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Article

New Regulation on Deforestation-free Products

Update

Following the EU Parliament, the Council has also adopted the new Regulation on Deforestation-Free Products. According to this EU-Regulation, affected companies have to fulfil due diligence obligations when they place, make available or export certain agricultural commodities, such as cattle, cocoa, coffee, oil palm, rubber, soya and wood, as well as derived products, on or from the Union market. This could relate to numerous product categories, from chocolate to furniture. The Regulation now has to be published in the Official Journal of the European Union and will then enter into force 20 days later. We have outlined the most important aspects of the new Regulation on Deforestation-Free Products.

Update: Adoption of the new EU regulatory framework

The new Regulation for Deforestation-Free Products (hereinafter: “Regulation”) has the aim of repealing and replacing the previous EU Timber Regulation (Regulation (EU) No 995/2010) and and the related Commission Implementing Regulation (EU) No 607/2012. The existing EU legal framework so far focused on tackling illegal logging and associated trade and did not address deforestation. The main objective of the Regulation is to reduce deforestation and forest degradation caused by EU consumption and production, which is expected to reduce EU greenhouse gas emissions and global biodiversity loss.

This shall be achieved by

i. minimising the consumption of products coming from Supply Chains associated with deforestation and forest degradation, and
ii. increasing demand for and trade in “deforestation-free” commodities and products in the EU.

The current EU Timber Regulation requires that operators placing timber on the Union market for the first time exercise due diligence and that traders keep a traceable record of their suppliers and customers. In many ways, the Regulation sets up a new and more extensive framework, with regard to the Scope of Application, the Group of Due Diligence Recipients and the relevant Due Diligence Obligations.
 

I. Scope of Application

The scope of the Regulation covers relevant commodities (cattle, cocoa, coffee, oil palm, rubber, soya and wood) as well as relevant products, defined as products containing, being fed with or having been made using relevant commodities. In Annex I of the Regulation, the relevant commodities are subdivided into further relevant sub-categories according to the Combined Nomenclature pursuant to Annex I of the EEC-Regulation on the tariff and statistical nomenclature (Regulation (EEC) No. 2658/87). In addition, the Regulation clarifies that goods made exclusively from material that has completed its lifecycle and would otherwise have been discarded as waste according to Art. 3 (1) of the Waste-Framework-Directive (Directive 2008/98/EC) are excluded from the Scope of Application of the Regulation. In turn, this exemption for goods derived from recycling does not apply to by-products of a processing operation if the process uses material that is not waste within the meaning of Art. 3(1) of the Waste Framework Directive.

 

II. Prohibition Regime

According to Art. 3 of the Regulation, relevant commodities and relevant products shall not be placed on the market, made available or exported from the market unless the following three conditions are cumulatively fulfilled:

a) they are deforestation-free

b) they have been produced in accordance with the relevant legislation of the country of production – which means that they have to be legal –; and

c) they are covered by a due diligence statement.
 

III. Definitions of Important Terms

According to Art. 2 (13) of the Regulation “deforestation-free” means:

a)       that the relevant products contain, have been fed with or have been made using, commodities that were produced on land that has not been subject to deforestation after 31 December 2020, and

b)      in case of relevant products that contain or have been made using wood, that the wood has been harvested from the forest without inducing forest degradation after 31 December 2020;

The terms “deforestation”, “forest degradation” and “forest” are comprehensively defined in Art. 2 of the Regulation. The Term “relevant legislation of the country of production” means, according to Art. 2 (40) of the Regulation, the laws applicable in the country of production concerning the legal status of the area of production in terms of:

-      land use rights,

-      environmental protection,

-      forest-related rules including forest management and biodiversity conservation, where directly related to wood harvesting,

-      third parties’ rights,

-      labour rights,

-      human rights protected under international law,

-      the principle of free, prior and informed consent (FPIC), including as set out in the UN Declaration on the Rights of Indigenous Peoples (see in particular Nagoya Protocol and Regulation (EU) No. 511/2014),

-      tax, anti-corruption, trade and customs regulations.

The obligation to submit a due diligence statement requires in particular a prior successful exercise of the procedures and measures mentioned in Art. 8 of the Regulation (see below under V.).

