Manage Your Risk : A Guide To The EU Deforestation Free Regulation

Associate and FDEA Member, Ella Paskett provides a guide to navigating the EU Deforestation Free Regulation.

Who is the Regulation impacting?

The scope of the EUDR will capture companies trading in seven key commodities cattle, cocoa, coffee, oil palm, rubber, soya and wood, and products derived from these commodities. Annex I of the Regulation contains an extensive list of derived products that the scope will also catch. Companies trading products such as chocolate, coffee, leather, wooden tableware and kitchenware, soybeans and paper must ensure they comply with the Regulation. See a full list of derived commodities in Annex I.

The Regulation applies to both Operators and Traders as defined in Article 2 of the Regulation.

Operators: This means any entity which places relevant products on the EU market or exports them from the EU market, whether through traditional or online means. e.g. Importers or producers of the relevant products in the EU

Traders: This means anyone in the supply chain, other than the operator who, in the course of commercial activity, makes the relevant products available on the EU Market. e.g. a company that buys chocolate from an operator based in the EU and, without transforming it, distributes it to supermarket chains.

Implementation Timeline

29^th June 2023 – The Regulation came into force on 29^th June 2023. As of this date, operators and traders will have 18 months to implement the new rules.

30^th December 2024 – Entry into application for large and medium-sized undertakings. The regulation defines large and medium-sized companies as those that exceed at least two of the following factors:

> 50 employees

> €8m turnover

> €4m balance sheet

30^th June 2025 – Extension of scope to small and micro-sized enterprises. Small businesses are defined in the Regulation as having less than 50 employees.

2028 – Every five years, the Commission carries out a general review of the EUDR, starting on June 30^th.

Why are they important?

In the last 10 years, we have lost 4 million hectares per year of our primary forests. The Food and Agriculture Organization of the United Nations (FAO) estimates that 420 million hectares of forest – about 10 % of the world’s remaining forests, equalling an area larger than the European Union – have been lost worldwide between 1990 and 2020. Deforestation and forest degradation are, in turn, important drivers of global warming and biodiversity loss – the two most important environmental challenges of our time.

The EU is the second-largest importer of agricultural goods linked to tropical deforestation (after China). The EU’s imports account for 36% of deforestation linked to crop products and over 25% of deforestation linked to ruminant livestock products and their equivalents.

Deforestation and forest degradation further global climate deterioration in a number of ways. Not only do they increase greenhouse gas emissions through associated forest fires but they can permanently remove carbon sink capacities, decrease resilience to climate change impacts and substantially reduce areas’ biodiversity and resilience to diseases and pests. Deforestation alone accounts for 11 % of greenhouse gas emissions as stated in the Intergovernmental Panel on Climate Change (IPCC) special report on climate change and land of 2019.

Obligations

The EU Deforestation Regulation (EUDR) requires companies to meet certain obligations when placing commodities or products on the EU market or exporting them from it.

Operators must:

1. Collect and maintain:

• ‘deforestation-free’; and
• produced in accordance with local production country laws concerning the legal status of the area of production in terms of land use rights, environmental protection, third parties’ rights, labour rights, forest-related regulations, tax, anti-corruption, and relevant trade and customs regulations.

2. Keep information collected for at least 5 years.

SME Traders must:

1. Collect and maintain:

• Information on buyers and suppliers
• Reference numbers of the due diligence statements associated with products

2. Keep information for at least 5 years

3. Provide information to competent authorities

Non-SME Traders must:

1. Meet the obligations of Operators

Companies planning on trading relevant products on the EU market will be required to:

• Collect precise geographical information
  • (coordinates) on farmland where the commodities that they source have been grown,
  • supplier details, and
  • adequate/ verifiable information that the commodities are deforestation-free (Article 9).
    
• Confirm and verify that commodities are produced in line with the relevant legislation of the country of production (Article 9);
  
• Carry out risk assessments (Article 10);
  
• Mitigate risks
  
• Carry out audits/ independent surveys to make sure that there is no risk or only negligible risk that risk commodities are not compliant (Article 11); and
  
• Establish & maintain due diligence systems, reporting and record-keeping (Article 12)

The Due Diligence Statement

The due diligence statement is an essential part of the obligations of both traders and operators as defined in the Regulation and demonstrates that regulated commodities are both deforestation-free and produced in accordance with local production laws.

