as the ACLU and EFF, among other organizations, push ahead with their own cases.

DHS/CBP Amends Customs Regulations to Include Civil Monetary Penalty Adjustments

On December 8, 2017, U.S. Customs and Border Protection (CBP) amended its regulations to adjust for inflation the amounts that CBP can assess as civil monetary penalties for the following three violations:

  • The penalty for transporting passengers between coastwise points in the United States by a non-coastwise qualified vessel has been increased from $750 to $762.
  • The penalty for towing a vessel between coastwise points in the United States by a non-coastwise qualified vessel has been increased from $875-$2,750 plus $150 per ton to a new amount of $889-$2,795 plus $152 per ton.
  • The penalty for dealing in or using an empty stamped imported liquor container after it has already been used once has been increased from $500 to $508. 

These changes are being made in accordance with the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 which was enacted on November 2, 2015. In addition, a number of other CBP civil penalty amounts were adjusted pursuant to this 2015 Act in previously published documents published in the Federal Register on July 1, 2016, and January 27, 2017; however, the adjustments for these three civil penalties were omitted from those documents inadvertently and so are being published now.   The rule went into effect on December 8, 2017.  The adjusted penalty amounts will be applicable for penalties assessed after December 8, 2017 if the associated violations occurred after November 2, 2015.

Suzanne DeCuir, Global Trade Expertise

DOC Announces New Civil Monetary Penalties Adjusted for Inflation

The Department of Commerce has announced new civil monetary penalty amounts adjusted for inflation that may be assessed for the following regulatory violations after January 15, 2017, including in instances when the associated violation took place before that date. 

  • failure to file export reports or information required by 13 USC 304 within prescribed period – maximum for each day’s delinquency has been increased from $1,333 to $1,360, maximum per violation has been increased from $13,333 to $13,605
  • other unlawful export information activities under 13 USC 305 – the maximum has been increased from $13,333 to $13,605
  • failure to provide the information required under 22 USC Chapter 46 (international investment and trade in services survey) – minimum increased from $4,527 to $4,619, maximum increased from $45,268 to $46,192
  • foreign-trade zone violations (19 USC 81s) –  maximum increased from $2,795 to $2,852; false or fraudulent claims under the Program Fraud Civil Remedies Act (31 USC 3802(a)(1) and (2)) – maximum increased from $10,957 to $11,181
  • prohibited acts relating to inspections or recordkeeping violations under the Chemical Weapons Convention Implementation Act (22 USC 6761(a)(1)(A) and (B)) – maximum increased from $36,849 to $37,601
  • violations of the International Emergency Economic Powers Act (50 USC 1705(b)) – maximum increased from $289,238 to $295,141

Several other adjustments were also made pertaining to the use of false records to pay or transmit money or property to the federal government (31 USC 3729(a)(1)(G)) and to Fastener Quality Act violations (15 USC 5408(b)(1)).  To see the full list of adjustments, see the Federal Register.

Suzanne DeCuir, Global Trade Expertise

Airbus Faces Probe into Compliance Irregularities

It has been reported that Airbus of Toulouse, France, faces legal difficulties regarding its failure to notify U.S. authorities about the use of outside sales agents to broker defense equipment and services deals; this presents a compliance lapse and could lead to financial penalties and perhaps a criminal investigation.

According to The Guardian of London, the problems stem from the use of so-called “commercial agents” who act as intermediaries in “difficult” territories where they sometimes assist large companies in securing contracts. In some cases these intermediaries act as legitimate consultants on technical matters, while in other cases they are really nothing more than individuals who know whom to bribe for a government contract. This kind of action is contrary to Part 130 of U.S. International Traffic in Arms Regulations (ITAR) concerning political contributions, fees, and commissions involved in the export of military equipment.

Airbus’ Chief Financial Officer Harald Wilhelm briefed reporters on October 31 regarding these legal issues. He would not speculate on the company’s potential financial or criminal exposure. Both the U.S. State Department and the Justice Department are looking into the matter.

Failure to comply with regulations can lead to large penalties. Airbus engine manufacturer, Rolls-Royce Holdings PLC , recently agreed to settle allegations of corruption to the tune of an $800 million dollar penalty. Because Rolls-Royce agreed to the settlement, the company avoided prosecution.

The compliance lapses at Airbus came to light during an internal review and were first reported at the end of 2016. After discovering irregularities in certain foreign transactions, Airbus came forward to report the problems it had found. The company’s hope is that by self-reporting, the penalties might be less punitive.

Suzanne DeCuir, Global Trade Expertise

U.S. Based Paper Company Settles with OFAC on Sanctions Violations

White Birch Investment, LLC, a paper company headquartered in Greenwich, CT, recently reached an agreement settling a case brought by the Office of Foreign Asset Control (OFAC). White Birch’s Canadian subsidiary was facing possible civil liability for three alleged violations of the Sudanese Sanctions Regulations, 31 C.F.R. part 538 (SSR). White Birch USA was accused of facilitating the sale and shipment of 543 metric tons of paper of Canadian origin valued at approximately $354,000. According to OFAC, White Birch USA and its Canadian subsidiary were “actively involved in discussing, arranging, and executing the export transactions to Sudan.” OFAC concluded that White Birch USA did not voluntarily self-disclose these apparent violations; however, it was determined that these violations constituted a non-egregious case. These transactions date back to between April and December of 2013.

This settlement underscores how critical it is that U.S. companies put processes in place to effectively wall off their U.S. operations and staff interactions to prevent violation of OFAC’s regulations. This is especially important for U.S. companies with overseas affiliates who may be transacting business involving sanctioned territories; such territories currently include Iran, North Korea, Cuba, Syrian and the Crimea area of Ukraine.

Suzanne DeCuir, Global Trade Expertise, October 23, 2017

ZTE Agrees to $892 Million Fine and Plead Guilty for Violating US Sanctions

ZTE, a Chinese telecommunications giant, reached a settlement with the U.S. Justice Department, which comes at the end of a 5-year investigation into a series of shipments ZTE has made to Iran in violation of US sanctions. Per the settlement, ZTE will plead guilty and pay the DOJ $430 million, with a fine of $287 million and a criminal forfeiture of $143.5 million. The total dollar figure may ultimately rise to as much as 1.19 billion depending upon whether or not the firm violates the terms of the settlement agreement with BIS (US Department of Commerce’s Bureau of Industry and Security).

According to the Justice Department, ZTE obtained components manufactured in the U.S. that are on the Department of Commerce’s Commerce Control List, incorporated those items into its own equipment, and subsequently shipped the finished products to customers in Iran. In addition, the Justice Department charges that the company continued to ship these items while the investigation was ongoing. Apparently the items were used to fulfill contract projects ZTE had in Iran to install cellular and landline network infrastructure. (The Commerce Department also reports that ZTE shipped controlled items to North Korea as well.)

U.S. Attorney John R. Parker for the Northern District of Texas stated that, “ZTE Corporation then went to great lengths to devise elaborate, corporate-wide schemes to hide its illegal conduct, including lying to its own lawyers.” As much as $32 million dollar’s worth of equipment was shipped to Iran between January 2010 and January 2016; the company was also able to obtain hundreds of millions of dollars in contracts with Iran, the Commerce Department said in a recent press release.

The plea agreement still requires court approval, but if approved, it would subject ZTE to a probationary period of three years during which the firm would be under the eye of an independent compliance monitor as well as a seven-year suspended denial of export privileges, which could be activated if there are further violations. The Justice Department reported that the criminal fine in this case is the largest ever levied in an IEEPA (International Emergency Economic Powers Act) prosecution.

Google Ordered to Turn Over Foreign Emails

Reuters reported that on February 3, 2017, Federal Magistrate Judge Thomas J. Rueter in Philadelphia handed down an opinion ordering Google to comply with a search warrant to provide emails stored outside the United States. Judge Rueter’s decision is at odds with the U.S. Court of Appeals for the 2nd Circuit’s Microsoft Ireland Warrant case which was recently turned down for a rehearing.

According to Judge Rueter’s decision, electronically transferring data from a server in a foreign country to Google’s data center in California did not constitute a “seizure” because there was no meaningful interference with the account holder’s possessory interest in the user data.

The case pertains to two Stored Communication Act (SCA) warrants served on Google regarding the contents of emails. Google did submit emails that it knows were stored in the United States, but refused to provide emails that could be stored outside the country. Apparently, Google routinely breaks up emails and stores them within a network of servers outside the U.S. The company maintains it does not always know where certain emails might be located, and so declined to provide them under the Second Circuit’s Microsoft case.

Back in July of 2016, advocates such as the ACLU and the U.S. Chamber of Commerce had been pleased with the ruling in the Microsoft case (which said the company could not be forced to turn over documents stored on a server in Dublin, Ireland.) Now, eight months later, Rueter’s ruling orders Google to comply with the search warrant it received.

Many technology companies now consider the Stored Communication Act (SCA), a federal law dating to 1986, to be outdated.

Attorney General Sally Q. Yates Discusses New DOJ Individual Accountability Website

On November 30, 2016, Attorney General Sally Q. Yates spoke at the Annual International Conference on Foreign Corrupt Practices Act.  In her remarks, she clarified the goals of the Justice Department in holding individuals and corporations accountable for their actions.

During her address, she discussed the so-called Yates Memo of September 2015 and reiterated the fact that it was never the intention of the Justice Department to merely increase the number of prosecutions each year by some arbitrary percentage.  Rather, Yates explained, “our goal was to develop and institutionalize mechanisms to ensure that, across the department, we consistently investigate and prosecute corporate cases as effectively as possible.”  To this end, she outlined three areas of focus:  1) corporations will only receive credit for cooperating if they willingly provide information regarding the individuals who have made the decision to knowingly violate the law; 2) department lawyers will pursue civil penalties as well as criminal penalties against wrongdoers, whether or not these individuals have the means to pay penalties; and 3) the Justice Department is going to treat companies who voluntarily self-disclose differently from those companies who only begin cooperating once their wrongdoing has been discovered by the Justice Department.

She acknowledged that,until recently, companies have lacked incentive to self-disclose because of the perception, which Yates admitted was based somewhat in fact, that there was little to be gained by self-disclosing.  Now, however, due to changes made last year to the Filip Factors, the question of whether self-disclosure occurred will make a key difference in how companies are treated.

Yates also announced the creation of a new website pertaining to these issues at https://www.justice.gov/dag/individual-accountability.

A full transcript of Yates’ remarks can be found here:  https://www.justice.gov/opa/speech/deputy-attorney-general-sally-q-yates-delivers-remarks-33rd-annual-international

 

Suzanne DeCuir, Global Trade Expertise

December 16, 2016

DEVELOPMENTS IN COMPLIANCE ENFORCEMENT

On August 15, 2016, the GAO (US Government Accountability Office) released a report that was critical of CBP’s handling of antidumping and countervailing duty orders, detailing the failure of CBP to collect roughly 2.3 billion in duties between 2001 and 2014.  In the report, the GAO stated the CBP “missed opportunities to identify and mitigate nonpayment risk.”  The trade community expects to see enforcement efforts increase in light of the fact that this report has a high profile and was delivered to the Senate Finance Committee.

Also released recently were CBP’s interim regulations, called “Investigation of Claims of Evasion of Antidumping and Countervailing Duties.”  These regulations took effect on Monday, August 22 and outline the process for CBP’s investigation of claims of AD/CVD order evasion. The new regulations were mandated by section 421 of the Trade Facilitation and Trade Enforcement Act of 2015 which became law earlier in 2016.  The current e-allegation system will continue to be in place, but the new system is designed to have advantages over that system; the procedures laid out include detailed steps for initiating, carrying out, and completing investigations.  This comprehensive process for investigating can be used by other government agencies as well as private parties.

Chinese Pharmaceutical Company Agrees to $12.8 Million Fine

According to the U.S. Securities and Exchange Commission (SEC), this February, SciClone Pharmaceuticals Inc. agreed to pay $12.8 million to settle the investigation into potential violations of the Foreign Corrupt Practices Act. Allegations stretch back to at least 2007, and include multiple instances of bribery in exchange for sales made to Chinese clients. Under the terms of the agreement, SciClone does not admit or deny any wrongdoing.

The details included in the SEC’s press release of February 4, 2016 point to numerous instances of SciClone’s offering lavish gifts, trips, and entertainment and then booking such expenses as legitimate business dealings. For instance, in April of 2010, SPIL (a wholly owned subsidiary of SciClone) sponsored Chinese health care professionals to attend a seminar in Japan pertaining to its principal drug, Zadaxin. Only half a day appeared to be devoted to educational activities; the rest of the 6-day trip involved visiting Mt. Fuji and other tourist locations. The SEC detailed numerous instances of travel and outings hosted by SPIL and designed to lure state health care employees to purchase the company’s pharmaceuticals and devices.

Included in the terms of the agreement are provisions that SciClone make a number of changes to improve its internal accounting controls and prevent the recurrence of any similar violations. SciClone has agreed to hire a compliance officer and create an internal audit department and compliance department; undertake a comprehensive review of the policies and procedures pertaining to employee travel; reduce the number of third party suppliers who provide travel and event planning services, and provide anti- corruption training to its own employees as well as to vendors.

SciClone is best known for its Hepatitis B treatment Zadaxin; its shares rose 16% to $9.47 following the news of the settlement agreement.

Suzanne DeCuir, Global Trade Expertise

BNP Paribas Sentencedwith $8.8 Billion Penalty for Conspiring to Violate IEEPA and TWEA

    On May 1, 2015, the world’s fourth largest bank, BNP Paribas S.A. (BNPP) was sentenced to a five-year probation, ordered to forfeit over $8.8 billion to the United States, and pay a $1.4 million fine for conspiring to violate the International Emergency Economic Powers Act (IEEPA) and the Trading With the Enemies Act (TWEA). BNPP is a global financial institution headquartered in Paris that knowingly processed billions of dollars in transactions through the United States financial system on behalf of foreign sanctioned entities subject to U.S. economic sanctions.  The sentencing, imposed by Judge Lorna G. Schofield of the Southern District of New York,  constitutes the first time a financial institution has ever been convicted and sentenced for violating U.S. economic sanctions. The combined forfeiture and penalty resulted in the largest financial penalty ever imposed in a criminal case.

    In its guilty plea on July 9, 2014, BNPP admitted to knowingly and willfully moving over $8.8 billion through the U.S. financial system on behalf of Sudanese, Iranian, and Cuban sanctioned entities between 2004 and 2012. Between July 2006 and June 2007, BNPP processed $6.4 billion of the $8.8 billion through the United States on behalf of Sudanese sanctioned entities, which are subject to U.S. embargo because of the Sudanese government’s role in facilitating terrorism and committing human rights abuses. 

    BNPP admitted to processing $1.74 billion on behalf of Cuban entities, even after it was clear that completing such transactions was illegal. Similarly, BNPP assisted Iranian sanctioned entities in transactions totaling more that $650 million, even after completing an internal investigation into sanctions compliance and pledging to cooperate with the government. 

    All U.S. government departments involved stressed the importance of this case and indicated that such action will be subject to similar consequences. Assistant Attorney General Caldwell stated that the “sentence demonstrates that financial institutions will be punished severely but appropriately for violating sanctions laws and risking our national security interests.” Chief Weber added that “the ability of IRS-CI and our partners to expose blatant violations of U.S. embargos and sanctions has changed the way financial matters are handled worldwide. We will continue to use our financial expertise to uncover these types of violations, as well as methodical and deliberate actions to conceal prohibited transactions from U.S. regulators and law enforcement.”

    Additionally, BNPP pleaded guilty in New York Supreme Court to falsifying business records and conspiring to falsify business records. As a result, BNPP agreed to terminate thirteen executives, including the Chief Operating Officer, suspend U.S. dollar clearing operations through its New York Branch and other affiliates for one year for business lines on which the misconduct centered, and extend for two years a monitorship put in place in 2013.

Aaron Ambrite, Extern, Global Trade Expertise