Lacey Act ensnares Gibson Guitar Corp.

Lacey Act ensnares Gibson Guitar Corp.    Companies engaged in international trade often feel they are adhering to customs rules if their intentions are good, but a recent case involving Gibson Guitars underscores the importance of having strong internal controls over compliance activities.
   On Aug. 24, agents from the U.S. Fish and Wildlife Service and Department of Homeland Security raided Gibson's executive headquarters, as well as two factories in Nashville and Memphis, Tenn., where they confiscated several pallets of wood, guitars and electronic files, according to the company and news reports.
   The investigation centers on company imports of partially finished ebony and rosewood guitar fingerboards from an Indian supplier. The fingerboard is the thin, long strip of wood that is laminated to the neck of the guitar and fitted with frets.
   Ebony and rosewood are endangered trees.
   It took almost a week for Gibson to get back to full operations. The one-day shutdown and the materials taken cost more than $1 million, according to Henry Juszkiewicz, Gibson's chairman and chief executive officer.

Juszkiewicz

   At issue is whether the company violated the Lacey Act, an anti-trafficking statute that prohibits commerce in illegally obtained wildlife and plants. Congress amended the law in 2008 in an effort to stem the flow of goods made from illegally harvested wood and document the foreign sources of wood-based products to help with compliance and conservation activities. It is also intended to level the playing field for U.S. producers so they aren't undersold by suppliers of illegal wood.
   Under the law, importers are prohibited from buying or selling of wood or wood-based products in violation of national forestry laws anywhere in the world, and they must electronically submit an import declaration listing the scientific name of the plant in the product, quantity, value and country of origin.
   An affidavit filed by the Fish and Wildlife Service to obtain the search warrant alleges Gibson falsely labeled the wood import to make it sound legal and omitted the company's name as the recipient. The sawn wood in question was exported from India by Atheena Exports under an incorrect tariff code (HS 9209), allegedly to avoid the Indian government's prohibition on export of sawn wood products (HS 4407), and was declared upon import as finished veneer (HS 4408). According to the affidavit, discrepancies among the paperwork accompanying 11 shipments over two years suggest the recipients knew they were purchasing sawn wood.
   The most recent shipment, with 1,250 pieces of ebony wood, arrived in Dallas June 27 via Germany on American Airlines and was detained by Customs and Border Protection officers for suspected violations of the Lacey Act and referred to Fish and Wildlife, according to the affidavit. The importer was Luthier Mercantile International, a Windsor, Calif.-based wood supplier, which told investigators the ultimate consignee was Gibson. The customs entry listed Luthier as the end user.
   'Gibson is innocent and will fight to protect its rights. Gibson has complied with foreign laws and believes it is innocent of any wrongdoing. We will fight aggressively to prove our innocence,' Juszkiewicz said in a statement on the company's Web site.
   The statement contends the Justice Department has misinterpreted Indian law, that Indian officials did not consent to the enforcement action, and that if wood from the same tree was finished by Indian workers the material would be legal.
   Indian law requires that all finishing work on ebony and rosewood be done in India before they are exported in order to add value to diminishing natural resources.
   Juszkiewicz has mounted an aggressive media campaign to discredit the government's position, saying the company has been sourcing fingerboard wood for 17 years and that it is being bullied by the Justice Department.
   'The issue here is not about whether this wood is legally logged. This is not about conservation. This is not about the environment. This is specifically about a law in India that requires domestic labor content that we (the United States) are enforcing,' Juszkiewicz said in a press conference outside the Gibson USA factory in Nashville on Aug. 25.
   The executive disputed the government's interpretation of the Indian law in a radio interview, saying he has affidavits from government officials that it is legal to export fingerboard blanks.
   He told the Wall Street Journal that a customs broker probably made a mistake in labeling the goods. According to the affidavit the broker was a Memphis company called V Alexander & Co. Inc.
   Gibson has been warned that any guitar with infringing materials that it sells and transports will be considered a separate violation of the Lacey Act.
   'I've instructed our staff to continue building the product and I'm taking personal responsibility for that action,' Juszkiewicz said.
   It is the second time in two years that the Fish and Wildlife Service has targeted Gibson for investigation. In November 2009, more than a dozen Fish and Wildlife agents raided the Nashville factory in search of illegally harvested ebony and rosewood from Madagascar, marking the first major enforcement action of the 2008 Lacey Act.
   Gibson claims that most of the wood it procures is certified by the Forest Stewardship Council, an international organization of timber users, traders and environmental groups that sets standards for forest management. It offers voluntary certification, through accredited third parties, that wood products are made from responsibly harvested and verified sources.
   The wood that was confiscated is considered 'controlled wood' by the Forest Stewardship Council. Controlled wood refers to wood from small areas which do not meet all the requirements for certification for reasons beyond the control of the forest manager, but which can be exempted so that the entire forest area can be certified.
