European Union Publishes Deforestation Regulation

On 31 May 2023, the European Parliament (the "EP") and the Council of the European Union (the "Council") adopted Regulation (EU) 2023/1115 on the making available on the Union market and the export from the Union of certain commodities and products associated with deforestation and forest degradation and repealing Regulation (EU) No 995/2010 (the "Deforestation Regulation" or the "Regulation").¹ The Regulation was published in the Official Journal of the European Union on 9 June 2023 and will enter into force on 29 June 2023, although the main prohibitions and obligations will not apply until 30 December 2024.

The Deforestation Regulation is aimed at (a) minimising the Union’s contribution to deforestation and forest degradation worldwide, and thereby contributing to a reduction in global deforestation, and (b) reducing the Union’s contribution to greenhouse gas emissions and global biodiversity loss.

Products Covered

The Regulation covers seven commodities representing the largest share of Union-driven deforestation and certain products that contain, have been fed with, or have been made using commodities listed in Annex I (“relevant commodities and products”): palm oil, soya, wood, cocoa, coffee, cattle, and rubber. By 30 June 2025, the Commission will also determine whether it is appropriate to amend or extend the list of relevant products in Annex I, particularly with respect to biofuels (HS code 382600).

The Deforestation Regulation does not apply to relevant products listed in Annex I produced before the entry into force of the Regulation (i.e., before 29 June 2023). However, the prohibitions established by the Regulation will apply to certain timber and timber products that were produced before 29 June 2023 and placed on the market from 31 December 2027 to the extent these were previously covered by Regulation (EU) No 995/2010 (i.e. the EU Timber Regulation).

Who Should Be Concerned?

The Deforestation Regulation sets prohibitions and obligations for:

• Operators, defined as any natural or legal person who, in the course of a commercial activity, places relevant products on the EU market or exports them from the EU market; and
• Traders, defined as any person in the supply chain other than the operator who, in the course of a commercial activity, makes available on the EU market relevant products.

In cases where the relevant products are placed on the EU market by operators established outside the European Union, the Deforestation Regulation provides that the first natural or legal person established in the European Union who makes relevant products available on the market would be considered an operator and, thus, subject to the relevant prohibitions and obligations.

While the Deforestation Regulation primarily imposes prohibitions and obligations on natural or legal persons in the European Union, producers of relevant commodities and products—including those outside the Union—would also be impacted as their products would have to meet the requirements of the Deforestation Regulation to be sold in or exported from the Union.

Prohibitions and Obligations

The Deforestation Regulation prohibits, as of 30 December 2024 placing or making available on the EU market—as well as exporting from the European Union—the relevant commodities and products listed in Annex I unless:

(a) they are deforestation-free: (a) the relevant products do not contain, have been fed with, or have been made using, relevant commodities that were produced on land that has not been subject to deforestation after 31 December 2020, and (b) in case of the relevant products that contain or have been made using wood, such wood has been harvested from the forest without inducing forest degradation after 31 December 2020;

(b) they have been produced in accordance with 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, tax, anti-corruption, trade and customs regulations; and

(c) they are covered by a due diligence statement confirming that due diligence was carried out and that no risk, or only a negligible risk, was found that the relevant products do not comply with the requirements set in (a) and (b) above.  Operators, traders or their authorized representatives will need to submit these due diligence statements through an information system.

Per the Deforestation Regulation, operators and traders may not place on the EU market or export from the European Union relevant commodities and products without (i) prior submission of a due diligence statement, for which they will assume full responsibility, and without (ii) having ascertained—through due diligence—that there is no risk or only a negligible risk that the relevant commodities and products are not deforestation-free or have not been produced in accordance with the relevant legislation of the country of production.

The Deforestation Regulation therefore requires operators and traders to conduct an extensive due diligence process with regard to all relevant products supplied by each particular supplier and to establish, implement and regularly update a due diligence system, to be reviewed at least once a year and as necessary, structured around three elements: (1) information gathering requirements, (2) risk assessment and (3) risk mitigation measures, complemented by reporting obligations. These obligations apply as of 30 December 2024.

• The first element of due diligence is information gathering, which requires operators and traders to collect a set of information, data, and documents demonstrating that the relevant commodities and products are deforestation-free and produced in accordance with the relevant legislation of the country of production. This includes geolocation (latitude and longitude coordinates) "of all plots of land where the relevant commodities that the relevant product contains, or has been made using, were produced, as well as date or time range of production.” To that end, the Regulation refers to the possible use of space data and services delivered under the Union’s space programs, EGNOS/Galileo and Copernicus.
  
