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Environmental Rights Blog: Is environmental crime just business as usual for South African corporates?

9 May 2013 at 3:43 pm

Photo: eNCA
Photo: eNCA
Photo: eNCA

Photo: eNCA

On 4 April 2013, an extraordinary event took place in the Regional Court in Nelspruit, Mpumalanga. According to a 10 April 2013 media release of the Department of Environmental Affairs (DEA), Regional Magistrate Nomaswazi Shabangu granted a confiscation order under the Prevention of Organised Crime Act, 1998 (POCA) against York Timbers Limited in the amount of R450,000, plus interest, representing the amount saved by failing to obtain an environmental authorisation prior to commencing a listed activity in contravention of the National Environmental Management Act, 1998 (NEMA). The court also granted a punitive costs order against York.

A confiscation order is a civil judgment for payment to the State or a victim of an amount of money determined by the court. Its purpose is to deprive a party convicted of an offence of the proceeds of the relevant crime. Previously only used in wildlife crimes, according to the DEA this was the first time that POCA had been used successfully in an environmental management case.

Importantly, prior to the application by the National Prosecuting Authority (NPA) for the confiscation order, York, a forest products enterprise that has been listed on the Johannesburg Securities Exchange since 1946, had pleaded guilty to commencement of a listed activity in the absence of an environmental authorisation, and had been levied a criminal fine of R180,000 for that offence.

In its heads of argument, the NPA alleged that York had not only undertaken the widening of a forest road without the necessary authorisation, but had thereafter dishonestly applied for an ordinary environmental authorisation without disclosing that the road widening had already taken place, ostensibly to “avoid the legal and financial consequences of the correct application in terms of Section 24G of the NEMA” (section 24G of NEMA, which currently provides for rectification of illegal activities, entails an application that is subject to payment of an administrative fine of up to R1 million.) York’s attorney has been quoted as saying that York “did not grade this road for the benefit of [them]selves, but rather for the citizens of Sabie.

As at time of publication, the written judgement of the Regional Court was not yet available. York has appealed the judgement of the Regional Court, and so the matter may not end here. However, this case is not the first time York has run into trouble with environmental authorities. In the National Environmental Compliance and Enforcement Report of 2009-10, the Department of Environmental Affairs reported the following:

“On 11 October 2007, a High Court Order instructed various government departments (including the national and Mpumalanga provincial environmental departments) to ascertain the state of compliance with environmental legislation of the Sabie Sawmill and Plywood Plant (now operated by York Timbers). A joint inspection was conducted by Environmental Management Inspectors (“EMIs”) from the national and provincial departments, officials from the Thaba Chweu Municipality, as well as the Department of Water Affairs (“DWA”). The findings from this inspection, a follow-up inspection and a review of additional information resulted in the development of an enforcement strategy aimed at the significant number of non-compliances found at the site. This strategy included a criminal investigation, with a specific focus on the waste issues.

Representations were made by York Timbers in response to the inspection report findings, which included non-compliances with various conditions of its air pollution registration certificate, effluent permit and water use licence. Copies of the inspection report were also sent to the Director-Generals of the DWA, Department of Health, the Department of Labour, the Municipal Manager of the Thaba Chweu Local Municipality, as well as the Head of the provincial department.

“Following an opportunity given to York Timbers to make oral representations, the department decided to use a combination of administrative enforcement tools, as provided for in the various pieces of environmental legislation. The pre-directive was aimed at addressing the activities and situation on site that poses a risk of serious harm to the environment (including air pollution) while the pre-compliance notice was aimed at dealing with the non-compliances relating to permitting requirements. These notices were issued to York Timbers in January 2009 and representations received in response thereto.”  It is not clear from the report what further action was taken.

Despite these findings of a “significant number of non-compliances found at the [Sabie Sawmill] site” and notices issued to the company between 2007 and 2010, we found no mention of any environmental violations in York’s recent Annual Reports. Instead, they contain statements like these:

  • As a responsible steward of the environment, York is committed to practicing sustainable forestry, conserving natural resources and energy whilst continually improving its environmental practices.” (AR2010, p.12)
  • York is committed over for [sic] the next 5 years to improve the air quality, water and waste treatment processes at all sawmills ensuring full compliance with current legislation.” (AR 2010, p.12)
  • This Forest Stewardship Council (FSC) certification assures stakeholders that products resulting from the York operations meet the social, economic and ecological needs of present and future generations.” (AR2011, p.20)
  • York promotes conservation by setting aside representative areas of biodiversity and managing them appropriately for the indigenous fauna and flora that occur there. Many of these areas contain rare or endangered species, and annual monitoring programmes are in place to support management decisions. York’s conservation plans integrate with those of the provincial conservation authority and the Mpumalanga Tourism and Parks Agency, thereby adding value and co-operation on a regional basis. York has a total of 1 100 hectares of indigenous forest within these protected areas. Grasslands have an important ecological value and are found throughout the landholdings.” (AR2012, p.7)

