EU agrees on new deforestation-free regulation

On 21 December 2022, the European Parliament and Council released the provisionally agreed text of a new Regulation on deforestation-free supply chains. The Regulation requires that certain commodities and products are only supplied on the EU market or exported from the EU where they are deforestation-free, they have been produced legally in the country of production and they are covered by a due diligence statement. Notably, the updated text of the Regulation extends the application of the draft Regulation to rubber products and ensures that due diligence takes into account the impact on indigenous rights and potential human rights violations.

Who is captured by the proposed Regulation?

The proposed Regulation applies to operators and traders. Operators include persons who, in the course of a commercial activity, first supply relevant commodities or products on the EU market or exporting them from the EU market. Traders include any other person in the supply chain, other than the operator, who supplies relevant commodities or products on the EU market (in the course of commercial activity). The Regulation does not apply to suppliers based outside of the EU, instead, the first person established in the EU (including those with a permanent business in the Union) who makes available those products or commodities on the market shall be considered as the operator under the Regulation.

Relevant commodities and products include:

1. cattle (including but not limited to live cattle, beef, raw hides and leather);
2. cocoa (including but not limited to cocoa butter, cocoa powder and chocolate);
3. coffee;
4. palm oil;
5. soya;
6. rubber (including but not limited to rubber sheets, conveyor belts, rubber tyres and rubber clothing); and
7. wood (including but not limited to particle board, plywood, sawdust, packing cases, casks and barrels, and wooden furniture).

Tariff codes (Combined Nomenclature codes under EU Regulation 2658/87) of commodities are decisive in determining whether a commodity is in scope of the Regulation. However, the EU Commission has proposed a progressive scope of commodities, so the list is likely to be expanded in the future (with maize being mentioned as the first possible extension).

What are the requirements of the proposed Regulation?

Deforestation-free

Operators and traders are required to undertake due diligence to ensure that the relevant commodities and products they are supplying are “deforestation-free” and have been produced in accordance with the laws of the country of production, including laws in relation to land use, environmental protection, labour rights, human rights, tax and trade. The Regulation has a retrospective element in that deforestation-free is defined to mean the relevant commodities and products that contain, have been fed with, or have been made using, commodities that were produced on land that has not been subject to deforestation, meaning the conversion of forest to agricultural use (including plantations), whether human induced or not, after 31 December 2020. In the case of products containing, or that have been made using, wood, the wood must have been harvested from a forest without inducing forest degradation, after 31 December 2020. Forest degradation means structural changes to forest cover taking the form of conversion of primary forests or naturally regenerating forests into plantation forests, other wooded land or planted forests. The Commission will also consider extending the scope of the Regulation to include degradation of other wooded land in future.

Risk assessment

Operators and traders must obtain evidence of the geolocation of where the relevant products or commodities were produced (and any products or commodities contained in or used to make those products), how they were produced and by whom, and undertake a risk assessment of that information. The risk assessment should include factors such as:

1. the assignment of risk of the relevant country;
2. the prevalence of deforestation or forest degradation in the country;
3. reliability of information and complexity of the supply chain;
4. the risk of circumvention or mixing with products of unknown origin;
5. violations of international human rights or corruption in the area;
6. UN or EU sanctions applicable to the country, region or area;
7. consultation and cooperation with indigenous people; and
8. any claims by indigenous people regarding the use or ownership of the area used for producing the relevant commodity.

For the purposes of the risk assessment, certain countries will be designated as low or high risk by the Commission by way of implementing acts, and all other countries will be considered standard risk. Where the relevant commodities or products are produced in a low-risk country, the full risk assessment and risk mitigation measures (such as having a compliance officer and implementing audit controls) are not required to be undertaken. If the risk assessment finds that the risk, after mitigation measures, is more than negligible (ie if there is any cause for concern that the products are not deforestation-free or produced in accordance with national law), operators and traders will be prohibited from supplying or exporting the commodity or product. The risk assessments undertaken by operators and traders and any risk mitigation measures implemented are required to be reviewed at least annually and made available to a competent authority upon request.