  
• The second element of due diligence is risk assessment, which requires operators and traders to verify and analyze the information collected and carry out a risk assessment, based on specified risk assessment criteria, including the risk of circumvention or mixing of relevant products of unknown origin or produced in areas where deforestation or forest degradation has occurred or is occurring, in order to ascertain whether there is a non-negligible risk that the relevant commodities and products are not deforestation-free or have not been produced in accordance with the relevant legislation of the country of production.
  
  These risk assessments have to be reviewed at least annually.
  
  If the operator or trader cannot demonstrate that this risk is inexistent or negligible, they cannot place on or export from the EU market the relevant commodities or products and must proceed to the third element of the due diligence, the risk mitigation.
  
  
• The third element of due diligence is risk mitigation. In case of a non-negligible risk that the relevant commodities and products are not deforestation-free or have not been produced in accordance with the relevant legislation of the country of production, operators and traders are required to adopt risk mitigation procedures and measures—such as requesting additional information, data or documents or carrying out independent surveys or audits—to achieve no or negligible risk. To that end, operators and traders are required to have in place adequate and proportionate policies, controls and procedures—such as model risk management practices, reporting, recordkeeping, internal control and compliance management—to mitigate and manage effectively such risks.
  
  The decisions on risk mitigation procedures and measures shall be reviewed at least annually.

The Deforestation Regulation requires operators and traders not only to implement the due diligence processes but also to establish a due diligence system (to be reviewed at least once a year) and to publicly report as widely as possible, including on the internet, on their due diligence systems and the steps taken to ensure compliance with their due diligence requirements under the Regulation. This includes conclusions of the risk assessments, undertaken risk mitigation measures, and description of the information and evidence obtained and used to assess the risk.

However, the Deforestation Regulation also envisions simplified requirements in the following circumstances:

• Simplified due diligence (involving only information gathering element) applies in relation to products produced in countries or parts thereof that have been classified by the Commission as being of “low-risk”, provided that a negative assessment is made with respect to risk of circumvention of the Regulation or of mixing with products of unknown origin or origin in high-risk or standard-risk countries or parts thereof. In such cases, operators and traders would be exempt from the second and third elements of due diligence, risk assessment and risk mitigation, unless they obtain or are made aware of information indicating that the relevant products are at a risk of being not deforestation-free or not having been produced in accordance with the relevant legislation of the country of production. The Commission will publish the list of the countries or parts thereof, that present a low or high risk no later than 30 December 2024, until then all countries will be assigned a standard level of risk.
• Traders that qualify as small- and medium-sized enterprises (“SMEs”) would only be required to collect and keep information relating to the identity of their supplier or clients as well as the reference numbers of the due diligence statements associated to those products. This means they would be required neither to submit a due diligence statement nor to carry out a comprehensive due diligence process.

Enforcement

The Regulation provides for an extensive framework relating to the enforcement of the prohibitions and requirements it foresees, which would be carried out by the competent authorities of the member states.

Such competent authorities would notably be entrusted and required to carry out checks within their territory, based on risk-based approach and risk criteria to be reviewed on a regular basis, to determine:

• If operators and traders comply with the Regulation; and
• Whether the relevant products that have been placed or are intended to be placed on or exported or intended to be exported from the EU market comply with the Regulation.

To that end, the Regulation requires that competent authorities be afforded wide-reaching investigative powers, including to perform examination of due diligence systems, documents examinations and spot checks in or outside the European Union and to rely on technical or scientific means and expertise, and provides for in-depth cooperation between the competent authorities of the different member states, the customs authorities of the different member states and the Commission. Notably, member states may authorise their competent authorities to reclaim the totality of the costs they incurred from operators or traders in cases of non-compliance with the prohibitions or requirements under the Regulation.

To ensure that checks are effectively carried out, the Regulation establishes the following minimum thresholds:

• With respect to relevant products that contain or have been made using relevant commodities produced in a country of production or parts thereof classified as standard risk, competent authorities of each member state will have to annually check at least 3% of the operators placing or making available on the EU market or exporting from the European Union such products;
• With respect to relevant products that contain or have been made using relevant commodities produced in a country of production or parts thereof classified as high risk, competent authorities of each member state will have to annually check at least 9% of the operators placing or making available on the EU market or exporting from the European Union such products as well as 9 % of the quantity of each of such the relevant products;
• With respect to relevant products that contain or have been made using relevant commodities produced in a country of production or parts thereof classified as low risk, competent authorities of each member state will have to annually check at least 1% of the operators placing or making available on the EU market or exporting from the European Union such products.

