Gibson Sings Supply Chain Blues, Again

Gibson Guitar Corp., one of the most widely known makers of guitars in the world, was recently raided by the U.S. Fish and Wildlife Service for a failure in the compliance arena. It was not for a violation of the Foreign Corrupt Practices Act, U.K. Bribery Act, OFAC or other more widely recognized anti-corruption statutes.  Gibson was raided through an investigation regarding alleged violations of the Lacey Act of 1900.

The Lacey Act

Originally passed to protect wildlife, the Lacy Act was expanded in 2008 to cover wood products. It now requires companies to make detailed disclosures about wood imports and bars the purchase of goods exported in violation of a foreign country’s laws.  Congress passed the amendment to curb the market for illegally harvested wood and to document the foreign sources of wood products to help with compliance and conservation activities abroad. 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 Act, importers are prohibited from buying or selling of wood in violation of national forestry laws anywhere in the world, and must electronically submit an import declaration listing the scientific name of the wood, quantity, value and country of origin.

The Gibson raid offers a lesson: companies should be diligent about ensuring their entire supply chain is sourcing wood legally.  Guitar makers would be wise to retain local counsel in the countries where they purchase tonewoods to make sure that the wood is not exported in violation of local law.

The Allegations

On Aug. 24, agents from the FWS 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 Gibson’s acquisition of two fingerboard woods, partially finished ebony and Madagascar rosewood, from an Indian supplier. 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.  FWS made two allegationin its affidavit to obtain a search warrant for the raids. The first was that the woods in question were “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).”  The second was that Gibson Guitar was not identified as the end user. The importer of record, Luthier Mercantile International, listed itself as the end user. The Lacey Act imposes strict liability on a company for those in its supply chain.

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, arrived in Dallas June 27 from Germany on American Airlines. The shipment was detained by Customs 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 responded unsurprisingly in a statement on its web site: “Gibson has complied with foreign laws and believes it is innocent of any wrongdoing. We will fight aggressively to prove our innocence.”  The statement further contends the Justice Department 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 under the Lacey Act.  Indian law requires that all finishing work on ebony and rosewood be done in India before they are exported, an attempt to add value to diminishing natural resources.
Juszkiewicz has mounted an aggressive media campaign to discredit the government’s position.  He says that Gibson has been sourcing fingerboard wood for 17 years and that it is being bullied by the Justice Department. To wit, at a press conference outside Gibson’s Nashville factory on Aug. 25:

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.

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. His affidavit identifies the broker as 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.

This is not the first time that the FWS has targeted Gibson. In November 2009, more than a dozen 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 confiscated from Gibson is actually not FSC certified.  It is what the FSC considers “controlled wood.”  Controlled wood is wood from small areas which fail the requirements for certification, but which are exempted by the FSC 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 the statement.

After the 2009 raids Gibson 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 is that it imposes strict criminal liability on any non-compliant company, even a company that didn’t know it was doing anything wrong. There is no mens rea requirement.  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.  For Gibson, understandably, this is exasperating.  As Juszkiewicz pointed out

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.

After the first raid the manufacturer no longer deals with Madagascar.  Juszkiewicz has conducted a series of interviews, mostly on talk radio shows, 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 copping 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. . .

The recent high profile raid of Gibson . . . 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.

Gibson’s public campaign is generating support on the company’s Facebook page 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., claiming to be 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. That’s outsourcing by government fiat from an administration that claims to oppose it.”  What we’re looking at has absolutely nothing to do with outsourced labor.

Compliance Convergence

The Gibson case underscores the importance of having strong internal controls over compliance activities. So how does a company, or an entire industry subject to the Lacey Act, manage all of these risks? I suppose the first thought would be to only buy American, but that thought is probably as unrealistic as a U.S.-based energy company not doing business overseas because of the FCPA. The answer is that a company must first identify the risks it faces and then manage those risks. Here the primary risks would appear to be knowledge of local laws and liability for the acts of those in your supply chain. There are two keys to managing these risks. The first is process, process and process. The second is document, document and document.

Whatever business you are in, the requirement is for you to understand what laws are applicable to your business. If you have to hire local lawyers in the jurisdiction where you are doing business to ascertain if your exports violate local law, don’t whine about it–hire them. If your company has strict liability for those in your supply chain, engage in due diligence, train those vendors in the law and your requirements, and manage those relations going forward. All of the above should be documented so that your company can produce those records in short order if it is investigated . Whining about unfair 111 year-old laws will not get you much sympathy from the U.S. Department of Justice, the U.S. Fish and Wildlife Service or a federal judge.

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