System for monitoring and tracking the origin of raw material in the Amazon Biome. Independent auditors limited assurance report

Transcription

1 JBS S.A. System for monitoring and tracking the origin of raw material in the Amazon Biome Independent auditors limited assurance report For the period from December 1, 2011 to May 31, 2012 MAA/VAB /JMK/NLM/SC 2852i/12

2 Tel.: Rua Major Quedinho 90 Fax: Consolação São Paulo, SP - Brasil INDEPENDENT AUDITORS LIMITED ASSURANCE REPORT To JBS S.A. Attn: Mr. Márcio Nappo São Paulo - SP Introduction We were engaged for the purpose of applying limited assurance procedures on the criteria and processes of implementation and maintenance that JBS S.A. (JBS) has adopted to guarantee the origin of its raw material (cattle purchase), exclusively in the Amazon Biome, for the period from December 1, 2011 to May Management s Responsibility JBS s management is responsible for the fair preparation and presentation of the information referring to the criteria and processes established to guarantee the origin of its raw material and for the internal controls considered necessary to allow the preparation of this information free of material misstatement, whether due to fraud or error. Independent auditors responsibility Our responsibility is to express an opinion on such information, based on the limited assurance engagement performed for its publishing and disclosure to external public. The limited assurance procedures were followed according to the Standard NBC TO Assurance Engagement Different from Audit and Review, issued by the Federal Association of Accountants (CFC), which is equivalent to the international standard ISAE International Standard on Assurance Engagements, issued by International Auditing and Assurance Standards Board (IASB), both for assurance engagements different from audit or review of historic financial information. These auditing standards require that we comply with relevant ethical requirements, including independence requirements, and that the engagement be performed to obtain limited assurance as to whether the information on the criteria and processes to guarantee the origin of the raw material is free from material misstatements. 2

3 A limited assurance engagement performed in accordance with NBC TO 3000 (ISAE 3000) mainly consists of making enquiries to Management and to other professionals of the Company responsible for the preparation of the information, and of applying analytical procedures to obtain evidence, which allow us to conclude on the limited assurance information taken as a whole. A limited assurance engagement also requires the adoption of additional procedures, if we become aware of issues that lead us to believe that the information provided may show material misstatements. The procedures selected were based on our understanding of the aspects related to the gathering and presentation of the information and of other circumstances of the work, and on our consideration about areas where relevant misstatements may exist. The limited assurance procedures comprise: (a) Planning of the work, considering the relevance, coherence, and volume of quantitative and qualitative information, and the operating and internal control systems used as basis for the preparation of JBS information; (b) Understanding the specific procedures adopted by the Company for the acquisition of cattle in the Amazon Biome by means of the document Cattle Purchase Program and of interviews with the people in charge of meeting the criteria established; (c) Crosschecking, based on sampling, the quantitative and qualitative information against supporting documentation; and (d) Checking the procedures followed for the monitoring of the properties suppliers of raw material. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our limited opinion. Scope and limitations The purpose of our work was applying limited assurance procedures on the criteria and processes adopted by JBS for the acquisition of cattle in the Amazon Biome, including the evaluation of its sustainability policies, practices and performance in the supply chain. The procedures applied do not represent an exam of financial statements according to audit standards. Qualitative interpretations on the materiality, relevance and accuracy of data are subject to individual assumptions and judgments. Additionally, our report does not provide any assurance on the scope of future information (such as targets, expectations, strategies and projections) and descriptive information which is liable to subjective evaluation. 3

4 Conclusion Based on the procedures followed and herein described, and except for the indirect suppliers chain and adhesion to the traceability system of the cattle production chain, from the animals birth to slaughter, whose comments are detailed further in the present report, we are not aware of any fact that lead us to believe that the procedures adopted by JBS, from December 1, 2011 to May 31, 2012, in regard to the processes of purchase of raw material in the Amazon Biome, are not in compliance with the social and environmental criteria applied by the Company in regard to what is demanded from its direct suppliers of cattle. São Paulo, November 14, BDO RCS Auditores Independentes CRC 2 SP /O-1 Mauro de Almeida Ambrósio Accountant CRC 1 SP /O-5 4

5 Introduction System for monitoring and tracking the origin of raw material in the Amazon Biome (*) (*) Text provided by JBS In order to guarantee that the origin of its raw material is not associated to deforestation, degrading work conditions or unlawful occupation of Conservation Unit or Indigenous Lands, JBS has developed since 2010 a monitoring system in the Amazon Biome that uses satellite images, georeferenced data of the suppliers holdings, and information from official public bodies to analyze each farm, supplier of the Company, located in that area. In the implementation of JBS' monitoring system, in view of the lack of a public registry with georeferenced maps of the rural properties, JBS started to gather at least a pair of geographical coordinates of the animals shipment point (shipment loading pen) in each farm of its suppliers and started ted to monitor, within a 10 km radius of the collected point, possible deforestation and/or encroachment of Indigenous Lands and/or Conservation Unit. Also in order to improve the information of its monitoring system, all suppliers of JBS in the Amazon Biome are required to send their official documentation with the geographical boundaries of each suppliers holding, such as the CCIR (Certificate of Registration of Rural Property), LAR (Rural Environmental License), CAR (Rural Environmental Register), georeferenced map, Title deed or the Descriptive Memorandum. Using this information the monitoring system of JBS analyzes whether the maps of the suppliers holdings (georeferenced maps or pair of geographical coordinates of the animals shipment point + 10 km radius of the collected point ) show them included in environmental restriction areas (deforestation, Indigenous Lands or Conservation Unit). If there are restrictions rictions to any of the criteria referred to above, the suppliers holdings are classified in JBS Monitoring System as IRREGULAR. Suppliers holdings whose perimeter (georeferenced map) show them included in areas undergoing degradation, Indigenous Land or Conservation Unit, or whose pair of geographical coordinates of the shipment point (shipment loading pen) + a 10 km radius are within any of these restriction areas, are classified as IRREGULAR. In these cases, the farm is immediately excluded from the information system (ERP) of JBS (excluded for new cattle purchase). 5

