Do your goods comply with the mandatory due diligence obligations in the new EU Deforestation Regulation 2023/1115?

The Deforestation Regulation (EU) 2023/1115 (“DR”), which intends to ensure that goods that have been produced on ‘deforested or degraded land’ anywhere in the world are no longer sold within the European Union (EU), enters into force on June 29^th 2023. This date marks the preparation period for any company importing or trading the commodities and derivative products that fall within the scope of the DR. In this article, we consider the obligations which the DR imposes with respect to such goods sold in the EU, how to ensure compliance with the DR, and what sanctions may be imposed if the DR is infringed.

In short, the prohibition on selling non-compliant commodities and relevant products, and the mandatory due diligence obligations apply as of 30 December 2024 ensuring that from that date onwards goods sold in the EU market have not been produced on ‘deforested or degraded land’ anywhere in the world. The obligations of the DR shall apply only from 30 June 2025 to operators that were established as micro or small undertaking by 31 December 2020 (Except for wooden products mentioned in the Annex of Regulation 995/2010).

Under the DR ‘deforestation’ means: “the conversion of forest to agricultural use, whether human-induced or not. The material scope of the DR extends to agricultural commodities such as cattle, cocoa, coffee, palm oil, rubber, soya and wood as well as derived or ‘relevant’ products containing those commodities (for example beef, leather products, palm oil, soya bean flour, wooden furniture, paper or chocolate) as specified in Annex 1 of the DR. According to the European Commission, these commodities have been chosen on the basis of a thorough impact assessment identifying them as the main drivers of deforestation and loss of biodiversity due to agricultural expansion.

The due diligence obligations mean that operators and traders will have to prove that the products are both ‘deforestation-free’ and comply with all relevant applicable laws in force in the country of production. Furthermore, companies will also be required to collect precise geographical information on the farmland where the commodities that they source have been grown, so that these commodities can be checked for compliance. Therefore, the European Commission will set up a benchmarking system that will assess countries or parts thereof and their level of risk of deforestation and forest degradation. The DR also observes the protection of human rights and introduces a judicial compliance mechanism through the means of public enforcement.

Ensuring compliance – retrospective effect of the DR obligations

The DR imposes mandatory due diligence obligations on operators and traders to prove that the relevant products which they import or sell on the EU market contain commodities that are ‘deforestation-free’ and ‘forest degradation-free’. This means that the commodities that these relevant products contain must have been produced on land not subject to deforestation, or harvested from forest without inducing forest-degradation, after 31 December 2020. In line with the EU’s ‘precautionary principle’, the cut-off date in the DR precedes its date of entry into force in order to prevent an anticipated acceleration of activities leading to deforestation and forest degradation between the announcement in the Commission proposal and the date of the DR’s entry into force. This way, the DR ensures that producers and operators that have caused deforestation and forest degradation during the regulation’ negation period are not allowed to place the relevant commodities and relevant products concerned on the market or to export them. The cut-off date of 31 December 2020 was chosen in view of international commitments agreed in the UN 2015 Sustainable Development Goals (SDGs) and the New York Declaration on Forests as well as the Commission’s own ambitions.

To ensure an effective due diligence mechanism, the DR also requires a risk assessment. Article 10(2) DR provides factors that should be taken into account. Moreover, it follows from recital 42 DR that when assessing the risk of non-compliance of relevant commodities and relevant products intended to be placed on the market or exported, violations of human rights that are associated with deforestation or forest degradation, including rights of indigenous peoples, local communities and customary tenure rights holders, should also be taken into account. Finally, it should be observed that pursuant to Article 22(1)(d) DR, failing to comply with the DR’s reporting requirements is subject to the DR’s sanction regime, which will be discussed below.

Due diligence obligations for ‘operators’

For the addressees that must comply with the DR, the DR distinguishes between ‘traders’ and ‘operators’. The DR defines ‘operators’ as: “any natural or legal person who, in the course of a commercial activity, places relevant products on the market or exports them.” Under the DR, ‘operators’ should formally take responsibility for the compliance of the relevant products that they intend to place on the market or export by making available due diligence statements. Such due diligence statements are expected to facilitate enforcement of the DR by the competent authorities and courts as well as increased compliance by operators. However, small operators can rely on due diligence declarations prepared by larger operators. Annex II to the DR provides an overview of the information to be contained in due diligence statements.

Due diligence obligations for ‘traders’

In addition, the DR provides that ‘traders’ are also responsible for collecting and keeping information to ensure the transparency of the supply chain of relevant products which they make available on the market. ‘Traders’ are defined as: “any person in the supply chain other than the operator who, in the course of a commercial activity, makes relevant products available on the market”. Non-SME traders have a significant influence on supply chains and play an important role in ensuring that supply chains are deforestation-free. Therefore, the DR imposes the same obligation on them as operators to take responsibility for the compliance of the relevant products with the DR prior to making the relevant products available on the market. Hence, traders also have to conduct due diligence in accordance with the DR and also assess that there is no or only a negligible risk that the relevant products do not comply with the DR.

Effective enforcement - sanctions and measures

To ensure adequate compliance with the DR, the DR also imposes an enforcement regime. Member States have to designate competent authorities responsible for enforcement of the DR and register their names etc. to the Commission by 30 December 2023. Member States must ensure that infringements of the DR by both operators and traders are subject to effective, proportionate and dissuasive enforcement. To that end, the DR imposes on Member States to grant certain powers to competent authorities to ensure its objectives adequately.

• Article 23 DR enables the competent authority to impose interim measures, including the seizure of the relevant commodities or relevant products, or the suspension of the placing or making available on the market or the export of the relevant commodities or relevant products.
  
  
• Article 24 DR enables the competent authority to take ‘corrective measures’ in the event of non-compliance. The competent authority can, for example: prevent the relevant product from being placed or made available on the market or exported, withdraw or recall the relevant product immediately, and even donate the relevant product to charitable or public interest purposes or, if that is not possible, dispose of it.
  
  
• Furthermore, Article 25 DR forces Member States to lay down rules for imposing ‘penalties’ that are effective proportionate and dissuasive. Member States must empower competent authorities not only to impose fines but also to confiscate relevant products as well as revenues gained from transactions with the relevant products concerned. Other sanctions include the exclusion of tenders for 12 months or fines of at least 4% of the operator’s or trader’s total annual Union-wide turnover in the financial year preceding the fining decision. This fine can be increased to exceed the potential economic benefit gained.

Finally, to increase the accountability of operators and traders, the DR empowers the Commission to publish on its website the list of final judgments against legal persons for infringements of the DR, including the penalties imposed on them.  In conclusion, the EU has taken a serious step to protect forests and indigenous people worldwide and preparation time has now started – both for the member states and designated authorities as well as for companies trading in the relevant commodities and derivative products.

If you would like to discuss the impact of introduction of the DR for your business and /or obtain help with realization of your ESG-ambitions, please get in touch.