Better Ways to Halt Environmentally Damaging Trade

In August, armed U.S. federal agents raided the Gibson Guitar Corp. in Tennessee on the suspicion that Gibson had violated the trade laws of India.

Since then an assortment of politicians, flooring companies, environmentalists, union representatives and instrument makers have been locked in a struggle over the enforcement of a 2008 amendment to the 111-year-old Lacey Act.

The Lacey Act was originally intended to protect endangered game animals, fish and wild birds from being illegally poached in one place for sale in another. The Act made it illegal for U.S. companies to purchase fish or wildlife that was “taken, possessed, transported, or sold” in violation of any state, tribal or foreign laws. The 2008 amendment expanded the protection to include many types of plants, excluding common food crops, but including trees and timber.

The law’s goals are worthy. By eliminating the market for illegally obtained flora and fauna, the law fights poaching the way an economist would – with the power of the market. It puts American legal muscle behind foreign environmental laws whose domestic enforcement may be spotty. It also prevents U.S. companies from being undersold in their home market by unscrupulous foreign-based competitors by banning the importation and sale of those competitors’ illegally-produced goods.

The Gibson case raises a policy question because the Indian law at issue is not directly related to environmental concerns. The guitar maker is accused of purchasing Indian ebony, which, under that country’s law, must be processed domestically and exported only within finished products. Gibson has countered that the wood came from a supplier certified by the Forest Stewardship Council, an industry-recognized, independent organization that monitors the management of the world’s forests. According to the Justice Department, however, it does not matter that the wood was harvested by sustainable and legal means, since its shipment for processing outside India was still illegal under Indian law.

The enforcement of the Lacey Act in this case gives the impression that U.S. officials are simply acting as agents of the New Delhi government for purposes of Indian protectionism. But while American companies may not like or agree with the Indian law, buying illegally exported goods is not an appropriate answer. Allowing a company like Gibson to do so would give it an unfair advantage over other firms that do not purchase illegally exported ebony.

Also, as a rule, companies that ignore one law may not hesitate to ignore others, including those that establish environmental standards.

Though I agree with the goals of the Lacey Act, the implementation of the amendment has still been troublesome. The main problem is that the law requires companies to shun illegally produced or exported products without giving them any help in determining whether a particular product is safe to buy. Instead, importers are under vague orders to exercise “due care” in ensuring that the products they bring into this country are legal. But what, exactly, is “due care?”

In some cases, there are red flags that should alert companies to the likelihood that they are in dangerous territory. In 2009, for example, a small Florida-based dealer in decorative wood ran afoul of the amended Lacey Act after he accepted an offer of three pallets of Peruvian hardwood from a woman he did not know, who requested that payment be made out to her personally. It turned out, unsurprisingly, that there was significant evidence that the documents accompanying the wood were forged. While the dealer used a broker to handle the transaction and was not aware of the problems himself, the wood was still seized before it reached him. His petition to have it returned was denied on the grounds that he “did not do all he could within his power to comply with regulations and ensure that the shipment was authorized by an export permit that properly documented the required information.”

That buyer probably got what he deserved. Willful ignorance is not true ignorance. Buyers of untitled cars and surprisingly cheap goods that “fell off the truck” know what they are getting into, even if they don’t know the exact provenance of their great bargains. This buyer also knew, or should have known, that what he was getting was too good to be true.

In other situations, however, it is less clear what constitutes “due care.” Andrea Johnson, director of forest programs for the Environmental Investigation Agency (which, notwithstanding its name, is a nonprofit environmental group and not a government agency), told NPR that neither third-party certifications nor government stamps are accepted as “proof of legality” by the U.S. government. In other words, a company can still be held responsible for not investigating further even when a third-party agency has certified the products.

Because of the difficulty of proving due care, many small companies have been forced to cut their inventories. The result, they say, is the opposite of the law’s intention. Instead of equalizing the playing field to help American companies compete with foreign ones, the law imposes paperwork burdens that hurt American wood consumers for the benefit of American wood producers.

A more useful system would be for the U.S. government to tell importers how they can exercise due care in their foreign purchasers. One approach could be to have Washington approve certain third parties to certify that foreign goods are legally produced and exported, and permit American businesses to rely on such certifications. Another, less promising, method might be to have the U.S. government provide such certification itself. Either strategy would allow companies without the resources to conduct their own investigations to do business with reputable foreign suppliers without fear of unintended violations.

For the amended Lacey Act to work, businesses and the U.S. government are both going to need to adapt. This won’t necessarily be a speedy or smooth process, but companies and government agencies can still adapt far more easily than the species the law is meant to protect.

About Larry M. Elkin 525 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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