6 Holdings without georeferenced maps and whose pair of geographical coordinates of the shipment point (shipment loading pen) + a 10 km radius are out of deforestation areas, Indigenous Land or Conservation Units are classified as on ALERT. Therefore, if no environmental restriction is confirmed, the properties classified as on ALERT will be eligible to sell its cattle to JBS and the supplier will be required to provide documents with the official geographical boundaries of the holdings, so that the perimeters of the properties can be checked. Finally, holdings monitored through georeferenced maps with no environmental restriction of any kind are considered ELIGIBLE. In addition to the analyses of geographical information obtained from the maps of the suppliers' holdings and of the environmental restrictions areas, JBS Monitoring System also checks, automatically, the lists of restrictions from government bodies (list of properties embargoed by the Brazilian Environment and Natural Resources Institute - IBAMA, the Black List of Slave-Like Work from the Ministry of Labor and Employment MTE, and of the Federal Public Prosecution Office - MPF), to check whether JBS suppliers have undergone embargoes or notification by any of those bodies. If any supplier or suppliers holdings are found in those lists, the name is excluded from the information system (ERP) of JBS for cattle purchase. This verification of the official lists is also made in three different moments: By the cattle purchaser before the purchase agreement is entered into, before shipment and transportation of the animals from the farm to slaughter, and before the slaughter of the animals at the meat-packing plant. Also, in order to reinforce its commitment to sustainability, JBS delivers to its suppliers, in the first purchase made to a meat-packing plant, a document presenting the socio-environmental criteria adopted by the JBS for the purchase of cattle. Additionally, JBS has participated pated in the most important discussion groups searching solutions and sustainable production models, such as the Working Group on Sustainable Beef (GTPS), the Global Roundtable for Sustainable Beef (GRSB) e Leather Working Group (LWG) formed by representatives of different sectors that make up the value chain of cattle production in Brazil and in the world. 6

7 Amazon Biome Socio-environmental criteria adopted by JBS for the purchase of cattle in the Amazon Biome 1. Zero Deforestation in the Supply Chain: a. Providing evidence, in a way that can be monitored, checked and reported, that no rural property, which is a direct supplier of cattle for slaughtering (feeder cattle farm) and which has deforested the Amazon Biome, as from October 5, 2009, is part of JBS s list of suppliers; b. Providing evidence, in a way that can be monitored, checked and reported, that none of its indirect suppliers (such as breeding and rearing farms involved in the Company s production chain) and which has deforested the Amazon Biome, as from October 5, 2009, is part of JBS s list of suppliers; c. Properties where deforestation of the Amazon Biome has been proved will be excluded from the list of suppliers, and will only be accepted again after proving the reparation of environmental damage, entering into a Conduct Adjustment Agreement (TAC), paying possible fines and indemnities applied to them, and proving the compliance with the effective environmental laws, including land title regulations. 2. Rejection of the invasion of protected areas and indigenous people s territory: the Company and its products shall be exempt from involvement in invasions of indigenous people s territory and areas protected by Federal, State or Municipal laws. a. Farms accused by the Federal Public Prosecution Office (MPF) or by the Brazilian Indian Foundation (FUNAI) of invasion of indigenous people s territory, farms included in the list of properties embargoed by the IBAMA, and those notified and assessed by state or federal bodies for invasion of protected areas will be excluded from the Company s list of suppliers, after unmistaken proof of the situation. These farms will only be accepted again after proving the reparation of environmental damage, entering into a TAC, paying the fines and indemnities applied to them, and proving the compliance with the effective legislation ruled by the MTE, MPF, FUNAI, IBAMA and other involved bodies. 3. Rejection of slave-like like work: a. Farms notified and assessed for degrading or slave-like like work, after unmistaken proof of the situation by the Company, will be excluded from the list of suppliers for a period of 2 (two) years and will only be accepted again after proving compliance with the legislation in effect ruled by the MTE and the MPF, or after entering into a TAC. 7

8 4. Rejection to land fraud and violence in the rural area: a. The Company will exclude from its list of direct or indirect suppliers, after unmistaken proof of the situation by the Company, those producers accused of land fraud by the Public Prosecution Office or by Federal or State Land Institutes, or provenly involved in provoking land conflicts based on accusations of the Public Prosecution Office. The return of the supplier to JBS list shall happen after a TAC is entered into or the accusation is dismissed. 5. Production traceability system verifiable, reportable and able to be monitored: Cattle can only be supplied by farms or groups formally committed with the adoption of a reliable traceability system which, in addition to the current demands, include clear environmental requirements intended to eliminate deforestation. a. The Company shall obtain from its direct and indirect suppliers the GPS coordinates of their rural properties in the proper scale, with a clear definition of their boundaries and of the used and unused areas, in addition to recent satellite images of the farm area. b. The Company has to prove that its direct suppliers have a rural environmental register within six months and/or an environmental license within 24 months, granted by the state or federal government body, as long as there is no impediment to do so from third parties. c. Until 2014, the Company intends to accept as suppliers only rural producers capable of proving the legality of their title deeds. All properties shall have available satellite images and GPS coordinates showing the used areas, conservation reserves and protected areas. d. The Company shall prove, in a way that can be monitored, checked and reported, the origin of all slaughtered cattle through a reliable and internationally accepted traceability system, and that deforestation, slave-like like work, invasion of indigenous land and of protected areas are not part of its supply chain. 6. Implementation of commitments in the production chain: a. The Company shall inform its suppliers of all requirements referred to above and make clear that the ones that do not satisfy these criteria will no longer be accepted as suppliers. A commission will be formed to monitor and follow the protocol in order to analyze, study and correct the course of the industry in favor of zero deforestation. To that end, the commission will have monthly meetings with representatives of the industry, NGOs, clients, financial institutions and the government. 8

