New obligations on importers and traders arising from the EU Deforestation Regulation

Following the European Green Deal, and following the Paris Agreement to curb deforestation, the European Union (“EU”) adopted the deforestation regulation (“EUDR”) on the 31 May 2023. The EUDR is aimed at minimising global deforestation and forest degradation whilst also protecting the rights of indigenous people. It is estimated that the implementation of the EUDR will result in more than 71,920 hectares of forest less affected by EU-driven deforestation and degradation annually by 2030, contributing to a reduction of at least 31.9 million metric tons of carbon emissions to the atmosphere. The EUDR seeks to reach these aims by introducing new obligations on traders (including SMEs) placing products on the EU market, and on exporters.

Background and Scope of Application

The EUDR seeks to ensure that products such as cattle, cocoa, coffee, oil palm, rubber, soya and wood, and other products deriving from the said products (the “Relevant Commodities”) are deforestation and forest degradation free. To ensure this, the EUDR mandates extensive due diligence obligations on importers and traders dealing in Relevant Commodities.

The Prohibition

The EUDR precludes the Relevant Commodities and their derived products from being placed or made available on the Union market or exported out of the Union unless they are:

deforestation free;
produced in accordance with the relevant legislation of the country of production; and
accompanied by a due diligence statement.

Obligations on operators and traders

Businesses must submit a due diligence statement to the respective competent authority prior to marketing the Relevant Commodities. This due diligence statement requires operators to extensively analyse their supply chain to ascertain whether these products were produced in line with the EUDR’s requirements and be able to have adequate, conclusive and verifiable information that the Relevant Commodities comply. Summarily, the main information that needs to be gathered as part of the due diligence process includes information on the relevant product, country of production, and the geolocation of all plots of land where the product was produced. Risk assessment and risk mitigation play a key role in ensuring that the risk of non-compliance with the EUDR is kept to a minimum.

The robustness of the due diligence process will depend on the risk associated with the sourcing country. A simplified due diligence process will be available where businesses are marketing relevant commodities which were produced in countries that the EU Commission has deemed present a low risk of deforestation.

SMEs are not required to carry out this extensive due diligence if such products have already been subject to a due diligence by another operator and a due diligence statement has already been submitted. In such cases, SMEs benefit from a simplified process whereby they may rely on existing due diligence statements. However, SMEs would still retain responsibility that the relevant products that they are importing satisfy the EUDR’s requirements.

Should operators as a result of their due diligence exercise uncover a non-negligible risk that the Relevant Commodities do not comply with the EUDR, such products cannot be marketed unless the risk is successfully mitigated.

Competent authorities and penalties

Compliance with the EUDR is enforced by the designated competent authority within the respective Member State. Though it appears that Malta is yet to notify its competent authority to the Member State, the 2023 Annual Report of the Environment and Resources Authority (ERA) mentioned that it was involved in the relevant discussions relating to the EUDR, and one would therefore expect that it would be the relevant competent authority which would ensure compliance with the EUDR in Malta. Competent authorities have wide-ranging powers at their disposal, including the ability to carry out surprise checks at operators and traders’ place of business.

Failure to comply with the EUDR comes at a heavy cost. Penalties, which are at the discretion of the Member States to implement, include confiscation of Relevant Commodities which are non-complaint together with revenues generated from the sale of such products, maximum fines of at least 4% of the infringer’s total Union-wide turnover and temporary exclusion from public procurement processes.

Timelines

The EUDR’s obligations on large businesses will come into effect on 30 December 2024, whilst SMEs will have to align their operations to comply with the EUDR by 30 June 2025.

Next Steps

Businesses whose commercial activities include any of the Relevant Commodities should immediately start to consider aligning their practices to comply with the EUDR. In practice, this includes taking the appropriate steps to get an in-depth understanding of their supply chains, engaging with their supplies to gather the required information and carrying out risk assessments to identify any potential risks and mitigating them accordingly. Some of these measures may dovetail with other initiatives that business could have already launched in line with their ESG obligations.