By Karen A. Lobdell – Director, Product Management for Thomson Reuters

What is the value to your company of a robust corporate social responsibility program that holds foreign vendors accountable to global regulatory requirements? Can you afford to pay tens of millions of dollars in penalties over numerous years rather than implement a compliance program? Can your brand withstand the bad press that comes with violations? A good test case for these questions is to consider the most recent Department of Justice violation for Lumber Liquidators, Inc.

On March 12, 2019, Lumber Liquidators agreed to pay a total penalty of USD 33 million for filing a materially false and misleading statement to investors regarding the sale of its laminate flooring from China to customers in the U.S. The penalty includes a criminal fine of $19 million and $14 million in forfeiture. This amount represents the company’s net profits from the sale of 100% of its Chinese laminate from January 16 to May 7 of 2015. The misleading statement affirmed that the company was in compliance with California Air Resources Board (CARB) regulations, when in fact, it was not. CARB regulations address allowable formaldehyde emissions in a product such as wood flooring –one of numerous environmental requirements that have surfaced in recent years. Lumber Liquidators is subject to various laws governing the use of certain chemicals used in wood products.  Despite tests that indicated that the product from a specific supplier was potentially not compliant, the company continued to order product from them and filed false statements regarding its compliance.

In addition to the $33 million penalty, the company must now implement rigorous internal controls and cooperate fully with the investigation of the company – and individuals. In addition to suspending sales of all laminate flooring from China in May 2015, Lumber Liquidators implemented new policies and procedures for compliance with CARB and other environmental regulations, sourcing of products, financial reporting, and internal controls.  The employees involved in wrongdoing were terminated or resigned and the company replaced executive management with experienced executives who have demonstrated a commitment to building an ethical corporate culture.

If the name Lumber Liquidators sounds familiar with respect to trade compliance issues, it is because the company is also known for paying the largest financial penalty ever in 2016 for Lacey Act violations –$13 million. Lumber Liquidators also agreed to a five year term of probation and mandatory implementation of a government-approved environmental compliance plan. The Lacey Act makes it illegal to import timber that was taken in violation of the laws of a foreign country or transport falsely-labeled timber across international borders into the U.S.  The timber in question was logged in Far East Russia and the false statement on the Lacey Act declaration documents (required by U.S. Customs) hid the true species and source. These illegal activities continued from 2010-2013, despite internal red flags.  In fact, the company increased its purchases from Chinese manufacturers using timber sourced in Far East Russia even though the purchases carried a high risk of illegality. The illegal cutting of Mongolian oak in far eastern Russia is of particular concern because the forests are home to the last 450 wild Siberian tigers. Illegal logging is considered the primary risk to the tigers’ survival, because they are dependent on intact forests for hunting and because Mongolian oak acorns are the chief food source for the tigers’ prey species.  Mongolian oak forests are also home to the highly endangered Amur leopard, of which fewer than 50 remain in the wild.

Corporate social responsibility has evolved from being something that is “nice-to-have” to being a compliance “requirement” in the last several years.  Whether the focus is on environment issues, such as the Lumber Liquidators violation, or in areas such as conflict minerals, forced labor, and anti-corruption, conducting vendor due diligence is becoming an increasingly important step in the procurement process.

The above incidents underscore the importance of integrating an automated supplier risk management system into your supply chain management strategy, and complementing that with a robust product database that stores flags for high-risk products. In a demanding global market, it has become increasingly important to conduct due diligence when sourcing materials, no matter the region. Implementing a solid strategy not only demonstrates due diligence, but helps your company to avoid fines, penalties, and possible damages to the brand.  In light of recent events, now is an ideal time to have a conversation with your stakeholders to consider implementing a Supply Chain Compliance solution to assess and mitigate risk.

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