9 Methodology, sampling and tests conducted As aligned, data and information from 6 (six) meat-packing units located in the Amazon Biome already audited in a previous work (RFP JBS 0012SUS2011/Business Proposal BDO No. 1592/11 June/2012) were used, and 2 (two) more units (Vilhena RO and Pimenta Bueno RO), as previously agreed, were selected for a more comprehensive sampling of JBS' operations in the Amazon Biome. Accordingly, this report includes analyses and procedures applied in 8 (eight) meat-packing units of JBS, namely: Alta Floresta Mato Grosso; Marabá Pará; Matupá Mato Grosso; Pimenta Bueno Rondônia; Redenção Pará; Rio Branco Acre; Tucumã Pará; Vilhena Rondônia. The stratified sampling was processed from the classification of 23 (twenty-three) meat-packing units of JBS operating in the Amazon Biome, considering the location and size of the slaughter facility (small, medium and large), which resulted in the selection of 8 (eight) meat-packing plants. During the period from August 20 to 21, 2012, a visit was made to the units of Vilhena RO and Pimenta Bueno RO, to better understand JBS' operations in regard to their routines of purchase of cattle and gathering of the documentation required for the analyses. The same procedures were followed for the remaining meat-packing units included in the scope of the previous audit. In all units it was possible to check JBS internal controls in regard to the routine of purchase of cattle and examine the documents that make possible meeting all the socio-environmental criteria previously described. So, it is important to present the meaning of the following acronyms: Rural Environmental Record (CAR); Rural Environmental License (LAR)/ Single Environmental License (LAU)/ Environmental License of Rural Property (LAPR); Certificate of Registration of Rural Property (CCIR); State Department of the Environment (SEMA); Brazilian Environment and Natural Resources Institute (IBAMA); Ministry of Labor and Employment (MTE); National Institute of Colonization and Agrarian Reform (INCRA); Brazilian Indian Foundation (FUNAI); Ministry of Environment (MMA); Federal Public Prosecution Office (MPF); Chico Mendes Institute for Biodiversity Conservation (ICMBio). 9

10 In order to conduct the tests, 25 (twenty-five) cattle purchase from each unit of the sampling were randomly selected by means of the software IDEA - Interactive Data Extraction and Analysis. In the meat-packing units visited in the prior audit, the tests were conducted by means of a list of cattle purchases made from December 1, 2011 to May 17, 2012, extracted from the ERP system by a JBS team. As for the 2 (two) plants visited in August, it was possible to consider the whole period. Within the scope of this sampling, it is possible to consider the result obtained for the period from December 1, 2011 to May 31, During the exam of this total 200 (two hundred) purchases, the following issues were checked: Pair of geographical coordinates of the shipment point (shipment loading pen) + 10 km radius: existence of at least one pair of geographical coordinates in the register of the supplier farm in which the purchase was made; CCIR of the supplier farm: entry of the document number in the register of the supplier farm in JBS ERP system. If found, a copy of the physical document is required and a consultation made with the competent body, in this case, through INCRA s website: ( /emissao/formemissaoccirweb.asp); LAR/LAU/LAPR/CAR of the supplier farm: entry of the document number in the register of the supplier farm in JBS ERP system. If found, a copy of the physical document is required and its validity checked through a search on SEMA s website of the respective state; Cattle breeder s Declaration: Existence or not of the document signed by the cattle supplier, according to the template included in Attachment V; Date of the last monitoring of the supplier farm carried out by APOIO Consultoria on a date previous to the cattle purchase analyzed: Date checked in the history of the monitoring, prior and closer to the purchase date stated in the invoice examined; Monitoring result: Classification of the supplier farm as ELIGIBLE, ALERT or IRREGULAR after analyzing the geographical information of the supplier farm (digitized d maps or at least a pair of geographical coordinates of the shipment point (shipment loading pen) + 10 km radius) and the satellite images available in regard to deforestation, Conservation Units and Indigenous Lands; Reason for the classification of the supplier farm: Register available in the monitoring report prepared by APOIO Consultoria which justifies the result determined by it; Period between the monitoring of the supplier farm and the purchase made: Number of days from the last monitoring carried out by APOIO Consultoria to the cattle purchase made by JBS in the respective supplier farm. 10

11 Specifically in regard to the socio-environmental criteria of the Company for the purchase of cattle in the Amazon Biome, we highlight: 1.a) Providing evidence, in a way that can be monitored, checked and reported, that the purchase of cattle was made only from properties which have not deforested the Amazon Biome, as from October 5, 2009, that is, properties classified as ELIGIBLE by APOIO Consultoria, and whose monitoring was carried out before the purchase date. We point out that our analyses comprise cattle purchases made during 6 (six) months, between December 1, 2011 to May 31, 2012; 1.b) Providing evidence, in a way that can be monitored, checked and reported, that none of its indirect suppliers has deforested the Amazon Biome; 1.c) Proving the exclusion from JBS list of suppliers, s, of the supplier farms where deforestation of the Amazon Biome has been proved and acceptance of those farms only after proving the reparation of environmental damage, entering into a Conduct Adjustment Agreement (TAC), paying possible fines and indemnities applied to them, and proving the compliance with the effective environmental laws, including land title regulations; 2.a) Checking the lack of involvement of the supplier farms of JBS with the invasion of Indigenous Land and Protected Areas, and in case of accusation by the MPF or FUNAI, checking the exclusion of the farm from the suppliers' list; 3.a) Checking the purchases made by JBS in the period under analysis, by verifying if the CPF/CNPJ (Individual/Corporate Taxpayer Identification Number) of the supplier is included in the registry of employers found exploiting workers in slave-like work conditions. If that is the case, verifying the exclusion of the involved farms from the JBS list of suppliers for a period of 2 (two) years and acceptance of those farms only after proving compliance with the legislation in effect, ruled by MTE and MPF, or entering into a TAC. 4.a) Proving the exclusion from the Company s list of suppliers, of farm owners accused of land fraud by the Public Prosecution Office or by Federal or State Land Institutes, or provenly involved in provoking land conflicts based on accusations of the Public Prosecution Office; 5.a) Checking the existence of digitized maps of the farms suppliers of JBS and quantifying the total number of digitized maps; 5.b) Existence of CAR and/or LAR/LAU/LAPR granted by responsible state or federal government bodies to the direct suppliers' holdings of JBS, according to established terms; 5.c) According to the objective established by the Company, it was found that JBS evaluates the legality of its suppliers title deeds by means of the CCIR. Accordingly, the CCIR entry in the register of the supplier farm in JBS ERP system was checked, and if found, a copy of the physical document was received and a consultation made with the competent body, in this case, through INCRA s website; 11

