On November 17, 2021, the European Commission ("Commission") published a proposal that seeks to prohibit placing or making available on the European Union ("EU") market as well as exporting from the EU certain commodities and products associated with deforestation and forest degradation ("Proposal").1 Through the Proposal, the Commission intends to impose stringent due diligence requirements on operators and traders that place on or export from the EU market these commodities and products, subject to extensive checks, redressive measures and penalties by the competent authorities of the EU member states.
The Proposal is in line with the Commission’s commitment—as part of the EU Green Deal—to promote imported products and value chains that do not involve deforestation or forest degradation.2 The Proposal is also part of a broader effort from the EU institutions towards more sustainable supply chains. In September, the Commission announced its plan for a ban on imports involving forced labor (see the Mayer Brown Legal Update) and is expected to publish a broader legislative proposal on sustainable corporate governance incorporating human rights due diligence obligations.3 The Proposal complements, but does not replace, these initiatives.
1. What products are covered by the Proposal?
The Proposal currently covers six commodities deemed to be the most relevant in terms of driving global deforestation and forest degradation and certain products that contain, have been fed with or have been made using such commodities, as listed in Annex I (“relevant commodities and products”). At this stage, the Proposal would therefore apply to the following commodities: cattle, cocoa, coffee, oil palm, soya and wood. It would also apply to certain products made from these commodities, such as cattle meat, leather, chocolate, soya-bean oil, oilcakes, plywood and wooden furniture.
The Proposal, however, would not apply to commodities and products that were produced before the entry into force of the proposed regulation, i.e., used commodities and products would not be covered.
2. Who is concerned by the Proposal?
The Proposal sets prohibitions and obligations for:
- Operators, defined as any natural or legal person who, in the course of a commercial activity, places relevant commodities and products on the EU market or exports them from the EU market; and
- Traders, defined as any natural or legal person in the supply chain other than the operator who, in the course of a commercial activity, makes available on the EU market relevant commodities and products.
In cases where the relevant commodities and products are placed on the EU market by operators established outside the EU, the Proposal provides that the first natural or legal person established in the EU who buys or takes possession of such commodities and products would be considered an operator and, thus, subject to the relevant prohibitions and obligations.
While the Proposal primarily imposes prohibitions and obligations on natural or legal persons in the EU, producers of relevant commodities and products—including those outside the EU—would also be impacted as their products would have to meet the requirements of the Proposal to be sold in or exported from the EU.
3. What are the prohibitions and obligations contemplated under the Proposal?
As a matter of principle, the Proposal states that relevant commodities and products, as listed in Annex I, may be placed on or exported from the EU market only if they:
- Are deforestation-free, i.e., they were neither produced on land that has been subject to deforestation after December 31, 2020, nor have induced forest degradation after December 31, 2020;
- Have been produced in accordance with the relevant legislation of the country of production; and
- Are covered by a due diligence statement that operators, traders or their authorized representatives would have to submit through an information system to be established under the Proposal.
As per the Proposal, operators and traders may not place on or export from the EU 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 or 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 Proposal therefore provides for an extensive due diligence process for operators and traders, which would be required to establish and keep up to date a due diligence system, to be reviewed at least once a year and as necessary, structured around three pillars:
- The first pillar is information gathering. Operators and traders would be required to collect a set of information 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 "geo-localization coordinates, latitude and longitude of all plots of land where the relevant commodities and products were produced, as well as date or time range of production." To that end, the Proposal refers to the possible use of space data and services delivered under the EU’s Space program, i.e., EGNOS/Galileo and Copernicus.
- The second pillar is risk assessment. Operators and traders would be required to verify and analyze the information collected and carry out a risk assessment, based on specified risk assessment criteria, 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 would 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 step of the analysis.
- The third pillar 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 would be required to adopt risk mitigation procedures and measures—such as requesting additional information, data or documents or independent surveys or audits—to reach no or negligible risk. To that end, operators and traders would be required to have in place adequate and proportionate policies, controls and procedures to mitigate and manage effectively such risks.
Operators and traders would be required not only to implement such due diligence processes but also 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 Proposal.
However, the Proposal also envisions simplified requirements in the following circumstances:
- 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. This means they would be required neither to submit a due diligence statement nor to carry out a comprehensive due diligence process.
