The new regulation 2023/1115, or EUDR, has an extraterritorial reach and is relevant to a considerable number of stakeholders. It covers seven commodities (palm oil, soya, wood, cocoa, coffee, cattle and rubber) and their derived products, as noted in a previous instalment of the Deforestation Act series.
Not getting ready now may have severe adverse consequences for companies involved with the relevant commodities and other relevant products (i.e., derived products). The ripple effects may reach financial institutions that have financial commitments to those companies.
“There are other regulations which get more attention. This regulation should probably be up there at the same levels as certain other regulations,” said Björn ten Seldam, an associate in the EU financial & competition law practice of Arendt & Medernach during an interview on 31 August 2023 in Kirchberg. It is true that the regulatory department of large firms have been inundated with a tsunami of complex ESG regulations and it is “difficult for market players to stay up to date to every single regulation.”
Has your product been produced after 31 December 2020, the cut-off date?
“The due diligence that’s being done now prepares for the compliance of next year, because there’s a cut-off date [...] the 31st of December 2020, which means that every product [that is] produced now needs to take into consideration [the cut-off date] to be sold after 2024. […] The products should be compliant already,” said ten Seldam.
According to the EUDR, the risk classification for countries (low, standard and high) defining the requirements for the stakeholders, needs to be delivered not later than 30 December 2024 by the European Commission. It is arguably a very late deadline given the preparation required to be compliant by that date. Yet, ten Seldam expects a “timely approach by the EC.”
What industries are the most affected by the regulation in Luxembourg?
“The most straightforward industries are the ones related to rubber […] and naturally, palm oil,” noted ten Seldam. “But the regulation does have consequences for the whole market. It can seep through all the way up the supply chain to all kinds of products, all kinds of imports and derived products.” He added: “it goes beyond just the main suspects, [i.e.,] the commodities themselves, it really goes much further, much further.”
Have there been already some changes in the process and approach for some companies and countries?
“There are talks of changes in the transparency of the supply chain,” observed ten Seldam. He noted that some importing companies are confronted with lack of transparency and visibility on the products that they are currently importing.
The operators importing the products could potentially make steps […] to support SMEs abroad to comply; they will have to, in a way, because they need to ensure that the whole supply chain is deforestation free
He explained that there are discussions on using supply chain technologies to track compliance and, more specifically, blockchain technologies to better verify the origin of a product. “[It] would facilitate, in a way, the regulatory burden for companies to check that their supply chain is compliant with this regulation,” stated ten Seldam.
Support of suppliers abroad
The EUDR expects the EC to engage with high-risk countries “to jointly address the root causes of deforestation and forest degradation.” ten Seldam added: “the operators importing the products could potentially make steps […] to support SMEs abroad to comply; they will have to, in a way, because they need to ensure that the whole supply chain is deforestation free.”
Custom checks in a sea-locked country
“The initial custom checks […] will likely be done by the member state in which the product and the commodity will be imported,” stated ten Seldam. He understands that it does not exclude other member states from checking if these products follow the regulation.
Should we expect a uniform application of the regulation across the member states?
ten Seldam explained that the EC expects the “these kinds of regulation” to be applied uniformly. Yet, “there have been regulations in the past where there [were] disparities in the enforcement, […] it’s not only necessarily negative, it can also be that the competent authorities are more efficient or more cooperative.” He further added: “if the competent authority is unresponsive, then it also makes it complicated to make use of that jurisdiction.”
Some provisions in needs of clarity
“Once the market participants start implementing their due diligence and once the EC have issued their guidance, then we [are] going to start to see […] the strengths and weaknesses [of the regulation],” said ten Seldam.
When it comes to weaknesses, some provisions in the regulation are incomprehensible for the man on the street. For example, when outlining the penalties for non-compliance: “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.”
In addition, ten Seldam noted that: “the provision provides that it [the fine] can be increased to exceed the potential economic benefit gained.” He added: “It’s unclear if the maximum [is] going to be up to 4%. And it’s unclear whether the 4% can be increased up to the potential benefit […]. We hope that the European Commission is going to give a bit of guidance on this […]. There may be an amendment to clarify.”
Compared to other regulations, ten Seldam considers the 4% penalty as “quite substantial.” Indeed, given that the margin for the operators and the traders is likely to be quite thin, non-compliance could have severe adverse financial consequences.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.
Editor’s note: The headline was amended 26 September at 3:20pm to clarify that Arendt is active in this space