What to include in your Due Diligence Statement:

Operators and relevant traders should include the following in their due diligence statements:

• A description of the product
• The operator’s name, address, EORI number
• Harmonised System code, quantity
• The Country of production and the geolocation of all plots of land where the relevant commodities were produced, as well as a date or time range of production
• A signed statement confirming that due diligence was performed and no or negligible risk was found.

The signed statement must be submitted before the product is placed on the EU mark

Checks and Sanctions

The EUDR will be enforced by ‘Competent Authorities’ in the Member States. Competent Authorities, appointed by member states, will be permitted to conduct checks on operators and traders established in their territory to ensure they comply with the EUDR (Article 16).

Importantly, “the competent authorities shall use a risk-based approach to identify the checks to be carried out. Risk criteria shall be identified based on an analysis of risks of non-compliance with this Regulation, taking into account in particular the relevant commodities and the complexity and the length of supply chains” (Article 16).

Checks for operators & non-SME traders and SME traders will be slightly different according to the regulation.

Checks on operators and non-SME traders

According to Article 18 of the Regulation, the checks on operators and non-SME traders can include:

• The examination of a company’s due diligence system and its implementation of it (including documents to prove compliance).
• On-the-ground investigations or use scientific analyses (e.g. DNA analysis or satellite images) carried out by competent authorities to gather more information.

Checks on SME traders

Corrective Action

Article 24 of the Regulation states that Competent Authorities can require Operators to take ‘appropriate and proportionate’ corrective action to rectify any non-compliance. This corrective action will include at least one of the following:

The regulation also requires that the infringing company address the shortcomings in its due diligence system that allowed the non-compliance.

Penalties

Article 25 of the Regulation details a number of different penalties for operators and traders that fail to comply with their obligations.

• Fines for non-compliance will be up to 4% of a company’s EU turnover. The fines will be proportionate to the environmental damage and value of the items (if there is repeated infringement, these fines will gradually increase up to the 4% benchmark).
• A temporary prohibition from dealing in the EU in the relevant commodities (for serious or repeated infringements), or a prohibition from using the simplified due diligence process (available to commodities produced in ‘low risk’ areas).
• Temporary exclusion from public procurement processes and access to public funding (for a maximum of 12 months).
• Confiscation of the relevant commodities or of the revenue gained from them.
  

Obligations under the EUDR will vary depending on the size of your business. You should start by determining whether some or all of your products are captured by the scope of the Regulation. If so, you should gather data for products in scope & inform suppliers about upcoming requirements. Look out for part 3 of our Deforestation-Free Regulation guide, which will provide further advice on how to best prepare for implementation.

Key Considerations Checklist for EUDR Preparation and Compliance

Determine your own scope – will your business be caught by the regulation? 

• Assess which of your products will be caught by the scope of the Regulation. 

• Define your role – are you an Operator or Trader under Regulation definitions. 

• Define your size – are you a SME or Non-SMEs under Regulation definitions. 

• Gather data for products in scope & inform suppliers about upcoming requirements. 
  

Assess the impact  

• Are your suppliers likely to be affected by the Regulation?  

• Can you prioritise goods based upon their importance to your business? 

• Creating and maintaining due diligence processes for supply chains will come with costs and additional training requirements, do you have appropriate staff and software? 
   

Screen your current and future suppliers  

• A Supplier Code of Conduct should be drawn up.  

• Do your existing standard form contracts need revising to account for the EUDR?  

If you have any bespoke sale contracts, consider whether there are any express provisions you could incorporate to take into account compliance with the EUDR. This will benefit both parties as you’ll have clarity from the start. 

An ongoing strategy will be needed to handle compliance with the Regulation in the long-term. This may involve several factors, some of which are below: 

• undertake due diligence with current suppliers; 

• monitor EU guidance; 

• reduce supply to the EU; 

• source from low-risk areas; 

• substitute other commodities; and  

• adapt supply base. 

 Useful Websites: 

EU Guidelines and FAQs  

EUDR Regulation  

Business value derives from setting up relationships correctly, proper governance and protecting your assets. Whether that’s protecting and licensing your Intellectual Property, advising you on digital expansion and implementation of technology or helping you ensure you have the right documents in place, our expert team will partner with you to ensure you are fully utilising the value within your business.