IV. The Group of Due Diligence Recipients

The Group of Persons subject to the Due Diligence Obligations generally covers Operators and Traders. Operators are any natural or legal person who, in the course of a commercial activity, places relevant products on the market or exports them from the market. In comparison according to the definition in Art. 2 (17) of the Regulation, Trader means any person in the supply chain who, in the course of a commercial activity, makes relevant products available on the market. According to Art. 2 (18) of the Regulation, “making available on the market” means any supply of a relevant product for distribution, consumption or use on the market in the course of a commercial activity, whether in return for payment or free of charge. The difference between an Operator and a Trader is whether a company either makes the relevant product available on the market (then a Trader) or places it on the market or exports it (then an Operator).

For Operators and Traders who are SMEs, there are specific provisions. Large Traders, who are not SMEs, are in principle considered as Operators and are subject to almost the same obligations as an Operator with regard to the relevant commodities and the relevant products they make available on the market. In the case of placing of relevant products on the Union market by an Operator established outside the EU, the first natural or legal person established in the EU who makes these relevant products available on the Union market shall be deemed to be an Operator (cf. Art. 7 of the Regulation).

Furthermore, Operators or Traders may mandate authorised representatives to make available the required Due Diligence Statement on their behalf, whereby the Operator or Trader shall retain responsibility for the compliance of the relevant product with Article 3 of the Regulation.
 

V. Due Diligence

The Operators shall exercise Due Diligence on all relevant products supplied by each individual supplier. In particular, the Operators have to ensure that the relevant products are “deforestation-free” and legally manufactured, the last condition deemed to be fulfilled for wood products if they are covered by a valid FLEGT license.

The Due Diligence Process shall comprises three steps:

1. Step 1 (Gathering all relevant information): The Operators should collect and organise statutorily determined information, documents and data (cf. Art. 9 of the Regulation), such as, inter alia, a description, including the trade name and type of the relevant products or the geolocation of any land on which the relevant commodity that the relevant product contains were produced.

2. Step 2 (Risk Assessment): Based on this information, the Operators shall identify and assess the risk of non-compliance of the relevant products with requirements of the Regulation. The Risk Assessment shall take into account the criteria listed in detail in Art. 10 (2) of the Regulation. The Risk Assessments shall be documented, reviewed annually and made available to the competent authorities upon request. In addition, the Operator shall be able to demonstrate how the information collected has been reviewed against the risk assessment criteria referred to in Art. 10 (2) of the Regulation and how the degree of risk has been determined.

If the risk assessment indicates that there is no or negligible risk and that the relevant commodities and products comply with the requirements of the Regulation, the Operator shall submit the Statement of Due Diligence to the competent authorities via a designated information system (cf. Art. 4 (2) of the Regulation). By submitting the statement of due diligence to the competent authority, the operator assumes responsibility for the compliance of the relevant products with the requirements of the Regulation (Art. 4 (3) of the Regulation).

According to Art. 2 (26) of the Regulation a “negligible risk” means the level of risk that applies to relevant commodities and relevant products, where, on the basis of a full assessment of product-specific and general information, and, where necessary, of the application of the appropriate mitigation measures, those commodities or products show no cause for concern for not being compliant with Art. 3 lit. (a) and (b). The meaning of “no cause for concern” remains unclear and is not further specified in the Regulation.

3. If necessary, step 3 (Risk Mitigation):

If in the course of the risk assessment, a risk has been identified that the relevant products do not comply with the requirements of the Regulation, the Operator shall adopt prior to placing the relevant products on the Union market or to their export risk mitigation procedures and measures that are adequate to reach no or negligible risk. Risk mitigation measures may include carrying out independent surveys or audits.

Decisions on risk mitigation procedures and measures shall be documented, reviewed annually and communicated to the competent authorities upon request. In addition, the Operator shall be able to demonstrate how a decision on risk mitigation measures was taken.


If the Operator cannot minimise the non-compliance with the Regulation to a negligible risk, then the Operator may not place the relevant products on the market or export them. For a Trader who is not an SME, the same applies with regard to making the relevant product available on the market.
 

VI. Simplified Due Diligence and Country Benchmarking System

According to Art. 12 of the Proposal, a Simplified Due Diligence Process applies if the Operators can ascertain that all relevant products have been produced in countries that have been classified as low-risk countries, according to the Country Benchmarking System described in Art. 27 of the Proposal. This requires that Operators have previously assessed the complexity of the relevant Supply Chain and the risk of circumvention or mixing with products of unknown origin or origin in high risk or standard risk countries or parts of countries. With the Country Benchmarking System, the EU-Commission assesses the risk of countries or parts of countries with regard to the production of deforestation-free relevant commodities or products by assigning a risk level (low, normal or high) to each country. The list of countries or parts of countries that have a low or high risk will be published by means of an implementing act.

In cases in which the simplified due diligence applies, the Operator only has to comply with Step 1 (Gathering all relevant information) of the Due Diligence Process; the obligation to carry out the Risk Assessment (Step 2) and, if necessary, Risk Mitigation (Step 2), are not required for the operator.
However, if the Operator obtains information or becomes aware that there is a risk of non-compliance of the relevant product with the requirements of the Regulation, the Operator has to fulfil all three Steps of the Due Diligence Process and communicate immediately any relevant information to the competent authority.

 

VII. Requirements for existing Due Diligence Statements

Operators shall communicate to other operators and traders down the supply chain, in relation to the relevant products they have placed on or exported from the market, all information necessary to confirm that due diligence has been carried out and that no or negligible risk has been identified, including the reference numbers of the due diligence statements for the specific relevant products.

Operators which are not SMEs may only refer to existing Due Diligence Statements if they have ascertained that the Due Diligence Process has been exercised in relation to the relevant products contained in or made from the relevant product. They shall include the reference numbers of those existing Due Diligence Statements in their own Due Diligence Statements. For parts of products that have not been covered by a Due Diligence procedure, the Operators have to implement the Due Diligence Process as outlined under V.

 

VIII. Risk Management and Reporting

Furthermore, Operators shall establish a framework of procedures and measures to ensure that the relevant products placed on the market or exported by them comply with Art. 3 of the Regulation. In addition, Operators who are not SMEs have an annual reporting obligation with regard to the due diligence system. In principle, certain information on relevant raw materials and relevant products shall be made publicly and as widely available as possible (e.g. via the internet).

IX. Checks on Operators/non-SME Traders and Corrective Action

Furthermore, checks of the Operators and Traders shall be carried out by the competent authorities. For this purpose, the competent authorities shall carry out obligatory measures according to Art. 18 (1) lit. (a) to lit. (b) of the Regulation, which include checks of the documentation required for the fulfillment of the Due diligence Obligations, or optional measures according to Art- 15 (2) lit. (a) to lit. (e) of the Regulation, which include, for example, on-site inspections and appropriate technical scientific checks (e.g. Earth observation data such as from the Copernicus programme).

In cases of non-compliance of the relevant products with the requirements of the Regulation or if an Operator or Trader has not complied with its obligations under this Regulation, the competent authorities shall immediately require the relevant Operator and Trader to take appropriate and proportionate corrective action to bring the non-compliance to an end within a specified reasonable period of time. With regard to the corrective actions listed in Art. 24 (2), a very significant aspect is that the operator can now also be required to withdraw or recall the relevant product from the market immediately. This provision is based on the EU Market Surveillance Regulation (Regulation (EU) 2019/1020) and refers to the respective definitions of the terms “withdrawal” and “recall”.
 

X. Conclusion

The Regulation sets out a new system of Due Diligence Obligations and requires the affected companies to carry out certain Due Diligence Processes. The material Scope of Application is – compared to the previous EU Timber Regulation – considerably extended. Furthermore, the risks for companies in connection with the non-conformity of relevant products have increased considerably, as the competent authority can also require companies to immediately withdraw or recall the relevant product from the market in such cases. Now there is also the threat of an officially ordered recall in case of “ESG-relevant defects”.

In addition, it has not been clarified when a “negligible risk” exists according to the Regulation. The definition that such a risk exists if there is “no cause for concern” is unclear. The use of unclear and inadequately defined terms generally creates legal uncertainties that require a lengthy process of clarification by the courts.

The Regulation has now to be published in the Official Journal of the European Union and will then enter into force 20 days later. As soon as the Regulation has entered into force, the Operators and Traders will have 18 months to implement the new provisions.

It is advisable to check now in advance whether the own product is covered by the material Scope of Application and which measures can be prepared and taken in order to be able to fulfill the own Due Diligence Obligations in time and to review the relevant Supply Chains.

 

Published: May 2023

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