Illegal logging is a crime of monumental proportions, and companies that are complicit can face regulatory fines and reputational fallout.
Interpol and the World Wildlife Fund estimate that 50%–90% of the wood harvested from the Amazon rainforest region, central Africa, and Southeast Asia, and 15%–30% of all wood traded globally, is procured illegally. On an environmental level, illegal logging contributes to deforestation and climate change, according to the European Commission.
Companies found to have purchased timber illegally — whether they are furniture retailers, guitar makers, paper companies, or other organisations selling products derived from timber — can face serious reputational damage and financial penalties, as the global regulatory environment around the importation of illegally sourced timber and wood products tightens.
In 2016, Virginia-based Lumber Liquidators Inc. paid more than $13 million in fines, forfeitures, and community service payments after it was found guilty of importing illegal timber in violation of the Lacey Act, the US law governing wildlife crime. The illegally logged wood was found to have originated from forests in Eastern Russia that provide habitats for endangered Siberian tigers and Amur leopards, according to a press release from the US Department of Justice.
And in Europe, companies found in violation of the Forest Law Enforcement, Governance and Trade (FLEGT) Action Plan — the EU trade agreement on logging — risk merchandise confiscation and hefty fines.
“Sustainability is something that can really affect a company’s reputation and bottom line,” said André de Boer, the former director of the Royal Association of Dutch Timber Companies (Koninklijke Vereniging Van Nederlandse Houtondernemingen, or VVNH) and former secretary general of the European Timber Trade Federation. “Not only is the regulatory environment tightening all over the world, increasingly, it’s also something that consumers, employees, and investors really care about.”
That’s why it’s important for savvy CFOs to keep abreast of risk factors and to make sure that the timber or timber-derived products their company is sourcing are of legal origin.
Here are some of the top red flags that warrant additional due diligence into whether timber is being sourced sustainably:
Timber from a known corrupt area: If the timber’s country of origin is high on the widely referenced Transparency International Corruption Perceptions Index, it’s a red flag that should automatically require a higher level of due diligence, according to Benoît Jobbé-Duval, director general of the International Tropical Timber Technical Association (ATIBT), which is based near Paris. The higher the ranking on the transparency index, the more widespread corruption is considered to be in a nation.
“You have to start with the corruption index, and the higher the index, the more careful due diligence you would need to do,” Jobbé-Duval said.
For example, wood from a country like Cambodia — which is ranked at 160 out of 180 nations included on the 2020 corruption index — would require additional investment in due diligence to verify the wood’s origin, he said.
Product from high-risk areas: Trees that come from disputed regions or conflict areas, or from forest areas buffering high-risk locales — for example, national forests near the border of another country known to have problems with illegal logging — also warrant additional scrutiny, according to Phil Guillery, executive director of the World Forest ID Project.
“You need to take steps to verify the product’s true origins,” he said. “This is critical because, increasingly, illegal timber is being laundered to get around regulations.”
Rare or endangered timber: The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) regulates international trade so that it doesn’t threaten the survival of certain species in the wild. Every three years, CITES updates its lists of controlled species, which can include animals or plants, and are divided into three groups:
- Appendix I includes species threatened with extinction (such as Brazilian rosewood or Guatemalan fir) and for which trade is illegal except in exceptional circumstances.
- Appendix II includes species that are endangered (for example, various species of rosewood — other than Brazilian — and mahogany) and for which trade is controlled.
- Appendix III includes species that are protected in at least one country (such as Korean pine or Japanese oak) and for which countries have requested assistance from other CITES parties in controlling trade.
“Anything that appears on the CITES Appendix I or II is automatically a red flag,” Jobbé-Duval said. “There are certain types of wood you just can’t buy, and it’s important to know what those are.”
Overly complex supply chains: Suppliers should be able to be transparent about the origins of any timber or timber products. If they are unable to do so, it’s a red flag, according to Guillery. Long, overly complex supply chains also raise red flags and warrant additional due diligence — particularly if tiers in the supply chain involve companies with post office boxes rather than physical addresses.
“Simpler supply chains are more transparent and make it easier to ensure you’re buying timber that was logged legally,” he explained. For example, most paper products consist of three tiers: a printer, who buys from a pulp mill, who buys from a forest. This shorter supply chain makes it easier to check, according to Guillery.
Compare that to plywood, which often goes through multiple brokers and as many as ten supply tiers from the originating forest.
“Plywood is much more complex and requires more care and due diligence,” he said. “If you can’t get your hands around what the supply chain looks like, it means it’s high-risk.”
Noncertified timber: All sources interviewed agreed that one of the key ways to reduce a company’s risk of exposure to illegal timber is to make sure all timber-related products are certified by globally recognised organisations.
The two most widely used certification schemes include the Forest Stewardship Council (FSC) and the Programme for the Endorsement of Forest Certification (PEFC).
The FSC certification scheme tracks supply chain transparency and the sourcing of wood products — including products made from hardwoods and plywood, as well as paper and other paper products — from responsibly managed forests. Wood and paper that is 100% certified should mean that the timber was logged legally, came from a responsibly managed forest monitored by a credible independent third-party auditor, and was tracked through the entire supply chain.
The PEFC system similarly relies on independent third-party auditors to assess that the forests where timber is logged are managed sustainably, and to track timber throughout the entire supply chain.
“Buying timber that has the certification is probably the single best way to make sure a business is operating in a sustainable economy,” Jobbé-Duval said.
— Malia Politzer is a freelance writer based in Spain. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.