12 5.d) Checking the existence of a reliable and internationally accepted traceability system that allow proving, in a way that can be monitored, checked and reported, the origin of all slaughtered cattle, so to guarantee that deforestation, slave-like like work, invasion of indigenous land and of protected areas are not part of JBS supply chain; 6.a) Proving the meeting of the monitoring committee. The result of the tests conducted is Attachment I. Along with the analyses of the 25 (twenty-five) purchases of each audited unit, an additional sample of 16 (sixteen) purchases randomly selected, 2 (two) of each selected unit, was determined to evaluate the whole monitoring process carried out by APOIO Consultoria. For this analysis, and in order to understand the whole monitoring process, a visit was made to the company that carries out this monitoring, APOIO Consultoria (a service provider engaged by JBS, located in Redenção - Pará, and specialized in satellite images processing, remote sensing and geoprocessing), and an interview was conducted with the team responsible for the work. In that occasion it was possible to follow all the methodology used in the monitoring process, from the request of the sustainability team of JBS until the answer of the consulting company with the classification of the property and the reason for that result. The details of this exam are included in Attachment II. For the analyses of the official lists of embargoed areas (IBAMA), the whole list of embargoed areas was downloaded from the website of IBAMA, except for the states of Pará and Mato Grosso, due to an error of the website during our consultation, which prevented us from gathering the data from these e 2 (two) states, although the analysis of the 25 (twenty-five) purchases of the samplings of the units in those states (Alta Floresta and Matupá MT, and Marabá, Redenção and Tucumã PA) was sufficient for the audit procedures. With these data, it was possible to compare the official list of IBAMA of embargoed properties with the purchases from December 1, 2011 to May 17, 2012 (for the units visited in the prior audit) or to May 31, 2012 (for Pimenta Bueno - RO and Vilhena - RO). Following the same methodology, the complete list of the Registry of Employers found exploiting workers in slave-like like work conditions, provided by the MTE, was compared with the purchases from December 1, 2011 to May 17, 2012 (for the units visited in the prior audit) or to May 31, 2012 (for Pimenta Bueno - RO and Vilhena - RO). The results and specifications of this analysis are included in Attachment III. 12

13 Conclusion The conclusions on the procedures implemented by JBS to guarantee the origin of the raw material for its operations in the Amazon Biome, and the results obtained from the selected samples, are described below: Based on data generated on 11/12/2012, we found that JBS has 22,549 (twenty- two thousand, five hundred forty-nine) supplier farms located in the Amazon Biome included in its list of suppliers, when considering the active registers from 01/01/2011 to 31/08/2012. From this total, JBS has actually purchased from approximately 15,062 (fifteen thousand, sixty-two) farms in average, in the last 3 (three) years. In 2010, it has negotiated with 15,444 (fifteen thousand, four hundred forty-four) four) farms, in 2011 with 15,015 (fifteen thousand, fifteen) farms, and from January to August 2012 with a total of 14,726 (fourteen thousand, seven hundred twenty-six) farms; JBS has at least a pair of geographical coordinates of the shipment point of the cattle (shipment loading pen) + a 10 km radius of 100% of its suppliers; JBS has requested from its suppliers the digitized maps of the supplier cattle farms, as well as the official documents describing the geographical boundaries of the property or descriptive memorandum for digitalization of the property map; With the digitized maps of the supplier farms, JBS monitors its chain of suppliers, through the company APOIO Consultoria, oria, by checking areas of deforestation, invasion of Indigenous Land or Conservation Units; Based on data generated on 11/12/2012, we found that JBS has 9,920 (nine thousand, nine hundred and twenty) digitized maps of the supplier farms located in the Amazon Biome in the data base of the Amazon Biome Monitoring System, kept by APOIO Consultoria; If the supplier does not have a digitized map of the farm and does not provide the official documents of the property for the digitalization of the maps, JBS monitors ors the farm using the pair of geographical coordinates of the cattle shipment point (shipment loading pen) and adding an area of 10 km radius of that point, internally called as security buffer, checking deforestation areas, invasion of Indigenous Land and Conservation Units; Based on data generated by JBS on 11/12/2012, we found that the Company had 509 (five hundred and nine) supplier farms blocked for deforestation, 171 (one hundred seventy-one) suppliers farms blocked for irregular occupation of indigenous land, and 82 (eighty-two) two) supplier farms blocked for irregular occupation of Conservation Units, which total 762 (seven hundred, sixty-two) supplier farms blocked in the Amazon Biome; Additionally, on the same date, 2,810 (two thousand, eight hundred and ten) supplier farms were blocked due to embargoed areas (IBAMA) and 83 (eighty-three) three) due to slave-like work involvement (MTE); In total, 3,655 (three thousand, six hundred fifty-five) five) supplier farms were blocked for purchase in the ERP system of JBS on 11/12/2012; 13

