LEGALITY MANAGEMENT SYSTEMS OF TIMBER LOGGING AND TIMBERPRODUCTS SUPPLY FOR EXPORT VALID IN THE RUSSIAN FAR EAST.
Alexander N. Sidorenko
Dalexportles Association of Timber Exporters, Far East, Russia

GENERAL OVERVIEW
Dear ladies and gentlemen! Dear participants of theseminar!
I am thankful to the organizers for a kind invitation andopportunity to introduce a management system for legalityof raw materials origin in the Russian Far East.
Several monitoring systems for legality of timber
harvesting and timber products supply for export exist on
the territory of the RFE:
•The state system is based on more than 30
legislative acts, and over 15 forestry ministries,
agencies and departments are involved in thisprocess.

Since the above laws are our internal laws, it is obvious,that there are very few people from other countries who
are familiar with the real situation in the Russian Timber
Industry Sector, and with the Russian system of forest use
and management in particular.
••Dalexportles Association(DEL) Verification
System andSGS VLTP System.
I’ll briefly describe each of them.

THE STATE SYSTEM FOR LEGALITY CONTROLThe state system covers all stages of the forest
business. In the thirties of the last century the research of
the forest stock of Russia was started. The strict
centralized regime, the state ownership on everything
without exception and a planned economy required
regular inventory of the whole property of the Soviet Unionof that period. A unique system of total inventory andcontrol has been established in each area and for eachbranch in the Soviet Union, including forestry. All forests
have been divided into districts and allocated to the statetimber industry incorporations.

long-term state policy in sustainable forest management.
There is a considerable number of territories, where forest
use is either restricted or completely prohibited. Such
restrictions are mainly related to environment protection
issues, water protected area areas, etc. At this stage thefederal laws, the Forest Code and Tax Code regulate thecompany’s activities.
The enterprise develops a cutting plan and otheractivities for harvesting in accordance with the state
regulations. The annual volume for harvesting is limitedby allowable (prescribed) cutting, providing a sustainable
forest management in the allotment of the leased forestfund. The observance control for cutting volumes andtechnology, ecological issues compliance is provided by
the state inspections: Rosleskhoz, Rosprirodnadzor,
Rosselkhoznadzor, Ministry of Natural Resources,
Ministry of Forestry Industry, environmental departments
at the Government of each territory, the subject of theRussian Federation.
Responsibility for violation of legislative acts andregulations under the above mentioned state departments
is various and depends on the degree of the violation.
Punishment varies from a financial fine to the enterprise’s
right deprivation on lease of a forest plot; whereas acriminal liability can be applied to the head of the company.
The infringer practically risks losing his business andfreedom.

Under the results of the logging operations, theforestry industry enterprise submits a declarationthat informs the state of the work performed: harvest
volumes, place of logging, etc.
After submission of the declaration on logging
executed, verification procedure of the data officiallyannounced and the actual data starts.
Both land survey and aerial photography fromplanes and satellites are used to perform
verification.

The forest inventory enterprisers organized for that
purpose have thoroughly studied and described thespecies of the forest stock, its density and age on everyallotment. The forest stock study and inventory is carriedout regularly to present day. They have also preserved thesystem of distributed and allocated plots of forest stock totimber industry enterprises.
The state grants plots of the forest fund to the forest
users for a long-term lease up to 49 years. At the sametime they estimate the legal status of a company- lessor,
its business solvency and social responsibility.
The forest plots are granted in compliance with theDrawing 1.shows the processed aerial photography
images.

Using the analysis of the aerial photography results,
one could see the violations, including the compact
undercut and harvesting outside of legal boundaries.
Moreover, the aerial photography allows disclosing thesigns of large environmental disruptions.
The violations detected from aerial photography are
double-checked and verified by land survey. The land
survey is also used to identify smaller ecologicaldisruptions. 1580 people, the forest unit workers, carry out
the land inspection in the Khabarovsk Territory. The
results of all kinds of control are compared, analyzed andissued for further decision- making.
The further control over the legality of wood productsupply for export under the state system is assigned to
Rosselkhoznadzor and the companies-carriers.
At dispatch station, while being transported in the otherregion, Rosselkhoznadzor checks timber at the storage
place and prepared for shipment for legality.
The
quarantine certificate, which indicates the volume andstructural parameters of the timber products for shipping,is issued.
Weighing of loaded cars at large transit terminals also
allows disclosing violations, related to illegal overweight ofcars, when the real volume of the timber products
exceeds the volume declared in a waybill.
The most frequent violations are the ones executed bydoubtful companies, when they deliver timber to People's
Republic of China via Grodekovo Terminal. If infringement
occurs, the fine is five times the amount of thetransportation fee.
Upon the freights’ delivery in ports, the goods are put
into customs control zones. Rosselkhoznadzor watchescarefully that all cars, arriving to a port and loaded withtimberproducts,
havequarantinecertificates.
Rosselkhoznadzor inspectors together with the VNIIKR
specialists (All-Russia Scientific Research Institute forPlants Quarantine) inspect timber again, calculatequarantine certificates issued at the place of shipment,
verify with the actual number of certificates at the storage
area and issue a unified phyto- quarantine certificate forall ship consignment.
The customs inspection precedes timber products’
loading on board a ship. In this case the procedures areregulated by the Customs Code. The Customs bodiesbuild their work upon the conclusions made by
Rosselkhoznadzor, Chamber of Commerce and Industry
expertise and other independent expert reports,
concerning the quantity and quality of the goods to be
shipped for export. The Customs also performs its own
inspection of the goods ready for shipment for export.
After completing loading the Customs issues a Cargo
Customs Declaration, which confirms the legality of timber
products shipped for export.
It’s obvious that a Cargo Customs Declaration cannot
provide a hundred percent guarantee for the productlegality. We acknowledge that we have such violations but
the state is fighting against those and the violation’s
number is getting reduced.
The violations are divided into two major categories:

