With its , or EUDR, the European Union aims to have an impact on the reduction of greenhouse gas emissions and global biodiversity loss by minimising the bloc’s contribution to deforestation and forest degradation globally.

Which commodities and goods must be deforestation-free?

EUDR prohibits the placement of palm oil, soya, wood, cocoa, coffee, cattle and rubber, and derived products such as leather, tyres and wooden furniture, to the EU market or exported from the EU unless they are deforestation-free. Their production must be in accordance with law of their country of origin and accompanied by a due diligence statement.

EUDR has defined “deforestation-free“ as products that do not contain or have not been fed with or been made using the relevant commodities after 31 December 2020, or products containing wood or derived from wood harvested from the forest without prompting forest degradation after 31 December 2021. The date has been set in the past to avoid front loading of production before the adoption of the law.

Applicable to whom?

The operators and traders of the relevant commodities and their derived products. The operator, any natural or legal person, must ensure that the relevant products it places on the EU market or export from the EU market complies with the prohibitions and obligations of the EUDR. The trader is any person “in the supply chain other than the operator” who makes the relevant product available to the EU market.

Should these persons be located outside of the EU, the relevant prohibitions and obligations apply to the first natural or legal person in the EU that made the products available on the market.

Operators and traders are required to precisely geolocate all plots of land where the commodities were produced and specify the date or time range of production.

Assuming the full responsibility for the compliance of the relevant products, operators and traders must file their due diligence statements through an information system, as per the details provided in , in which they declare that there is “no risk or only a negligible risk that the relevant commodities and the derived products are not deforestation-free and in compliance with the laws of the country of production.”

Mandatory requirements of the due diligence process

First, the statement must provide a precise description of the relevant product, including all the relevant documents and data--such as the geolocation and the time range of production--demonstrating that it is deforestation-free. It must also specify the details of the operators or the trader acting as supplier or client.

Second, an annual risk assessment on the non-compliance of the relevant products imported or exported in or out of the EU must be carried out by the operators and the traders. The risk assessment must conclude “no or only a negligible risk” of non-compliance. The review covers 14 criteria including the European Commission’s risk classification, claims from indigenous people, the prevalence of corruption and/or deforestation and/or forest degradation and/or evidence of circumvention of the EUDR in the country of production.

The risk classification contains three categories. “High risk” refers the country of production where there is a high risk that the relevant products will be non-compliant. There is a “low risk” in a country of production where “there is sufficient assurance” that the non-compliance of the relevant products is “exceptional.” Standard risk applies to countries which do not fall in either category.

Third, a risk mitigation must be carried out by independent surveys or audits, additional data or document collection when companies cannot provide evidence that the non-compliance risk is inexistent or negligible. Companies must demonstrate the existence of “adequate and proportionate policies, controls and procedures to mitigate and manage effectively the risks of non-compliance of relevant products,” including reporting and the appointment of a compliance officer, among other mitigating actions.

A simplified due diligence may be permitted when the European Commission has classified a country as “low risk” upon demonstrating a negligible risk assessment of circumvention. As a result, companies are exempted from running a risk assessment and a risk mitigation. Besides, companies that qualify as SMEs may only be required to perform the data collection elements of the due diligence process from suppliers and clients.

Broad roles for the implementation of EUDR by member states

EUDR provides for far-reaching power to the authorities to implement the regulation. Yet, it also enables them to “provide technical and other assistance” to companies to facilitate compliance with the regulation, such as providing data on geolocation.

Authorities should also facilitate the exchange of information between member states but also with third party countries to ensure best practices, compliance and a harmonised implementation of the EUDR. Without prior warnings, checks are expected to be carried out by the authorities according to a risk-based approach which should account for the “the complexity and the length of supply chains” and conclusions of European Commission expert group meetings, among other factors.

Relationship with third countries

The EUDR expects the EC to engage with high-risk countries “to jointly address the root causes of deforestation and forest degradation.” The cooperation should promote “conservation, restoration and sustainable use of forests, deforestation, forest degradation, and the transition to sustainable commodity production, consumption, processing, and trade methods.”

The EUDR also expects the EC to engage with international bilateral and multilateral discussions on environment policies at various forums organised, for instance, by the United Nations. Moreover, the EC should also play a part to promote “the adoption of ambitious requirements to minimise such countries’ contribution to deforestation and forest degradation.”

Rules on checks

The annual checks to be carried out will be risk-based with the samples covering minimally 1%, 3% and 9% of the companies active in low, standard and high-risk countries, respectively. The checks of companies include examination of their due diligence system, documentation and records that may result in on-the-ground examinations, technical and scientific investigations and field audits, when possible, if the initial examinations have raised questions.

Once a year, member states are expected to communicate, to the public and the EC, their plans for checks and their criteria, the quantity of products checked and the percentage of checks carried out without warning. For non-compliant cases, the corrective actions undertaken should also be published.

Required actions for non-compliance

Authorities identifying a high risk of non-compliance are expected to suspend “the placing or making available” of the relevant products on the market according to a certain timeframe depending on the nature of the product (e.g., is it perishable?).

Persistent non-compliance may result in the rectification of any former formal non-compliance, a ban on the sale of the products in the EU or exported, a withdrawal, a recall or a donation of the product to a charitable or public entity.

Severe penalties for non-compliance

The penalties for non-compliance must be set by member states. However, they must be “effective, proportionate and dissuasive.” Fines must be “proportionate to the environmental damage” and may increase on repeated infringements. “The maximum amount of such a fine shall be at least 4%” of the total annual turnover in the EU of the non-compliant operator or trader. The fines may be higher “to exceed the potential economic benefit gained.”

The penalty may not only result in the confiscation of the product, but also the revenues gained by the non-compliant company. It may also result in the temporary exclusion of public procurement processes and public funding. Serious or repeated infringements may result in the temporary prohibition of transacting the relevant products or using the simplified due diligence procedure.

This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .