Danish furniture importer Philip Rafn of Furnhouse can testify to the serious work that it takes to comply with the EU Timber Regulation (EUTR). Even so, he finds the investment made sense, in terms of business and company ethics.
Today Philip Rafn, owner of the furniture trading company Furnhouse, is positive about the EU Timber Regulation (EUTR). The company’s efforts to meet the letters of the law have resulted in positive customer response, and he is glad to know the company is doing their bit to look after the world’s forests.
However, getting there has been a long road. It took four attempts to convince the Danish EUTR Competent Authority, the Nature Agency, that the company’s due diligence system is able to handle high-risk products made from Chinese oak adequately.
An unexpected challenge
The story begins one day in the late autumn of 2014, when Mr Rafn receives a letter. The Nature Agency notifies the company that they are going to pay a control visit to the company to verify their compliance with the EUTR.
”I thought, what’s going on here? A control visit? I had never heard about the timber regulation before, so I was totally blank,” recalls Mr Rafn. He continues, ”I call the Nature Agency to understand the matter. They immediately make clear that our ignorance about this piece of legislation is a problem.”
Like other Danish furniture importers, Furnhouse has not joined any Danish industry association. There are too few companies in this business to set up their own association in Denmark and they do not fit into any of the existing associations. The company therefore lacks easy access to information about new legislation.
The next step in the process is a meeting in November 2014. ”Two people from the Nature Agency arrive. After twenty minutes, we receive an enforcement notice asking us to put our house in order by March 2015. I write a letter to all of our 23 suppliers. At this point, I am not aware of the exemptions. Later on, we found out that some of our products are actually exempt from the due diligence obligations,” observes Mr Rafn.
”We tell our suppliers that we want documentations with stamps, FSC labels, and so on. And we promptly receive the requested paperwork. I’m thinking, this is perfect!”
However, the second visit by the Nature Agency – which lasts an hour – only results in an extension of the deadline of the enforcement notice.
”We soon realised that the company was unable to satisfactorily explain how they conducted risk evaluation and risk mitigation. This pertained to both country-specific risk as well supplier-specific risk,” says inspector of the Nature Agency Mads Brinck Lillelund.
He continues, ”Inspections normally have a duration of 3-4 hours, however we may cut it short if we observe significant shortcomings in the company’s due diligence system.”
”Next step is the police yard”
”I am told that the documentation we have collected is completely useless. The paperwork is not trustworthy due to the corruption level in our supplier countries. It all looks pretty bleak – unless we rectify the situation, the next step will be the local Odence Police Yard. In the worst case, a police report submitted under the EUTR may lead to confiscation of our stock. I am not fully clear that we must work at a deeper level,” relays Mr Rafn.
”The nature Agency gives us one more chance. They help us to understand the exemptions of the EUTR and this means we only need to work with seven suppliers. Now, all we need to do is to establish a due diligence system covering this part of our trade. The Agency advises us to seek expert assistance. We follow their advice and find NEPCon through an internet search.”
Mr Brinck Lillelund explains, ”The reason why we prolonged the deadline was that the company had evidently worked towards a due diligence system between the first and the second inspection. They had contacted their suppliers and received documents from them. However, major inadequacies remained, in particular with regards to explaining the documents and most importantly, how the company had sought to validate the paperwork."
He adds, ”When trading with countries with a high corruption level, it is important to be critical towards documents of any kind, regardless of who seemingly issued the papers. When there is no verification, we typically disregard such documents during inspection visits, because we have no assurance of their validity.”
In February 2015, Furnhouse meets with NEPCon’s LegalSource experts Christian Sloth and Ditte Steffensen.
”The meeting lasts almost a full day. This is the final wake-up call that makes us fully understand what this is all about and just how seriously we need to work. It’s a bombshell!” recalls Mr Rafn.
“That day, we prepare a list of information we need to collect, e.g. on tree species and suppliers. We organise the work in a systematic way, and in dialogue with NEPCon, we prepare a mini due diligence system during the course of 2-3 months. We now feel considerably better armed for the Agency’s next visit.”
However, at the third meeting with the Nature Agency, the verdict of the Agency remains that Furnhouse still has not quite hit the target.
”Since there is major risk connected with our procurement of oak furniture from countries such as China, we can expect an immediate enforcement notice. However, the Nature Agency can see that we have made serious inroads, are engaging with an external expert and have made visible progress. Therefore they give us one more chance – and a deadline of August 2015,” says Mr Rafn.
”At the third visit, we were able to verify that the company had now moved close to a satisfactory due diligence system. For this reason, we chose to extend the deadline once more,” says Mr Lillelund.
He continues, ”However, it was important to us that the company was able to present and explain their own due diligence system on their own instead of relying on NEPCon’s experts for this. We only accept such reliance on external experts when the company uses them as a EUTR Monitoring Organisation. This was not the case with Furnhouse.”
Coming to grips with due diligence
”We have several meetings with NEPCon,” explains Mr Rafn. ”In the end, we decide to ask NEPCon’s LegalSource partners in China to visit our seven suppliers in order to identify the actual risks that are connected with their products.”
The evaluation of Furnhouse’s seven Chinese suppliers results in a 70-page report, which NEPCon turns into a shorter risk assessment with recommendations for the company’s approach to managing each supplier.
Furnhouse follows up on the advice in close collaboration with NEPCon. ”There are frustrations,” concedes Mr Rafn. ”For example, NEPCon recommends us to disconnect from two of our Chinese suppliers due to the risk of engaging with them. We are not very happy with this recommendation. In this case, we choose a different route where we keep our suppliers on board whilst intensifying our risk management in dialogue with NEPCon.”
During the fourth and final meeting with the Nature Agency, the nerves are on edge. But this time, the Agency declares itself satisfied with the company’s efforts.
”Together with NEPCon, we had produced some very professional materials for the meeting. Surely, the fact that we’ve hired an expert to work with us so thoroughly creates a solid impression,” comments Mr Rafn.
He also feels well equipped to answer the Agency’s questions. ”It is clear that they use a questioning technique where they are crosschecking information. The reason why we don’t fall into any traps during the final meeting is simply that we have finally come to grips with due diligence,” he concludes.
A net gain for Furnhouse
According to Mr Rafn, the process took up so many resources that the company saw a reduced turnover for a period of nine months. Yet today he finds that all the due diligence work was worth the trouble. The company’s losses have been more than offset by what they have gained from it.
During the process, Furnhouse’s due diligence system was not the only thing to undergo significant change. The company’s owner and staff have also developed a deeper understanding of what a difference due diligence can make for the world’s forests by fostering legal timber production and trade.
”Today, I do not see the cost as being one cent too much for this invaluable piece of work – especially when you end up having a bit of heart in this matter,” states Mr Rafn.
”We told our buyers how we keep track of the timber and its origin, and our efforts were very well received. In fact, our turnover has soared since then,” he smiles.
Furnhouse is a wholesale company based in Odense in central Denmark. Amongst other products, the company imports furniture in oak and acacia from China and other parts of Asia, reselling them to primarily Scandinavian furniture retailers. Especially oak from China is a cause for concern, as there is a risk that the timber has been illegally harvested in Russia. All of Furnhouse’s imported goods enter into the EU via the harbours of Aarhus, Denmark or Hamburg, Germany. In EUTR terminology, Furnhouse is therefore an ‘operator’ for all imported furniture covered by the EUTR.