1.
2.

Illegality of harvesting, causing damage to theenvironment;
Illegality related to economic violations in forestry
business.

Illegal harvesting in Russia is rather limited due to theexisting system of overlapping satellite and airplanecontrol. The above violations and the persons at fault
could be easily identified and punished. In this connection,
the number of violations in the harvesting process isgradually dropping.
It’s more complicated to control the economic
violations in the forestry business, where the major
violation is deviation from taxes payment. Unfortunately,
the similar violations are typical for all other branches ofindustry and not only in this country.
One of most significant issues is the price making
procedure for the timber products to be sold is a rather
serious process. The price is defined and establishedbetween a seller and buyer individually, upon theirdiscretion and depends on many factors.
On a monthly basis, the State Customs Committee sets
up the prices minimum level, recommended for usage by
the customs throughout the territory of Russia, when
determining the customs value of the goods for export,
including the timber products.
In case the exporter declares the price lower than thefair value, the customs shall correct the export duty, using
the legislative act- Adjustment of the Customs
Value.However, because of the unfair actions during pricemaking (double invoices), a gross violation of the RussianCurrency and Tax legislation occurs. It happens when aseller asks a buyer to transfer only a part of the sum to an
account in Russia, whereas the rest would be transferred
to various bank accounts.
In this case the customs duties do not suffer, but the statebudget receives less of the tax revenues, and an unfair
exporter receives an additional illegal profit, saving ontaxes.
It’s a serious infringement of the Federal Law No.173Φ3 of December 10, 2003 “On Currency regulation andcurrency control”, Chapter 3, Article 19 and is penalizedby fine from three fourth up to one size of the sum ofmoney resources, which have not been paid onto theaccounts in authorized banks ”. Point 4, Article15.25. of“ the Code on Administrative violations ” of December 30,2001. No.195-Φ3.
The Currency Control Bodies of the Central bank ofRussia observe this kind of infringement through theagent banks, realizing settlement operations under foreign
trade contracts. Under such infringement theunderestimated base for the taxation is formed. Only after
receiving all amount of money for the sold goods on hisaccount, the seller has the right to transfer money to any
account of any country if necessary.
This significant infringement is very difficult formonitoring from Russia. The Customs follows the unified(indicative) prices. If the prices of the sale are lower than
the indicative prices, the Customs have no right to either
forbid export of the goods or make any obstacles, but will
only increase the duties up to the level of therecommended (indicative) prices. The attempts of theCustoms to stop export of forest products under the illegal
prices have been challenged in courts by the sellers. The
function of the customs is to collect duties for the goods
crossing the border, and the customs is not a commercialorganization to define what price is fair and what price is
not fair.
However, the Japanese companies –buyers canrender a great help to the Russian party in stopping theabove violation, which we call “ the illegal price”, andconsequently in stopping the illegal timber products supply.
From now on the Japanese buyers know that all money
should be transferred to an account of the seller, specified
in the contract and if a Russian seller asks to transfer
money to several accounts, using double invoices, itmeans an illegal activity.
The purpose of any illegal activity, in most cases, is toreceive additional revenue, which is impossible when you
observe the legislation.
The illegal activity is accompanied by reduced costs at
timber harvesting, when every sort and kind of regulations
and legislative acts are violated, the environmental
sustainability is infringed.
The State Control System struggles against the above
mentioned violations.
Illegal activity is also accompanied by a product value
hidden from taxation- it’s the trade using double invoices
under “illegal price. At this stage we are applying ourJapanese colleagues for support and interaction and notto purchase forest products from Russia for which it isnecessary to transfer money onto accounts not specified
in the contract. It is an illegal purchase.
VERIFICATION SYSTEM FOR
IMPLEMENTED BY TIMBERDALEXPORTLES ASSOCIATIONLEGALITY BEINGEXPORTERS OF

Besides the State System of Control, there exists theverification system on legality for timber harvesting andtimber supply for export, being implemented by
Dalexportles Association.

1)
2)

The items under verification are subject to the policyof the Association, developed for the purpose of theverification on legality for timber harvesting and timber
products supply for export.
The appointed commission of experts receives from theenterprise - applicant answers to the questionnaire,totaling 78 points.
The questions are categorized under the following
headings:
1.

