Rules against deforestation: the effect and coming into effect of Deforestation Regulation

Background to the law

The Deforestation Regulation entered into force on 29 June 2023. The regulation is part of a broader action plan to tackle deforestation and forest degradation, and can be seen as a European response to the lack of binding international rules on forest protection. The aim of the regulation is to minimise deforestation and forest degradation resulting from EU consumption and production, while also reducing the EU's contribution to greenhouse gas emissions and biodiversity loss. To this end, the regulation lays down rules on marketing, offering and export of certain raw materials and products, namely cattle, cocoa, coffee, palm oil, soya, rubber and timber. These raw materials and products may only be placed on the market or exported if they (i) are deforestation-free, (ii) have been produced in accordance with the relevant legislation of the country of production, and (iii) are covered by a due diligence statement. The regulation replaces the 2010 Timber Regulation, which was primarily aimed at curbing illegal logging. 

Obligations for companies

Operators (and non-SME traders) are required under the regulation to carry out due diligence regarding raw materials and products listed above. This due diligence consists of three steps: (i) collecting certain information, (ii) carrying out a risk assessment based on the information collected and (iii) identifying measures to reduce any risks concerning non-compliance of the relevant products to zero or negligible levels. The set of procedures and measures resulting from these three steps is also referred to as "due diligence system” and should be reviewed annually by the operator. In addition, operators, except for SME traders, must report annually on their due diligence system to the widest possible audience, including through publication on the Internet.

With regard to the first step, operators should collect, among other things, the following information on each relevant product:

• A description of the trade name and type of relevant products;
• the quantity of the relevant products
• the country of production
• the geolocation of all plots where the relevant raw materials were produced and the dates of production
• the name, postal address and e-mail address of the suppliers of the relevant products;
• the name, postal address and e-mail address of the buyers of the relevant products;
• sufficiently conclusive and verifiable information demonstrating that the relevant products are deforestation-free; and
• sufficiently adequate and verifiable information showing that the relevant raw materials have been produced in accordance with the relevant legislation of the country of production.

If operators are unable to collect the above information, they are not allowed put the relevant products on the market under the regulation. 

During the second step, companies falling under the scope of the regulation must carry out a risk assessment based on the information collected to determine whether there is a risk of non-compliance of the relevant products intended to be marketed or exported. Non-compliance means a violation of the prohibition clause in Article 3 of the Deforestation Regulation. According to this article relevant raw materials and relevant products may only be placed on the market or exported if they (i) are deforestation-free, (ii) have been produced in accordance with the relevant legislation of the country of production, and (iii) are accompanied by a due diligence statement. Only when there is no or a negligible risk of non-compliance may the relevant products be imported or exported in trade. This risk assessment should take into account several criteria, such as the prevalence of deforestation in the country of production, the presence of indigenous peoples, and the conclusions of Commission expert group meetings. Risk assessments should be documented and reviewed at least annually and made available to competent authorities upon request. 

Regarding the prohibition clause in Article 3 of the Deforestation Regulation, the European Parliament proposed an amendment on 14 November 2024 to add a "no-risk" category to the article. Raw materials or products from no-risk countries (or parts thereof) must have been produced in accordance with that country's legislation. Thus, the steps of the due diligence system do not need be followed in case of no-risk countries. It is now up to the Council to negotiate this amendment. It is therefore still unclear whether this amendment will be included in the final text of the regulation. 

Finally, in case there is a risk of non-compliance of the relevant products, operators must adopt risk mitigation procedures and measures. If there is no such risk, this obligation does not apply. The mitigation procedures and measures may include requiring additional information, carrying out independent investigations or providing support to (small) farms to comply with the requirements of the regulation. 

If companies fail to fulfil the above obligations, for example by placing a non-compliant product on the market or by failing to carry out an adequate risk assessment, the competent authorities - in the Netherlands the NVWA - can require corrective measures to be taken. These measures may include the immediate withdrawal of a product from the market or its recall. In addition, the NVWA can for example impose fines and companies can be excluded from procurement procedures for a period of up to one year in case of violation of any of the regulation's requirements. Criminal administrative enforcement under the Economic Offences Act is also possible.

Challenges in implementing the law

From the regulation's entry into force in June 2023, large companies had 18 months and micro and small companies 24 months to prepare for the application of the new rules. In recent months, several (industry) organisations have reported that this period was too short to adapt. Especially collecting data on relevant products proved challenging for several companies. In addition, the Commission was supposed to come up with additional guidelines earlier this year, providing additional clarity for companies and enforcement authorities, and there were concerns about the online register for maintaining due diligence statements. These guidelines, however, were delayed. 

In order to give companies more time to familiarise themselves with the law (i.e. to gather the necessary information and make the necessary assessments), the Commission proposed at the beginning of October to postpone the application of the rules by 12 months to 30 December 2025 for large companies and to 30 June 2026 for micro and small companies. This proposal was adopted, postponing the application of the regulation. Meanwhile, the Commission has also published the new guidelines for the implementation of the law. The guidelines cover a wide range of issues such as traceability requirements, penalties and interpretation of critical definitions. In addition, an online portal where due diligence statements can be prepared and submitted was opened on 6 December 2024

Conclusion

Although the application of the Deforestation Regulation is to be postponed, it is important for companies that fall within the scope of the law to prepare and implement a due diligence system.  Depending on the complexity of the supply chain, this can be a time-consuming process. The Commission's guidelines and updated FAQ will hopefully provide the guidance that practitioners have been asking for.

Many thanks to Fabian de Vries (student-intern during the writing of this blog) for his useful contribution to this blog post.