14 Daily, JBS imports the official lists of embargoed areas (IBAMA) and slave-like work involvement (MTE) to its ERP system, which automatically blocks the suppliers included in those lists. For the selected samples, it can be concluded that: We did not identify purchase of cattle from supplier farms included in the list of embargoed areas disclosed by IBAMA; We did not identify purchase of cattle from individuals or legal entities (CPF/CNPJ) included in the registry of employers found exploiting workers in slave-like like work conditions disclosed by the MTE. In regard to the criteria of deforestation, invasion of Indigenous Land or Protected Areas, the company APOIO Consultoria monitors satellite images, superimposing official maps of IBGE - Brazilian Institute of Geography and Statistics, INPE - National Institute for Space Research (PRODES - Legal Amazon Deforestation Monitoring Project and DETER - Real Time Deforestation Detection), perimeters of Indigenous Lands (FUNAI), Conservation Units (MMA and ICMBio) and adding a security buffer area of 10 km on those protected areas. In this process, other aspects are also verified, such as the specificity of the legislation ruling the Conservation Units, given that some decrees allow cattle raising activities in protected areas, for example. After structuring this data base, the digitized maps of the farms suppliers of raw material, or the pair of geographical coordinates of the shipment point (shipment loading pen) plus the 10 km radius of that point (in case there is not map), provided by JBS, are added. Details on the origin of the data base used for the monitoring are in Attachment IV. The results of the monitoring processes are recorded in the Amazon Biome Monitoring System (SMBA), kept by APOIO Consultoria, with the following classification: IRREGULAR: properties whose perimeter (digitized map) superimposes a deforested area (PRODES/DETER), Conservation Unit or Indigenous Land, or whose pair of geographical coordinates of the shipment point (shipment loading pen) plus a 10 km radius of that point are within any of these restriction areas; ELIGIBLE: only properties monitored through digitized maps that do not have within their perimeters any deforested areas, Conservation Unit or Indigenous Land. It may occur cases of properties included in PRODES/DETER lists but classified as ELIGIBLE, when analyses show that the deforestation was not intentional or effective, such as fire in neighboring properties, natural fires, exposed rocks and dry river beds, as long as that can be proved through analyses of experts from the monitoring company; 14

15 ALERT: properties (with no digitized maps) whose pair of geographical coordinates of the shipment point (shipment loading pen) plus a 10 km radius of that point are out of deforested areas, Conservation Unit or Indigenous Land, or which have inconsistent coordinates. APOIO Consultoria, which performs the monitoring, issues a digital certificate of each monitored property on a website exclusively developed to that end, recording the data of the farm and cattle farmer, the name of the technician responsible for the monitoring, the result of the monitoring and its justification, as well as a history of the monitoring processes already performed in the property under analysis. The result of APOIO Consultoria s monitoring, along with the classification of the suppliers as IRREGULAR, ELIGIBLE and ALERT, is then sent to the Sustainability Team of JBS, which classifies the ELIGIBLE or ALERT monitored properties in the ERP system as allowed for cattle purchase, and the IRREGULAR properties as blocked for cattle purchase. The properties classified as IRREGULAR are not actually excluded from the list of suppliers, but cattle purchase from those properties is immediately suspended and they remain blocked in the registry of JBS' suppliers for an indefinite time. The release or unblocking of suppliers happens only when APOIO Consultoria classifies the property as ELIGIBLE or ALERT, in case the supplier provides documents supporting the environmental regularization, or when they are no longer included in the official lists of embargoed areas (IBAMA) or slave-like like work involvement (MTE), monitored by the Sustainability Team of JBS. JBS is working to obtain the georeferenced map of all farms supplying the company in the Amazon Biome, by requesting to the cattle farmers, before negotiation, specific documentation on the property (CCIR, LAR, CAR, or descriptive memorandum) to digitize the maps. The only state in which JBS has all the maps is Pará, given that in that state the CAR is mandatory and the document contains the georeferenced map of the property. Although JBS has at least a pair of geographical coordinates of the shipment point (shipment loading pen) plus a 10 km radius of all its suppliers in the Amazon Biome which do not have the digitized map, it is not possible to monitor those suppliers with the proper severity, given that it is impossible to accurately guarantee that the whole area of the property is not involved in deforestation or invasion of Indigenous Land and/or Protected Areas. 15

16 Specifically in regard to the CAR, the exams of the samples showed that 100% of the suppliers in Pará (Marabá, Tucumã and Redenção) have the document, 30% in Mato Grosso (Alta Floresta and Matupá), and none in the remaining units (Vilhena, Pimenta Bueno and Rio Branco), as follows (identified CAR/number of suppliers in the sample): Vilhena RO (0/25); Pimenta Bueno RO (0/25); Rio Branco AC (0/25); Alta Floresta MT (5/25); Matupá MT (10/25); Marabá PA (25/25); Tucumã PA (25/25); Redenção PA (25/25). In the states in which the CAR is mandatory, only in the unit of Tucumã PA, there were 3 (three) cases in which the meat-packing plant provided the printed document. However, by checking SEMA s website, the register of those documents was not found. As the professional who prepares the CAR and makes the upload of the document in SEMA's system also has access to exclude the document, the data base of JBS is likely to be outdated, given that the documents may be recorded in the Company s ERP, but with no validity in the environmental agency. Also, we point out that the in the samples analyzed, we found cases of divergences in the CAR numbers recorded in JBS system and showed on SEMA's website, probably due to the reason referred to above. On 10/30/2012, JBS had 4,491 (four thousand, four hundred ninety-one) CARs recorded in its system of suppliers. As for the LAR/LAU/LAPR, the exam showed that only 1% of the suppliers of the sample had the documents, as follows (identified LAR, LAU or LAPR/number of suppliers in the sample): Alta Floresta MT (0/25); Marabá PA (1/25); Matupá MT (0/25); Pimenta Bueno RO (0/25); Redenção PA (0/25); Rio Branco AC (0/25); Tucumã PA (0/25); Vilhena RO (1/25). On 10/30/2012, it was possible to verify that JBS had 278 (two hundred seventyeight) LAR/LAU/LAPR recorded in its system of suppliers, in addition to 390 (three hundred ninety) protocols. 16

17 Accordingly, there are actually few suppliers with the document, due to the slowness of the process analysis by the state environmental bodies. However, the suppliers which have and present to JBS the request protocol of LAR/LAU/LAPR - waiting analysis of the documentation and final issue of the LAR/LAU/LAPR by the environmental body have the register number of its documents included in the supplier s list. As for the CCIR, the exams of the samples showed that 2.5% of the suppliers had the document (in the units of Pimenta Bueno RO and Marabá PA), and none in the remaining units, as follows (identified CCIR/number of suppliers in the sample): Alta Floresta MT (0/25); Marabá PA (1/25); Matupá MT (0/25); Pimenta Bueno RO (4/25); Redenção PA (0/25); Rio Branco AC (0/25); Tucumã PA (0/25); Vilhena RO (0/25). The difficulties for the regularization of rural properties are evident (ownership of rural properties), and for this reason the Brazilian government, by means of Federal Decree No /11, has extended the period for regularization in up to 20 years. Therefore, JBS has difficulties to demand from its suppliers of raw material proof of the legality of their title deeds. As for the totality of licenses and certificates (CAR, LAR/LAU/LAPR LAPR and CCIR), the exam of the samples shows their lack in all but 1 (one) of the 8 (eight) units visited, which is in Rio Branco - AC. It is important to mention that the maintenance of those licenses and certificates is not mandatory in most Brazilian states. Pursuant to current legislation, only in the state of Pará the CAR is mandatory. In the state of Mato Grosso, for example, the deadline for regularization is 11/13/2012. It is also important to highlight that the licenses and certificates of the properties are manually input into the system, which allows that divergences in the records occur. A work intended to request and question the cattle farmers about updates on the documentation is already being performed. Additionally, certain units also search websites in order to check changes and updates in the documentation. 17

18 In both situations, in the units that have such control, if a change in the number of the document is verified, the document is digitally and physically filed in the unit and the change entered into the register of the supplier. An action related to this control is being developed in partnership with state environmental bodies and with INCRA, aiming the periodical disclosure of environmental and rural property regularization documents, allowing them to be crosschecked against the data base of the Company s suppliers. JBS also has an internal rule that describes the procedures for the purchase of cattle and procedures for importing the official lists of embargoed areas (IBAMA) and slave-like like work involvement (MTE) to block and unblock suppliers in JBS ERP system. Additionally, in the first negotiation between the supplier farm and JBS meatpacking plant, a declaration is printed and must be signed by the owner or legal representative of the cattle supplier property, in which the person responsible for the property ensures that he/she is not party to any civil and/or criminal legal action resulting in a sentence of conviction in a lower court, related to the following issues: Illegal deforestation; Illegal occupation of government or indigenous land; Land conflicts; Slave-like like work conditions, discrimination because of race or gender and child labor. When the negotiation is conducted at the unit, or when the supplier accompanies the slaughter of the animals, the document is signed in the same day and filed. When there is no personal contact, the suppliers send the signed documents by mail or . The meat-packing plant establishes a control over the declarations using physical folders and, in some cases, using spreadsheets, so that if the cattle farmer has not signed the document yet, in a next purchase the document is printed again and the supplier required signing it. This declaration is the only guarantee that JBS has in regard to the involvement of its suppliers in land fraud and land conflicts, given that INCRA does not make available any official list of areas involved in this sort of situation, that could be used as basis for the blockade by the Company. 18

19 Through the exam of the sample, we found that only 33 (thirty-three) suppliers referring to the 200 (two hundred) purchases in the period did not provide the declaration so far, which totals 83.50% of signed declarations, as follows (cattle breeder s declaration/number number of suppliers in the sample): Alta Floresta MT (17/25); Marabá PA (25/25); Matupá MT (24/25); Pimenta Bueno RO (12/25); Redenção PA (25/25); Rio Branco AC (15/25); Tucumã PA (25/25); Vilhena RO (24/25). The declaration is issued along with the conclusion of the negotiation, as well as the Instructions Guide to the Cattle Farmer (which provides information on the deadlines for environmental and rural property regularizations), automatically printed in all purchases (through the ERP system), which guarantees that the documents and information on current legislation and the socio-environmental criteria adopted by JBS are known by 100% of its direct suppliers. As for indirect suppliers, no control was found, given that traceability systems are not applied on large scale in Brazil to allow the identification of the cattle origin, before its destination to the direct supplier. Also, traceability in Brazil is focused on sanitary purposes and socio-environmental traceability is not part of government programs. We found that 100% of the purchases are accompanied by the Animal Transit Form (GTA), which guarantees the traceability of direct suppliers. Additionally, JBS has specific clients and programs that guarantee the origin of the animals, from birth to slaughter. However, these are small-scale scale and not quite representative programs in comparison with the slaughter volume of the Company. During the audit procedures, we found that JBS has at least a pair of geographical coordinates of the shipment point (shipment loading pen) plus a 10 km radius of 100% of the supplier properties, as stated in the purchase report used as test basis. Without at least a pair of geographical coordinates of the shipment loading pen, the slaughter does not happen. In certain situations, if there are no other restrictions indicated by the Monitoring and Traceability System of JBS (deforestation, invasion of Indigenous Land or Protected Areas) and by the official lists of IBAMA and MTE, the pair of geographical coordinates of the shipment point (shipment loading pen) is collected at the moment the animals are shipped, by means of JBS tracked trucks which automatically obtain those points, or through manual GPS devices, so that in the moment the animals are slaughtered at the meat-packing plant the situation is already regularized. 19

20 Specifically in regard to the official lists of MTE and IBAMA, in addition to the automatic blockade of irregular suppliers, JBS adopts the procedure of checking the file downloaded from the MTE website, with the list of Employers found exploiting workers in slave-like like work conditions, and the website of IBAMA, with the official list of embargoed areas, in 3 (three) different moments: when the cattle purchase order is input into the system, upon the shipment of the cattle, and before the slaughter of the animals at the meat-packing units. The purchase of cattle is also blocked using the CPF/CNPJ of the cattle farmer, in a way that if one of the properties is embargoed, other farms of the same owner are also blocked. In case of embargo by IBAMA, for some of the properties to be authorized for purchases again, a formal request has to be sent to the Sustainability Team of JBS, showing the regularity of the property, despite the existence of other property registered under the same CPF/CNPJ. When found that the property is no longer embargoed by IBAMA, the blockade is removed and the farm temporarily returns to the list of suppliers. In case the cattle farmer is included in the list of MTE of involvement in slave-like work, the blockade reaches all properties registered under the same CPF/CNPJ, and this supplier cannot be unblocked. If irregularities from the cattle farmer are found in any of those phases, the purchase transaction is cancelled. As JBS has an automatic system for blocking irregular suppliers, block and unblock actions can be proved by means of records with date and time of data import. As a result of the analyses made, it is possible to guarantee that the ERP system of JBS has parameters that ensure the traceability of the block and/or unblock actions, as well as of cattle purchase. During the audit work, it was possible to identify that the log tool, on the cattle purchase screen, is enabled and that the block of the properties that fail to meet JBS criteria is automatic. We point out that the data bank of IBAMA and MTE is daily downloaded and manually imported into the system. This situation may compromise the integrity of the data, given that the volume of information to be downloaded is significant and may lead to errors, intentional or not, during the downloads. There are discussions between the Company and IBAMA and MTE (with which negotiations are nearly concluded) to turn this phase of data importing automatic, as data are updated by the agency. However, this process requires changes in the websites of IBAMA and MTE, in order to make the information compatible. As we were informed by the Sustainability Team of JBS, in regard to the criteria that involve official bodies for checking the regularity of the direct suppliers or their managers, periodical meetings are conducted with those bodies, such as MTE, IBAMA, FUNAI, INCRA, ICMBio and MMA, and the main discussions and achievements are the following: 20

21 IBAMA Discussions i. Requesting a computer-based tool to integrate the systems of IBAMA and JBS for the search of properties included in the list of embargoed areas; ii. Making available a field named IBGE City Code for properties included in the list of embargoed areas, in order to automatically identify the municipality of the embargo. iii. Standardizing the description of the violations from IBAMA s field inspector to the website of embargoed areas; iv. Solution for the constant failures of the server hosting the data bank and website of embargoed areas; v. Making available the perimeters identified as embargoed within the assessed properties; vi. Creating the field Date of entry in the list in website of embargoed areas; vii. Creating procedures that can be monitored, audited and reported in the website of the embargoed areas. IBAMA Achievements i. Creation of the field Date of entry in the list ; ii. Availability of the computer-based tool WebService for the exchange of information (in process to become functional); iii. Reduction in the number of failures of the server that hosts the embargoed areas website; iv. Beginning the standardization of the completion of the notices of violation. MTE Discussions i. Creating a public list of child labor; ii. Creating the field Last update in the black list of employers involved in slave- like work; iii. Computer-based searching tool to identify suppliers included in that list through CPF/CNPJ; iv. Creating a tool for previous warning of updating in the black list of employers involved in slave-like like work; v. Creating procedures that can be monitored, audited and reported in the website of the black list of employers involved in slave-like like work. MTE Achievements i. Negotiations on the creation of a public list of child labor already started; ii. Creation of the field Last update in the black list of employers involved in slave-like work. 21

22 FUNAI Discussions i. Making available a public list of properties (per perimeter of properties or CPF/CNPJ) included in the boundaries of indigenous lands; ii. Making available, updating, and informing the date when the perimeters of the indigenous areas in the Brazilian territory were updated. iii. Creating procedures that can be monitored, audited and reported in the website that hosts the indigenous land perimeters. FUNAI Achievements i. Availability of the Brazilian indigenous land perimeters in a way that can be monitored, audited and reported. ICMBio Discussions i. Making available the perimeters of federal environment protection areas on a website, in a way that can be monitored, audited and reported. ICMBio Achievements i. Availability of the perimeters of federal environment protection areas on a website, in a way that can be monitored, audited and reported. INCRA Discussions i. Making available a more simple and quick way to check the CIR and CCIR; ii. Creating a public list of properties involved in land conflicts, land fraud and trespassing; iii. Creating procedures that can be monitored, audited and reported for the availability of those lists. MMA Discussions i. Making available the perimeters of state and municipal environment protection areas on a public website, in a way that can be monitored, audited and reported; ii. Making available lists of regular and irregular properties included in the perimeters of state and municipal environment protection areas. In general, it is possible to verify the efforts that JBS has been making to turn the procedures of its System for Monitoring and Tracking the origin of raw material in the Amazon Biome more effective. Nevertheless, we understand that the cooperation of the competent bodies in providing periodical information, particularly about the irregular properties, is required in order to facilitate the monitoring process of the supplier farms. 22

23 Attachments 23

24 Attachment I Conducted tests - Alta Floresta - MT Property's Georeferenced Point CCIR LAR/LAU/ LAPR CAR a) b) c) a) a) a) a) b) c) d) a) Cattle breeder s declaration Last monitoring before purchase Monitoring result Name or company name Cattle breeder CPF / CNPJ Date Municipality UF Reason Note 1 FAZ.MANTRINCHA PEDRO TEODORO ARANTES :00: APIACAS MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 5/14/12 ALERT inconsistent coordinates 0 days - 2 FAZ. SITIO NOSSA APARECIDA AMAURI FERMINO FERREIRA :00: ALTA FLORESTA MT ok (d) (c) ok (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 4/18/12 ALERT inconsistent coordinates 12 days - 3 FAZ.ESTANCIA RENASCER MIGUEL ANTONIO MENDES :00: CARLINDA MT ok (d) (c) (b) ok (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 4/18/12 ELIGIBLE matching perimeter 21 days - 4 FAZ.RANCHARIA ALEXANDRE LAVEZO NETO :00: PARANAITA MT ok (d) (c) (b) (q) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok none (s) 5 FAZ.ROSA BRANCA ODENIR DOMINGOS ARALDI :00: PARANAITA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 4/11/12 ALERT inconsistent coordinates 8 days - 6 FAZ. SITIO LAGOA DA MATA ROSANI DE OLIVEIRA PEREIRA BARBOSA :00: CARLINDA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) (l) 12/19/11 ALERT inconsistent coordinates 2 days - 7 FAZ.SAO SEBASTIAO VICENTE GESUALDO :00: ALTA FLORESTA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) (l) 5/4/12 ALERT inconsistent coordinates 0 days - 8 FAZ.PURI SANTOS JERSON NONATO DOS SANTOS :00: ALTA FLORESTA MT ok (d) (c) ok (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 12/19/11 ALERT inconsistent coordinates 3 days - 9 FAZ.SITIO ROSIMEIRE ROSEMILDO ADRIANO GENZ :00: PARANAITA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) (l) 3/7/12 ALERT inconsistent coordinates 2 days - 10 FAZ.ESTANCIA UIRAPURU ANTONIO CHIUCHI NETO :00: ALTA FLORESTA MT ok (d) (c) ok (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 1/20/12 ALERT inconsistent coordinates 0 days - 11 FAZ.ESTANCIA RENASCER MIGUEL ANTONIO MENDES :00: CARLINDA MT ok (d) (c) (b) ok (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 4/5/12 ELIGIBLE matching perimeter 8 days - 12 FAZENDA CORRENTAO II DAVID VENTURA :00: TERRA NOVA DO NORTE MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 3/17/12 ALERT inconsistent coordinates 2 days - 13 FAZ.SITIO BERTIN ANTONIO SERGIO BERTIM :00: ALTA FLORESTA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 1/9/12 ALERT inconsistent coordinates 1 day - 14 ESTANCIA CONQUISTA JOSE APARECIDA ZANQUETA :00: NOVA BANDEIRANTES MT ok (d) (c) (b) ok (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 2/20/12 ELIGIBLE matching perimeter 4 days - 15 FAZ.SITIO NOSSA SENHORA AUXILIADORA MARIA INEZ WERNKE GESSER :00: PARANAITA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 1/17/12 ALERT inconsistent coordinates 2 days - 16 SITIO RIBEIRO PAULO PEDRO RIBEIRO DE SOUZA :00: PARANAITA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 4/16/12 ALERT inconsistent coordinates 3 days - 17 SITIO 3 IRMAOS MARCIO SANTOS DE AQUINO :00: PARANAITA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 3/13/12 ALERT inconsistent coordinates 30 days - 18 FAZ.SITIO ALTO JARDIM ANTONIO FELISBINO DA SILVA :00: CARLINDA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 4/18/12 ALERT inconsistent coordinates 1 day - 19 FAZENDA BRAGATTI III WAGNER XAVIER RIBEIRO :00: PARANAITA MT ok (d) (c) (b) ok (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) (l) 4/18/12 ELIGIBLE matching perimeter 19 days - 20 FAZ.SANTA CECILIA SEBASTIAO AGUIAR DA SILVA :00: ALTA FLORESTA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) (l) 4/18/12 ALERT inconsistent coordinates 12 days - 21 FAZ.SANTA MARIA CELIO ROBERTO AGUIAR :00: NOVA MONTE VERDE MT ok (d) (c) ok (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 3/19/12 ALERT inconsistent coordinates 23 days - 22 FAZ.TSUYU SERGIO MITSUO KUME :00: ALTA FLORESTA MT ok (d) (c) ok (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) (l) 1/23/12 ALERT inconsistent coordinates 2 days - 23 FAZ.SANTA CRUZ CARLOS CRUZ :00: PARANAITA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) (l) 12/12/12 ALERT inconsistent coordinates 3 days - 24 FAZ.SANTO ANTONIO ANA LUCIA DE OLIVEIRA :00: ALTA FLORESTA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) ok 4/16/12 ALERT inconsistent coordinates 1 day - 25 SITIO DOLEYS SANTO RECH DOLEYS :00: CARLINDA MT ok (d) (c) (b) (p) (a) (e) (f) (g) (h) (m) (i) N/A (j) (o) (l) 12/6/11 ALERT inconsistent coordinates 2 days - Period between monitoring and purchase (a) To the indirect supplier this kind of control does not exist, given that there is no traceability program. (b) Lack of Rural Environmental Record (CAR). (c) Lack of Rural Environmental License (LAR) (d) Lack of Certificate of Registration of Rural Property (CCIR). (e) The supplier is blocked, but not excluded. They are unblocked only after proving the reparation to the environmental damage. (f) Funai does not make data regularly available for consultation. There were no cases of slave-like or degrading work. (g) The supplier is blocked, but not excluded. Purchases are restarted after the supplier is unblocked. (h) The National Institute of Colonization and Agrarian Reform (INCRA) has no official list, therefore, it is difficult to comply with this item. (i) In the state of Mato Grosso, CAR and LAR are not yet mandatory. However, some properties already have the CAR. (j) There is no control and proof of cattle s growing and development. Accordingly, traceability will be limited for these analyses. (l) Lack of Cattle Breeder s Declaration. (m) There is no control and monitoring of indirect suppliers, therefore the audit s analysis is limited. (o) The meetings of the Commission with representatives of the industry, NGOs, customers, the financial system and Government are not held monthly. (p) The result of the property's monitoring was ALERT, which allows the purchase, but there is no reliability. (q) According to the Monitoring Certificate presented, there was no monitoring before the purchase. (s) There was no monitoring previous to the purchase date, however, according to the certificate issued by APOIO Consultoria on 04/18/2012, a monitoring was conducted after the purchase and the property was then classified as ALERT. ok According to the performed work stage test. N/A Not applicable. 24