Due diligence statements

Where the due diligence concludes that the commodities and products are compliant, operators and traders must upload a due diligence statement to a centralised online information system before supplying the relevant items. Operators are required to communicate all information necessary to confirm that due diligence was carried out and no negligible risk was found. Operators that are small to medium enterprises (SMEs) are not required to undertake this due diligence and risk assessment process for products which have already undergone diligence and instead can refer to the existing due diligence statement (although they retain responsibility for compliance with the Regulation). Operators that are SMEs are still required to carry out due diligence where the product (or part thereof) does not have an existing due diligence statement. Where an operator is a natural person or a microenterprise, they can request the next operator or trader in the supply chain that is not a natural person or microenterprise to act as their authorised representative and submit due diligence statements on their behalf. Traders that are SMEs are not required to undertake this diligence and risk assessment process and instead are only required to keep the records of their suppliers and customers, and the reference numbers of the due diligence statements associated with their products.

Records relating to due diligence are required to be kept for five years from the date the product is placed on the market or exported from the Union market, Operators (excluding SMEs, microenterprises and natural persons) are required to publicly report on an annual basis, as widely as possible, on their due diligence system and the steps taken to comply with the Regulation.

Enforcement

Annual checks

Member States will be required to nominate competent authorities for the purposes of the Regulation, who will be required to undertake annual checks on operators, according to a national risk criteria designated by each national competent authority in an annual plan. The risk criteria must take into account a number of factors, including the relevant commodities, the complexity of the supply chain, the history of non-compliance and the risk of circumvention. The operators and traders that are selected for annual checks should also be included in the annual plan. Records of all checks carried out under the Regulation, including both those identified in annual plans and unplanned checks, must be kept in a register for at least ten years and shall constitute environmental information for the purposes of EU Directive 2003/4/EC38, meaning it will be made available upon request.

Enforcement powers and penalties

Where operators receive information that an item already placed on the market is not compliant with the Regulation, they must inform the competent authorities of the relevant Member States immediately. Where the competent authorities determine there is a high risk of non-compliance with the Regulation, they will have the power to take interim measures to suspend the placing or making available of products on the market or the exporting of the relevant products for 72 hours. Where it is established that products are not compliant with the Regulation, the competent authorities will require the relevant operator or trader to:

• rectify any formal non-compliance;
• prevent relevant items from being supplied or exported;
• withdraw or recall the items; and/or
• destroy the product or commodity, or donate it to charitable or public interest purposes.

Member States will decide the applicable penalties for a breach of the Regulation, including confiscation of the items and related revenues, fines proportionate to the environmental damage (at least 4% of the relevant entity’s annual Union-wide turnover in the preceding financial year), temporary exclusion from the public procurement process for a maximum of 12 months and temporary prohibition from placing relevant commodities or products on the market. The Commission will publish on its website the names of persons subject to penalties, a summary of the violation and the penalty applied.

Third party concerns

Third parties will be entitled to submit substantiated concerns about non-compliance with the Regulation to the competent authorities. The relevant competent authority must inform the third party of the follow up to the submission within 30 days of receiving the concern, if not otherwise stated within national law. Where the third party meets the criteria (if any) for having a sufficient interest under existing national law, they shall have access to a court or other independent public body to review the procedural and substantive legality of decisions of the competent authority.

What does this mean for operators and traders?

The Regulation looks likely to be adopted in 2023, and should take effect at the national law level within 18 months of the Regulation coming into force (mid-2024 at the earliest). Microenterprises and small enterprises will have an additional six months before being required to comply with the Regulation. A three-year transitional period will apply to timber and timber products that have been produced before the Regulation is published and placed on the market after the Regulation comes into force, where Regulation (EU) No 995/2010 will still apply. Technical and other guidance, foreshadowed in the Regulation, is expected to be published by the Commission.

Given the definition of deforestation-free is retrospective and the high standard of due diligence that must be proven, in-scope operators and traders should look to start creating a suitable due diligence programme and commence work now on ensuring their supply chains will be compliant. The requirements for publishing due diligence statements and the ability for third parties to submit concerns mean that compliance with the Regulation is likely to be subject to a high level of public scrutiny. Companies should be well prepared for what’s to come.