   'Gibson has a long history of supporting sustainable and responsible sources of wood and has worked diligently with entities such as the Rainforest Alliance and Greenpeace to secure FSC-certified supplies,' the company said in a statement.
   After the 2009 raid it said it takes the subject of responsible wood sourcing 'very seriously' and that it was working to increase the amount of wood purchased from certified sources.
   The guitar maker has tried to make sure, to the extent possible, that it is dealing with reputable suppliers, Juszkiewicz said.
   A statement to The Tennessean newspaper from the Rainforest Alliance said Gibson has made a good effort to locate and import legal woods since the earlier raid, but added the effort 'also must be accompanied by a clear commitment to eliminating any volume, no matter how small, of illegal wood that may contaminate its supply chain.'
   No charges have been filed so far in either case, although internal e-mails and other information released in court documents related to the first case indicate that Gibson decided to buy illegal wood knowing the risks involved. Federal prosecutors have filed motions stating that Gibson was not allowed to obtain the wood from Madagascar because it was unfinished wood and the in-country supplier was not authorized to sell it.
   Gibson sourced the ebony in the form of blank strips from a German company, which obtained it from a supplier in Madagascar. The country prohibits the harvest of ebony wood as well as the exportation of unfinished ebony, according to the current civil case in the District Court of Tennessee, where Gibson has sued for return of its confiscated materials.
   Gibson maintains the wood seized in 2009 was legally exported and that it violated no law in Madagascar.
   'We feel totally abused. We believe the arrogance of federal power is impacting me personally, our company and the employees here in Tennessee,' Juszkiewicz told reporters at the press briefing, a video of which is posted on the Gibson Web site. He said Gibson feels singled out because all guitar manufacturers use Indian ebony and rosewood for their products. The company also hasn't been afforded due process as the government drags its feet trying to postpone the civil proceedings or filing any charges, he complained, adding that investigators won't explain what Gibson allegedly did wrong.
   'We're guilty of something they can't tell us what it is yet' so the company can't defend its reputation, Juszkiewicz said.
   A troubling aspect of the Lacey Act, Gibson's CEO said, is that the company is criminally liable even though it didn't know it was doing anything wrong. Importers are expected to take all reasonable means to comply, but the law doesn't define the steps a company should take to ensure it doesn't obtain prohibited wood products, the exasperated executive said.
   'That's like a giant blank check for the prosecutor,' he said.
   'If people wanted to stop us from doing something you would think they'd tell you in advance. 'Hey, look guys we have a problem with this. You need to do something. Give us a plan.'
   'In two cases, we had a SWAT team treat us like drug guys. Come in and shut us down with no notice. That's just wrong,' Juszkiewicz said.
   After the first raid the manufacturer no longer deals with Madagascar, he acknowledged.
   Juszkiewicz has conducted a series of interviews, mostly with conservative talk radio shows and TV programs as well as several newspapers, in an apparent effort to bring public pressure on the government to back off. In one radio interview he said the raid two weeks ago is an attempt 'to intimidate us into coping a plea' in the first case as Gibson prepares to present evidence that it behaved properly.
   The National Association of Music Manufacturers expressed 'deep frustration' with the Lacey Act in a Sept. 1 letter to President Obama and members of Congress.
   'The wide range of interpretation possible in the law and lack of regulatory clarity has resulted in great difficulty in compliance. The confusion is due in large part to the law's ambitious scope, including enforcement of the laws from all other countries that are the source of these natural materials,' NAMM Chairman Kevin Cranley wrote.
   'The recent high profile raid of Gibson Guitars, a leading NAMM member company in Tennessee, compounded with the slow response on needed guidance for compliance that we have been seeking has created fear and uncertainty for all those involved in the manufacturing, distribution and retailing of instruments and increasingly, artists and owners of musical instruments.
   'We cannot state strongly enough the impact that this confusion, uncertainty and threat of criminality are having on our industry even when intentions of due care and compliance are followed and documented. We have concrete ideas on how to improve the law and are ready to work with members of Congress and federal agencies to make positive changes that will fulfill the intended vision of the Lacey Act and preserve not only the world's forests, but the vital work of U.S. manufacturing and commerce in the music products industry,' Cranley added.
   Juszkiewicz public campaign is generating support on the company's Facebook and Twitter pages from people opposed to big government and outsourcing of U.S. jobs.
   And in an interview on KMJ 105.9 in Fresno, Calif., Rep. Thaddeus McCotter, R-Mich., a guitar player himself, said, 'You're looking at American artisans having the federal government come in and tell them they'd be better off if they let people in Madagascar or elsewhere do the work is insane,' McCotter said. 'That's outsourcing by government fiat from an administration that claims to oppose it.' ' Eric Kulisch