- For operators and traders otherwise subject to the full scope of obligations under the Proposal, simplified due diligence would apply in relation to products sourced from countries or parts thereof that have been qualified as being of “low-risk” based on a list to be drawn up by the Commission.4 This means that only the first pillar, information gathering, would apply. In such cases, operators and traders would be exempt from the second and third pillars, risk assessment and risk mitigation, unless they obtain or are made aware of information indicating that the relevant products are not deforestation-free or have not been produced in accordance with the relevant legislation of the country of production.
4. What are the measures foreseen under the Proposal in case of non-compliance?
The Proposal 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 to carry out checks, based on risk-based plans and criteria to be reviewed on a regular basis, to determine:
- If operators and traders comply with their obligations under the Proposal; and
- Whether the relevant commodities and products have been placed on or exported from the EU market in compliance with the requirements under the Proposal.
To that end, the Proposal suggests that competent authorities should be afforded wide-reaching investigative powers, including to perform documents examinations and spot checks in or outside the EU and to rely on technical or scientific 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. Of note, competent authorities would be entitled to reclaim the costs they incurred from operators or traders in cases of non-compliance with the prohibitions or requirements under the Proposal.
To ensure that checks are effectively carried out, the Proposal foresees minimum thresholds:
- Competent authorities would have to check at least 5 percent of the operators and traders (except SME traders) placing on or exporting from the EU market each of the relevant commodities on their market as well as 5 percent of the quantity of each of the relevant commodities placed on or exported from their market.
- For countries or parts thereof listed as “high-risk,” based on a list to be drawn up by the Commission, as well as in cases where there is a risk of relevant commodities or products produced in such countries or parts thereof entering the relevant supply chain, these thresholds are raised to 15 percent.
In terms of redressive measures, the Proposal would empower competent authorities to adopt:
- Interim measures pending ongoing checks, including seizure or suspension of the placing on, import in or export from the EU market of relevant commodities and products;
- Appropriate and proportionate corrective action to bring non-compliance to an end, including rectifying or preventing non-compliance but also withdrawing, recalling, destroying or donating non-compliant commodities or products;
- Effective, proportionate and dissuasive penalties, including (i) fines expressed as a percentage of the annual turnover in the member state(s) concerned,5 (ii) confiscation of non-compliant commodities and products, (iii) confiscation of revenues gained from transactions involving non-compliant commodities and products and/or (iv) temporary exclusion from public procurement processes.
Cooperation and information exchange mechanisms, as well as reporting requirements, are also foreseen under the Proposal to enhance the effectiveness and transparency of enforcement actions.
5. How would civil society be involved in enforcement under the Proposal?
The Proposal puts forward a mechanism whereby natural or legal persons would be entitled to submit “substantiated concerns” to the competent authorities of the member states that operators or traders are failing to comply with their obligations. Such substantiated concerns are defined as well-founded claims based on objective and verifiable information regarding non-compliance with the prohibitions and requirements under the Proposal and that may require the intervention of competent authorities.
In effect, the Proposal suggests the implementation of a complaint mechanism, as competent authorities would be required to diligently and impartially assess such substantiated concerns and take the necessary steps to detect potential breaches.
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 commodities or products placed on or exported from the EU market were non-compliant.
6. What are the next steps?
The Proposal will now go through the ordinary legislative procedure and must be adopted formally by both the European Parliament and the Council of the European Union, which may submit amendments, including with regard to the scope of the obligations imposed to operators and traders or to the list of commodities or products to which the new rules should apply. In that respect, rubber has been explicitly discussed as a potential candidate for inclusion, notably by certain members of the European Parliament.
If adopted, the Proposal foresees a transition period, whereby traders and operators would have 12 months from the entry into force of the regulation before they must implement appropriate due diligence mechanisms and submit due diligence statements prior to placing on or exporting from the EU market relevant commodities or products. This transition period would be extended to 24 months for microenterprises.
Individuals and companies placing on or exporting from the EU market commodities and products within the scope of the Proposal should closely monitor the upcoming discussions on the Proposal and start to assess their internal due-diligence mechanism to make sure it is fit for the possible upcoming obligations.
Producers of these commodities and products—including those outside the EU—should also be mindful of the potential consequences of the Proposal and consider appropriate steps to ensure that their commodities and products are compliant with the requirements foreseen thereunder and that they are capable of supplying adequate information to their customers in this regard.