In addition to these planned checks, the competent authorities would be able to carry out checks when they obtain or are made aware of relevant information concerning a potential case of non-compliance with the Regulation.

In terms of corrective measures, the Regulation requires the member states to empower their competent authorities to adopt:

• Immediate interim measures pending ongoing checks, including seizure or suspension of the placing on, import in or export from the EU market of relevant products;
• Appropriate and proportionate corrective action to bring non-compliance to an end, including rectifying or preventing non-compliance but also withdrawing, recalling, donating or disposing of non-compliant products in accordance with regulations onwaste management;
• Effective, proportionate and dissuasive penalties, including (i) fines expressed as a percentage of the total annual Union-wide turnover in the financial year preceding the fining decision; in the case of a legal person, the maximum amount of such a fine shall be at least 4% of the operator’s or trader’s total annual Union-wide turnover in the financial year preceding the fining decision; (ii) confiscation of non-compliant products, (iii) confiscation of revenues gained from transactions with non-compliant products and/or (iv) temporary exclusion for a period of up to 12 months from public procurement processes.

Cooperation and information exchange mechanisms, as well as reporting requirements, are also established by the Regulation to enhance the effectiveness and transparency of enforcement actions.

Role of Civil Society in Enforcing the Regulation

The Regulation establishes a mechanism through which natural or legal persons may submit “substantiated concerns” to the competent authorities of the member states when they consider that one or more operators or traders are not complying with the Regulation. Such substantiated concerns are defined as a duly reasoned claim based on objective and verifiable information regarding non-compliance with the Regulation and which could require the intervention of competent authorities.

In effect, the Regulation envisages the implementation of a complaint mechanism, as competent authorities would be required to diligently and impartially assess the substantiated concerns, including whether the claims are well-founded, and take the necessary steps. Such steps may include carrying out checks and conducting hearings of operators and traders, with a view to detecting potential non-compliance with the Regulation, and, where appropriate, taking interim measures to prevent the placing or making available on and export from the EU market of relevant products under investigation.

Operators and traders (including SME traders) would also have to take into account such substantiated concerns, as they would be obliged to inform competent authorities immediately, if they receive new information—including substantiated concerns—that relevant products that they have placed on or exported from the EU market were non-compliant.

Future Developments

The Regulation requires the Commission to present an impact assessment accompanied, if appropriate, by a legislative proposal to extend the scope of the Deforestation Regulation to (1) include other wooded land (no later than 30 June 2024) and (2) other natural ecosystems, including other land with high carbon stocks and with a high biodiversity value, such as grasslands, peatlands and wetlands (no later than 30 June 2025).

Furthermore, as mentioned above, the Commission shall publish the list of countries, or parts thereof, that present a low or high risk no later than 30 December 2024. Also, by 30 June 2025 the Commission will determine whether it is appropriate to amend or extend the list of relevant products in Annex I, in particular with respect to biofuels (HS code 382600).

How to Prepare

Individuals and companies placing or making available on the EU market, or exporting from the EU products within the scope of the Regulation should start to assess their internal due-diligence mechanism to make sure it is fit by 30 December 2024 for the obligations introduced by the Regulation.

Operators and traders should:

• start assessing the complexity of their regular supply chains and the stage of processing of the relevant products, to determine difficulties in connecting relevant products to the plot of land where the relevant commodities were produced;
• assess the risk of circumvention of the Regulation or of mixing with relevant products of unknown origin or produced in areas where deforestation or forest degradation has occurred after 31 December 2020 or is occurring;
• apprise themselves on the laws applicable in the countries where their regular suppliers produce relevant products 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, tax, anti-corruption, trade and customs regulations;
• monitor any of the Commission's proposed implementing acts, as well as relevant legislation of the member states;
• start collecting in respect of any relevant products produced from 29 June 2023 which will be placed on, made available, or exported from the EU market from 30 December 2024, documents and information that would enable them to comply with the information gathering element of due diligence.

Producers of the relevant commodities and products—including those outside the European Union—should take appropriate steps to ensure that their commodities and products are compliant with the requirements established by the Regulation and that they are capable of supplying adequate information to their customers in this regard.

Mayer Brown has extensive experience helping EU and non-EU companies navigate their due diligence and export-related obligations. We stand ready to help our clients to assess the impact of the Regulation on their business.