2.

3.

4.
5.

6.
This work started after the moment the Memorandum
between Dalexportles, the Far Eastern Timber Exporters
Association and Japan Lumber Importers Association wassigned in Khabarovsk, Russia in April 2006.
In accordance with the Memorandum the Russian
exporters have to confirm the origin of raw timber forlegality using one of the existing systems, that is byreceiving the certificates of sustainable forest
management.
Taking into consideration that receiving of the certificate
under “FCS" system takes long time, it has been agreed
to accept the guarantee from Dalexportles Association as
the provisional measure for the above period.
The collective verification system on legality fortimber harvesting and timber products supply for export,
being implemented by Dalexportles Association, is asfollows:

Above all, a company should be the member ofDEL;
The Association appoints a commission ofexperts, consisting of the representatives of theauditing company, Far East Forestry ResearchInstitute and representatives of the Executive
Board of Directors of DEL Association.

The legal status of a company
Law observance/compliance of a companyapplicant is verified at the stage when thecompany issues shares and undergoes theprocedure of registration as the business
representative.
Access to land and forest fund
Under this item the legality for harvesting
operations right acquisition is verified;contracts, providing the foundation for theallotments of forest fund granted to a company–applicant, are examined, fulfillment ofobligations by the company-applicant under thesigned contracts is assessed.
Timber products manufacture technology
The expert team studies the harvesting
technology and its compliance with the law andregulations
Quality management system
Regulations observance of storing, measuring,
grading and inventorying of timber products
Sustainable forest managementIt
includesobservanceoflegislation
requirements in terms of environment protection,reforestation, forest fire protection, utilization of
all timber products assortment, etc.
Enterprise management systems

Completeness and correctness of tax and otherobligatory payments is examined. The established level ofsalaries and obligatory payments to budget andnon-budget funds is studied.
I would like to point to the fact that the companies,optimizing the above item, that is applying illegal schemes
for reducing tax fees, do violate the Law. Besides, they
have an opportunity for receiving excess profits, andconsequently expanding their illegal activity.
It should be noted that the examination for completenessand correctness of the tax computation is a distinctive
feature of the verification system being implemented by
Dalexportles Association, compared to other actingsystems.
7.

Timber products traffic monitoring
Warehousing methods, inventory of timber
product traffic in the warehouse and observanceof the Customs Code is attested at this stage.

The attention is focused on the value of theproduct to be sold at this stage.
The Association informs the company-applicant of theexpert commission assessment results and its decision,
which either confirms the legality of harvesting and wood
products supply for export, or rejects it.
3)

In case the company-applicant is not theDalexportles Association member, the former
can apply for a membership.

The observance of laws, reputation –are the values,
highly respected by the Dalexportles Associationmembers. We are happy to state that more and morecompanies share our views and approaches are ready tobecome DEL Association members and be verified forlegality of harvesting and wood products supply forexport.
SGS VLTP VERIFICATION SYSTEM
Besides the above described State Control System
for legality of the raw timber origin and its supply for export
AND the collective verification system being implementedby Dalexportles Association, the Validation of Legal
Timber Programme (VLTP) is being realized on theterritory of the Russian Far East. The Programme isrepresented in a separate block and I shall only briefly
report on it.
Validation of Legal Timber Programme (VLTP) is thepart of a global Forestry Monitoring Programme, which
operates in 145 countries. The objective of theProgramme is to contribute to international, national andregional initiatives aimed at struggling the illegal timber
harvesting and trade of illegally produced timber products.
The concept of the Program meets the requirements ofinternational initiatives for fighting the illegal forest
management.
In the Russian Far East SGS VLT Programme isbeing implemented under the Territorial Governments
within the state- private partnership framework on a
voluntary basis. “Legality verification” under SGS VLTP
is considered as an alternative, but additional and usefulstage in the sustainable forest management verification
process.
Program management is realized by SGS in
partnership with the local organization, the Center ofForest Certification, through the VLTP Agency, set up in
Khabarovsk, Far East of Russia.
Verification methods for legality include: datacollection and cross analysis of the information received
from the companies and competent state bodies,
undeclared inspections of production areas, continuous
monitoring of industrial operations, data analysis of thetimber products manufacture in dynamics and data
analysis of the remote monitoring.

CONCLUSION
It’s quite obvious that of the above-introduced
systems for verification on legality for timber harvesting
and timber products supply for export, the State Control
System is the most powerful and effective one. It consistsof a great number of overlapping verification sub-systems,
which double-check each other in some cases. The State
Control System is responsible for reliability of theinformation provided or for hiding of information. At thesame time the companies under inspection bearresponsibility for violating the Law. The system of
ecological safety has always been an old tradition in
Russia.
I can gladly note that we at present we observe theinteraction of the representatives of different controlling
institutions and determination of the timber industry
companies to conduct a responsible and legal businessand it’s the most important tendency. We all realize thatlegal, transparent and sustainable business is theguarantee for our future