So how does one explain this fundamental disconnect between the way this company’s environmental conduct is being judged by authorities, including the NPA, and the way York represents itself to investors, potential investors, clients, accreditation agencies like FSC and the business media? How is it possible that a well-known listed company can plead guilty to an environmental crime, be the recipient of a confiscation order of the sort we usually hear about in relation to drug lords and endangered species smuggling (and a punitive costs order) with no apparent business consequences of any significance, and no apparent impact on its management?

Is it possible that investors and the market are not adequately informed? Despite some media coverage of the judgement pursuant to a media statement by the DEA, we cannot find any trace of a SENS announcement by York to inform current shareholders or the market of the conviction or the confiscation order (as at 30 June 2012, large shareholders in York include the Industrial Development Corporation (28.7%), Lereko Metier Capital Growth Fund (16.5%), Coronation Fund Managers (11.79%).) York’s own website is devoid of any mention of the case. Yet on the day that the DEA issued a media statement on the confiscation order, York shares fell 2.71 percent, suggesting that this information was probably material to at least some shareholders. On 28 April 2013, only a few weeks later, the Sunday Times ran a story expounding on York’s plans to expand aggressively – to the tune of R1,5 billion –  into Mozambique and Angola (“York is logging a major recovery“). The report made not a single reference to the company’s recent criminal conviction, nor to its history of environmental non-compliance. (Interestingly, the share price fell a further 1.72 percent on news of York’s leave to appeal against the Regional Court ruling.)

Clearly there is still a need to crack the glass ceiling on criminal penalties and find ways to make penalties an actual deterrent against environmental crime, and – where appropriate – be significant enough to ensure that disclosure is mandatory. York is a listed company who in FY2012 reported gross revenue of more than R1 billion, and net profit of R216 million (R138 million after tax). The R180,000 fine – likely agreed in a plea and sentence agreement – is largely immaterial. Even if the magistrate had imposed the maximum penalty of R5 million provided for in NEMA, that would still only amount to 2% of net profit for York for the previous financial year. The R180,000 York now has to pay – excluding interest – amounts to 0.08% of that net profit for FY2012. Add the confiscation order and you get to R630,000 – hardly an amount that shareholders in or creditors of a listed company are likely to care about.

But are shareholders not entitled to know what kind of company they have invested in, or are considering investing in? Allowing a company to undertake activities that result in a guilty plea for a criminal conviction coupled with confiscation order under POCA is surely at best a significant failure in management; in this case, there were also allegations of dishonesty and misrepresentation. In its application for the confiscation order, the NPA argued that “[t]he mentioned history of the Defendant’s dishonesty shows continued deliberate attempts to avoid the legal and financial consequences of their illicit actions. It also shows a lack of remorse on the part of the Defendant for the environmental crime that they had committed. This behaviour amounts to an abuse of the legal process and is worthy of the strongest censure. This behaviour is certainly not expected from a company that the Defendant alleges has a good name and reputation.” Considering that the magistrate apparently accepted these arguments and granted a punitive costs order against York, a company like York should be profoundly embarrassed by this, appeal or no appeal. Management heads should roll.

It is a common complaint that authorities are ineffective in enforcing environmental legislation, and indeed even companies themselves will use the lack of effective enforcement as a reason for their failure to invest in compliance. In this case, we see extraordinarily effective action by a range of authorities (if not as speedy as one would like). It should be clear to all environmental violators that the NPA and the authorities who detected and investigated this case are raising the stakes, and are starting to use new tools to fight environmental crimes.

How will corporate South Africa respond to this turn of events? Thus far, for York Timbers, we see absolutely no business consequence to the violations, or the enforcement action taken. Now that authorities are getting better at environmental enforcement, it is time for corporate South Africa to show their true colours and demonstrate that they truly support environmental sustainability and compliance. Whatever the outcome of York’s appeal, we need to see investors – particularly institutional investors – stand up and take issue with those responsible for what appears to be willful disregard for environmental laws.

Read the heads of argument and media coverage of this case here.

Latest: Read about York’s latest plans for the R1.5-billion “site integration project” at their Sabie facilities: Forestry group moves ahead plan to integrate Sabie site, extract more value, Engineering News, 10 May 2013