Introduction

Deforestation is a pressing global issue, contributing significantly to climate change, biodiversity loss, and the degradation of ecosystems. The European Union (EU) has introduced stringent regulations to combat deforestation and forest degradation associated with commodities and products imported into, exported from, or placed on the EU market. This article delves into the definitions, scope, detailed actions required, and due diligence processes outlined in the EU regulation to mitigate deforestation.

Important Definitions

Understanding the terminology used in the regulation is crucial for compliance and effective implementation. Here are key definitions:

• Relevant Commodities: Cattle, cocoa, coffee, oil palm, rubber, soya, and wood.
• Relevant Products: Products listed in Annex I that contain, have been fed with, or have been made using relevant commodities.
• Deforestation: The conversion of forest to agricultural use, whether human-induced or not.
• Forest: Land spanning more than 0.5 hectares with trees higher than 5 meters and a canopy cover of more than 10%, excluding land under agricultural or urban use.
• Agricultural Use: Use of land for agriculture, including plantations and rearing livestock.
• Forest Degradation: Structural changes to forest cover, converting primary forests into plantation forests or other wooded land.
• Operators: An operator is any natural or legal person who, in the course of a commercial activity, places relevant products on the market or exports them.
• Traders: A trader is 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.

Scope of the Regulation

The regulation applies to the following:

1. Placing and making available on the EU market, as well as exporting relevant products listed in Annex I that contain, have been fed with, or have been made using relevant commodities.
2. The regulation aims to:
• Minimize the EU's contribution to global deforestation and forest degradation.
• Reduce greenhouse gas emissions and biodiversity loss.

Exceptions are made for relevant products produced before specific dates as detailed in Article 37(3).

Detailed Actions Required

Prohibition and Compliance

Operators must ensure that relevant products meet the following conditions before placing them on the market or exporting them:

1. Deforestation-Free: Products must contain, be fed with, or be made using commodities not produced on deforested land after December 31, 2020.
2. Legal Production: Products must comply with the relevant legislation of the country of production.
3. Due Diligence Statement: A due diligence statement must be submitted confirming compliance with the regulation.

Obligations of Operators

Operators must exercise due diligence by:

1. Collecting Information: Gathering necessary data and documents demonstrating compliance with the regulation.
2. Risk Assessment: Evaluating the risk of non-compliance based on collected information.
3. Risk Mitigation: Implementing measures to mitigate identified risks, ensuring negligible risk of non-compliance.

Operators must retain records of due diligence for five years and provide them to competent authorities upon request. They must also assist authorities during checks and communicate relevant compliance information along the supply chain.

Obligations of Traders

Traders must:

1. Collect and keep information on the relevant products they trade, including supplier and buyer details.
2. Retain records for at least five years and provide them to competent authorities upon request.
3. Assist competent authorities in carrying out compliance checks.

Authorised Representatives

Operators and traders can appoint authorised representatives to submit due diligence statements on their behalf. However, the responsibility for compliance remains with the original operator or trader.

Due Diligence Process

Information Requirements

Operators must collect and retain information, such as:

1. Product description and trade name.
2. Quantity of products.
3. Country of production and geolocation of land used for production.
4. Supplier and buyer details.
5. Evidence of deforestation-free status and legal production.

Risk Assessment

Operators must verify and analyze collected information to assess the risk of non-compliance. Criteria for risk assessment include:

1. Risk levels assigned to the country of production.
2. Presence of forests and indigenous peoples.
3. Prevalence of deforestation and forest degradation.
4. Reliability of documentation and information sources.

Risk Mitigation

If a non-negligible risk is identified, operators must adopt risk mitigation measures, such as:

1. Obtaining additional information.
2. Conducting independent audits.
3. Supporting compliance efforts among suppliers.

Operators must document and review risk mitigation decisions annually.

Penalties for Non-Compliance

Penalties for non-compliance include:

Fines:

• Fines are proportional to the environmental damage caused and the economic benefits derived from the infringement.
• For legal persons, fines can be up to 4% of the operator's or trader's total annual Union-wide turnover in the financial year preceding the fining decision. The fine can be increased to ensure it exceeds the potential economic benefits gained from non-compliance.

Confiscation:

• Confiscation of non-compliant products and any revenues gained from transactions involving those products.

Temporary Exclusion:

• Temporary exclusion for up to 12 months from public procurement processes and access to public funding, including grants and concessions.

Prohibition:

• Temporary prohibition from placing or making available non-compliant products on the market, especially in cases of serious or repeated infringements.

IT Reporting Obligations for Operators and Traders

Information System

The EU regulation mandates the establishment of an information system by December 30, 2024. This system will:

1. Register Operators and Traders: Including their authorized representatives in the Union.
2. Store Due Diligence Statements: Assigning and communicating reference numbers for each statement.
3. Convert Geolocation Data: From relevant systems to identify geolocation accurately.
4. Record Check Outcomes: On due diligence statements.
5. Integrate with Customs: Through the European Union Single Window Environment for Customs.

How ComplyMarket Team Can Help You?

1. ComplyMarket offers System to System Due Diligence Reporting interface
2. ComplyMarket can collect due diligence information from your suppliers using ComplyDoC
3. ComplyMarket offers Ad-Hoc consulting