Another chapter has been added to the saga of the Gibson Guitar Corporation (Gibson) forfeiture case that began with a raid of the company’s Nashville and Memphis manufacturing plants in November 2009. At that time, and again in an August 2011 raid, Gibson was suspected of violating the Lacey Act, which makes it unlawful to “trade in any plant that is taken, possessed, transported, or sold in violation of the laws of the United States … or any foreign law that protects plants.” While settlement with the Department of Justice (Justice) was reached in the form of a criminal enforcement agreement dated July 27, 2012, the terms of settlement call for Gibson to pay a $300,000 penalty to the U.S. directed to the Lacey Act Rewards account, to pay a community service payment of $50,000 to the National Fish and Wildlife Foundation, and to invest in a comprehensive upgrade to what was deemed an inadequate compliance program.
Details of Gibson’s new compliance procedure are outlined herein. The term of the settlement is 18 months, but the ramifications should “reverb” with Gibson and other manufacturers, and their suppliers, for years.
In the manufacture of guitars, Gibson fabricates fretboards that are attached to the guitar necks, just under the strings. Ebony is one type of wood Gibson uses in the creation of fretboards. Fingerboard blanks are boards of wood Gibson purchases from various suppliers to specification, which are then manufactured into the fretboards.
The November 2009 case involved claims that Gibson imported ebony and rosewood from India in violation of Indian laws. These claims were dropped when Justice conceded that, in fact, India’s Foreign Trade Policy did not prohibit their export. However, should Indian law change, the government will notify Gibson and give it sixty (60) days, or such other time as is agreed to be reasonable, to address such shipments received or en route.
Underlying the August 2011 raid were claims the ebony and rosewood Gibson purchased were exported illegally from Madagascar. In both instances, the exports originated in Germany (although the wood was from elsewhere), the importer was a third-party customer, and the ultimate consignee was Gibson. The Fish and Wildlife Service (FWS) made a point in both cases about the wood not being properly classified when exported by the seller, and then classified differently when imported by the middleman.
The Statement of Facts contained in the criminal enforcement agreement entered into by Gibson includes several admissions. Among them is that Gibson assumed, without ever asking its supplier, that the wood from which the fingerboards were made was lawfully harvested and exported from Madagascar. After the search warrant was executed, the supplier asserted it was, but apparently that was the first time Gibson asked. This is important because one of Gibson’s staff went on a trip in June 2008 to Madagascar, and documentation from both during that trip and afterwards raised questions about the legality of ebony harvested and exported as (unfinished) fingerboard blanks, as opposed to (finished) “guitar fingerboards.” Despite having such information in hand, and freely exchanging it internally within the company, Gibson admitted that it received shipments from the supplier without any validation of legal harvesting or exportation. There are also emails in which a Gibson employee notes the vendor can only supply “grey market” wood, in this context meaning that which cannot be properly documented, due to political instability and violence.
For international traders, the classification of the wood was a key factor raised in the agreement. The wood at time of export was classified as “builder’s joinery and carpentry of wood ….” The import documents classified the fingerboard blanks as “wood sawn or chipped lengthwise, sliced or peeled.” While the agreement makes clear there is no evidence Gibson was involved in the classification of the goods at either point, the difference in classification was noted and becomes important when you consider the scope of documentation that Gibson must now administer as a result of this settlement. This also demonstrates that the way in which goods are classified in the tariff can, by inference, be seen by regulators to mask improper activity—whether intentionally or not.
There are currently two civil cases pending and a third one not yet filed. In those three (3) cases, Gibson agrees to withdraw all claims to the Madagascar wood. Regarding the Indian wood, Gibson is permitted to seek remission and mitigation and the government agrees not to oppose such efforts. The pending cases are before the United States Court for the Middle District of Tennessee: United States v. Ebony Wood in Various Forms, Civ. No. 3:10-cv-00747; United States v. 25 Bundles of Indian Ebony Wood, Civ. No. 3:11-cv-00913, and U.S. v. Indian Ebony and Rosewood, Civ. 3:12-mc-00014.
With Gibson complying with all terms of the settlement, Justice agreed not to pursue criminal prosecution of Gibson for violations of the Lacey Act or other laws (not including tax violations, if any) regarding the order, purchase, or importation of wood from India or Madagascar from June 2008 through September 2009. The settlement is not binding on any federal, state, local, or foreign prosecuting authority other than the Department of Justice, Environmental Crimes Section. So if other government entities wish to prosecute Gibson, they are free to do so.
Interestingly, the Gibson settlement applies only to the company and not to any individuals, which leaves the door open for Justice to proceed against individuals, if it is so inclined. In fact, as part of the settlement, Gibson must disclose any nonprivileged information about its activities and those of its “current and former directors, officers, and employees and others, concerning the import or purchase of ebony or other woods for use in manufacturing guitars….” Gibson is also required to bring to the government’s attention “all criminal conduct by, or criminal investigation of, Gibson or any of its senior managerial employees, … as well as any administrative proceeding or civil action brought by any governmental authority that alleges fraud or criminal violations by or against Gibson.”
Gibson must also fully cooperate with any Lacey Act investigation and assist in any such investigation “by providing logistical and technical support for any meeting, interview, grand jury proceeding, or any trial or other court proceeding …” concerning the Lacey Act. It must use best efforts to get its officers, agents, and employees to any such meeting or other proceeding and provide evidence as appropriate in any Lacey Act investigation or prosecution. Further, Gibson is required to strengthen its compliance, bookkeeping, and internal standards and procedures and to report its compliance efforts twice, once nine (9) months after execution and again sixty (60) days prior to the end of the term of the agreement.
New Compliance Program
Gibson is now obliged to significantly ramp up its compliance program. There follows just some of the more noteworthy steps Gibson must now take pursuant to the settlement:
- Gibson must educate its suppliers about the company’s expectations and work with them to identify challenges faced by the suppliers and assist to overcome them.
- Gibson must obtain as much information as possible about the supplier and the wood- based products and where they originate. (See Sample Checklist below.)
- Gibson may not rely only on the checklist, but must conduct “independent research and exercise care” before making any purchases, which includes “internet research, consultation with U.S. or foreign-based experts or authorities, arranging an on-site supplier/forest visit, if possible, or speaking with local authorities and/or experts on documentation required for legal export and the validity of such documents received from the supplier.”
- Gibson must request sample documentation, and verify the validity of such documentation, prior to wood purchases so as to reasonably ensure the sufficiency of its Lacey Act compliance efforts. In the event of uncertainty, Gibson agrees not to make the purchase.
- Gibson must encourage its suppliers to work with third-party certification groups and require the certification number to be listed on each invoice.
- Each shipment is to be accompanied by copies of all “relevant import forms and declarations (including required Lacey Act Plant declarations) and export documentation, including from country of origin and/or harvest.”
- All Gibson importers and suppliers will also be required to furnish to Gibson “copies of any applicable export or business licenses that they maintain to be updated on at least an annual basis.”
Does this mean that Gibson is now mandated to check the classification of each shipment when exported and separately when imported? If inconsistencies are discovered, who decides whether those inconsistencies are material and so warrant further inquiry? Who decides if enough questions were asked and enough documents provided?
- Gibson must use watch lists and other reliable sources to identify illegal logging practices and perform risk assessments.
- Gibson must consult other available industry or governmental guidance so as to verify the legality of the wood it is purchasing, especially from high-risk countries.
- Gibson must conduct annual training for employees involved in purchasing and for its wood suppliers. Gibson must also provide wood suppliers with links to existing resources.
- Gibson must conduct an annual audit of its supply chain that includes an evaluation of all documents, certifications, licenses, and other records associated with its wood purchases. As part of this process, Gibson will “evaluate adherence to existing laws governing the protection and export of wood” in all countries where it sources wood, including consultations with foreign government agencies, third-party certifiers, nonprofit organizations or nongovernment organizations to identify “changes in foreign forestry or export laws.” All such audits must include corrective measures. Gibson also agreed to share its methods and results with others in the musical instrument manufacturing industry.
- To the extent a country is identified as high risk, Gibson agrees wood from there may be sourced only if the product is certified against a chain of custody or traceability standard, the supplier certificate is valid and the scope includes the product supplied, the product has been traced by Gibson along an unbroken and verified chain of custody from the purchaser back to the source entirely by obtaining supplier certification codes on documentation for that product down to the forest level, and the harvest and export of the species is not restricted or prohibited in the source country.
When you consider all the steps Gibson has agreed to perform and compare that to the documentation Gibson has agreed to seek and retain for five (5) years, one is left with the impression Gibson now has to check what everyone along the supply chain does, document those efforts carefully and in detail, and make sure that any inconsistency between documents is thoroughly addressed and promptly resolved. It makes you wonder what steps the company and its President could have taken early on to mitigate culpability. This outcome also demonstrates that international trade enforcement has “evolved” beyond customary trade fraud statutes and regulations. Finally, this settlement is yet another example of how companies can find themselves having violated the law when it comes to their international transactions. The remedies are often significant and costly, particularly when compared with taking prudent precautions now to ensure you are in compliance all along your supply chain.
- Does the supplier have long standing relationships with the supplier/s (exporter) of this product? How long?
- Do the supplier/s of this supplier buy this product from the “spot markets?”
- Does supplier regularly question their suppliers regarding the origin of this product?
- Did supplier provide you with all required documentation?
- e.g. for non-high risk countries, a written and signed document from supplier identifying companies included in the full supply chain of the product back to the harvesting entity/ies, including name and location of the harvesting entity/ies and Forest Management Unit.
- A list of supplying companies harvesting wood from source forests and copies of the associated harvesting permits for supplied product and/or other form of authorization from the forest owner, including, for example:
- species, district of origin information and any other related harvesting or purchasing agreements.
- Evidence of compliance with timber transportation documents: Copies of transport or sales permits with specification of species and volumes as applicable.
- Have you reviewed the documents and verified that they meet Gibson requirements?
- Is there any reason for supplier to believe that paperwork from their suppliers may not be authentic for this product?
- Is there a ban on exports from this region/country?
- Have you checked on approved species/products with State/Province for that supplier?, etc.) [sic]
- Have you retained copies of required documentation?
- Is this supplier sourcing from a high risk country?
- If yes, verify that additional required procedures were followed, e.g.,
- product is certified against Chain of Custody or Traceability Standard,
- the supplier certificate is valid and the scope includes the product supplied,
- the product has been traced by Gibson along an unbroken and verified chain of custody from the purchaser back to the source entirely by obtaining supplier certification codes on documentation for that product down to forest level, and
- the harvest and export of the species is not restricted or prohibited in the source country.