Supply-Chain Policing to Be Selective, Environmental Cops Say

The Justice Department’s environmental division won’t necessarily conduct detailed investigations of a company’s supply chain partners as long as the company is making good-faith efforts to comply with the law, an agency spokesman told Bloomberg Law.

Those remarks clarify comments from Todd Kim, assistant attorney general for Justice’s Environment and Natural Resources Division, who said at an American Bar Association conference in December that if a corporate supply chain “originates from a criminally tainted source, then my division will consider the criminal responsibility of all parts of that supply chain.”

At least one former department official has cautioned that Kim’s posture could end up snaring companies for the acts of distant suppliers scattered around the world.

But the Justice spokesman who spoke to Bloomberg Law on condition of anonymity said that “a company that is doing its best, that has a meaningful compliance plan, and that is meeting industry standards of compliance would not be anticipated to be a priority for detailed investigation of its supply chain.”

By contrast, a company that has filed false declarations, or is “demonstrably dealing in illegally sourced or high-risk materials could expect to be a higher priority for further examination of its supply chain,” to determine whether there is greater or lesser culpability, the spokesman said.

To illustrate the distinction, he posited a hypothetical company that is making false declarations to hide violations, as opposed to one that got false information somewhere in its supply chain “despite its best efforts.”

An Impossible Position?

Paul Larkin, a former assistant to the solicitor general at Justice from 1984 to 1993, said Kim’s doctrine could put companies in the impossible position of having to “become private detectives on a worldwide basis.”

“When you have multiple links in a chain, you make it impossible as a practical matter for somebody to know what every link in the chain is doing, in terms of compliance with that nation’s laws,” said Larkin, now a senior research fellow at the conservative Heritage Foundation. “There’s a million things that can happen.”

Kim’s remarks also send a signal to the agencies to “bring us the cases,” Larkin said.

But current DOJ officials specializing in environmental crimes countered that Larkin’s objections ignore that the government must prove a company actually knew the merchandise was illegal, or that in the exercise of due care should have known, according to the Justice spokesman.

Moreover, companies only need to undertake reasonable efforts that other companies in their situation would undertake to determine products they purchase aren’t illegal, according to the officials. Companies aren’t required to take every conceivable effort, they said.

Rick Claypool, research director at Public Citizen, denied it’s impractical for companies to keep an eye on vast supply chains.

That argument “sounds to me like a concession that the companies in question are too big to manage,” Claypool said.

Corporate Culture

Other former Justice Department officials said they took Kim’s comments as a call for companies to tighten their corporate culture.

“I think what they’re trying to say here is, ‘You’re going to have to show us that you have a real compliance program, that you really investigated your sources as part of your compliance program,’” said Jonathan Feld, a former associate deputy attorney general and now a corporate compliance attorney at Dykema Gossett PLLC. “Is it something more than just on paper? Is it reasonably tailored to what’s going on in your industry?”

Steve Solow, former chief of DOJ’s environmental crimes section and now a Baker Botts LLP partner, agreed. Broadly, he said, the message is that “it is the culture, and not the individual compliance program, that is likely to most influence a regulated entity’s capacity to achieve compliance.”

Feld also said the question of how far down a company’s supply chain that Justice is likely to look will be fact-specific and limited.

“It goes back to having a good corporate compliance policy,” he said. “If something is discovered, did you go through a reasonable process of validating your purchase?”

Limits on Scrutiny

Another consideration is how important the supplier’s materials are to a company’s business, Feld said.

“If it’s the cover to a hubcap, that’s not a very important part,” he said. “But if it’s an electrical part, and the lithium was purchased from a mine that was discharging into rivers, that’s important.”

Jeffrey Wood, a former acting assistant attorney general in DOJ’s environmental unit, said Kim’s pledge doesn’t necessarily raise the stakes for businesses because the division has already been scrutinizing corporate supply chains.

The comments could encourage companies to go even further in tightening their supply chain accountability and management, “particularly as government agencies and the general public are increasingly interested in the role of companies in the compliance practices of not just their own employees but also many others along the supply chain,” said Wood, now a partner at Baker Botts LLP.

Nor is it unusual for DOJ’s environmental division to widen its enforcement targets. In 2018, Wood publicly committed to spotlighting organized crime—including illegal wildlife trafficking and illegal drug activities on private lands—as one of his top enforcement priorities.

Left unclear is whether DOJ’s new supply chain initiative will focus on coordinated criminal activity in discrete contexts, such as a company that is purchasing illegally-taken natural resources, or whether prosecutors might also try to criminalize corporate negligence over the management of their supply chains, according to Wood.

Imposing criminal liability throughout a supply chain is “more viable in contexts like the Lacey Act"—which regulates the taking of timber—"and less so in other environmental statutory contexts, where supply chain concerns are not front of mind,” he said.

Another possible outcome, Solow said, is that DOJ will more widely require independent corporate monitors for bad actors.