On 13 September 2022, the European Parliament adopted its position on the “Proposal for a Regulation of the European Parliament and of the Council on the making available on the Union market as well as export from the Union of certain commodities and products associated with deforestation and forest degradation and repealing Regulation (EU) No 995/2010”, adopted by the Commission on 17 November 2021 and on which the Council of the European Union adopted its negotiating position (“General approach”) on 28 June 2022.
In this way, the path taken by the European legislator in approving the aforementioned Proposal, aimed to prevent commodities/products associated with deforestation and forest degradation from being placed on the European Union market or exported from the European Union (hereafter, “relevant commodities and products”), continues. The Proposal’s goal is to achieve this objective by imposing on operators and traders (who are not SMEs) a series of obligations and, in particular, the obligation of due diligence, i.e., the obligation to verify that the commodities/products falling under the scope of the Proposal are indeed deforestation free commodities/products. The due diligence obligation consists, in principle, of three steps: 1) collecting all the required information and documents; 2) identifying and assessing the risk of non-compliance of the relevant commodities and/or products, to be conducted on the basis of the information collected and in light of the relevant criteriology; and, finally, 3) taking appropriate risk mitigation measures to reduce the identified risk to a negligible level, unless the identified risk has been found to be already negligible.
The main features of the amended version of the Proposal are summarized below.
Broadening/reshaping of the Proposal’s scope
While the version of the Proposal approved by the Commission had regard to six commodities (namely cattle, cocoa, coffee, palm oil, soybean, and wood) and to products listed in Annex I, which contain or are fed/manufactured with these commodities, the version approved by the European Parliament significantly broadens of the scope of the Regulation. In fact, the latter now includes the following (see Amendment 83): «cattle, swine, sheep and goats, poultry, cocoa, coffee, oil palm and palm-oil based derivates, soya, maize, rubber, and wood (“relevant commodities”), and products, including charcoal and printed paper products, as listed in Annex I», which also was subject to appropriate additions (by way of example only, new, retreaded or used pneumatic tires, of rubber).
Moreover, the reshaping of the scope of the Proposal involves a more precise definition of the terms described in Article 2, including those of deforestation, deforestation-free, forest and other natural ecosystem degradation, non-compliant products and the addition of new definitions. Specifically, under the new text, “deforestation-free” refers to relevant commodities and products, including those used for or contained in relevant products, that are produced on lands that have not been subject to deforestation, and have not induced or contributed to forest degradation or forest conversion after 31 December 2019 (and no longer after December 31, 2020); further, “non-compliant products” are defined as relevant commodities and goods that were not produced in a deforestation-free” manner, or were not produced in accordance with the relevant laws and standards, including those on the rights of indigenous peoples, tenure rights of local communities, and the right to free, prior and informed consent, and which were not covered by an accurate due diligence statement (see, respectively, Amendments 95 e 98).
Human rights and rights of indigenous people and local communities
The common thread of the European Parliament’s amendments aims to underline the protection of human rights and the unprecedented reference, in several parts of the new text of the Proposal, to the rights of indigenous people and local communities (see, for example, Amendments 100 et seq.).
Tightening of obligations on operators/non-SME traders
Under the amended text, adopted at first reading by Parliament, the obligations on operators – i.e. any natural or legal person who, in the course of a commercial activity, places relevant commodities and products on the Union market or exports them from the Union market – and traders that are not small and medium-sized enterprises (non-SME) – i.e. 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 Union market relevant commodities and products – are further tightened. In particular, there is an extension of disclosure requirements for operators/non-SME traders, whereby they are now required to collect, organize and maintain adequate and verifiable information on the fact that the commodities/products concerned are deforestation free, but, also and among others, adequate and verifiable information, obtained via independent audits and appropriate consultation processes, regarding the fact that the area used for the purpose of producing the relevant commodities and products is not subject to any claims on the basis of indigenous, customary or other legitimate tenure rights or subject to any dispute regarding their use, ownership or occupation and adequate and verifiable information disclosing the views of any indigenous peoples, local communities and other groups that claim tenure rights in respect of the area used for the purpose of producing the relevant commodities/products regarding the production of those relevant commodities and products (see Amendments 125 and 126). Accordingly, operators and non-SME traders should conduct the risk assessment by taking into account the following additional criteria: the presence of vulnerable population, indigenous people, local communities and other customary tenure rights holders in the country or parts thereof where the relevant commodity or good is produced; the existence of claims or disputes regarding the use of, ownership of, or exercise of customary tenure rights on the area used for the purpose of producing the relevant commodity or product, whether formally registered or not; concerns in relation to the country of production or origin and parts thereof, such as level of corruption, prevalence of document and data falsification, absence, violation or lack of law enforcement of tenure rights and rights of indigenous people and local communities, armed conflict or presence of sanctions imposed by the United Nations Security Council or the Council of the European Union; the complexity of the relevant supply chain, in particular difficulties in connecting commodities and/or products to the plot of land where they were produced or national data protection rules which prohibit the transmission of such data; the risk of mixing with products of unknown origin or produced in areas where deforestation, forest degradation or forest conversion as well as violations of the relevant law has occurred or is occurring; the outcome of multi-stakeholder dialogues where impacted parties, such as smallholders, SMEs, indigenous peoples and local communities, have been invited to actively participate (see Amendments 131 et seq.).
The new Proposal also lays down obligations for operators to take necessary measures in order to: (a) engage meaningfully with vulnerable stakeholders, such as smallholders, indigenous peoples and local communities, in their supply chain; (b) ensure that those vulnerable stakeholders receive adequate assistance and fair remuneration so that their commodities and products can comply with the rules, in particular with regard to the geolocation requirement, and to ensure that the costs resulting from the implementation of the Regulation are fairly shared among the different actors in the value chain; and c) ensure the implementation of agreed commitments, guaranteeing that adverse impacts on identified vulnerable stakeholders are addressed (see Amendment 114).
4. Obligations of financial institutions
Another new element that characterizes the amended text of the Proposal is that, unlike the previous version, it also lays down obligations for financial institutions headquartered or operating in the Union that provide financial services to natural or legal persons whose economic activities consist, or are linked to, the production, supply, placing on or export from the Union market of the relevant commodities and products, providing that:
financial institutions shall provide financial services to customers only when the financial institutions conclude that there is no more than a negligible risk that the services in question potentially provide direct or indirect support to activities leading to deforestation, forest degradation or forest conversion (see Amendment 105);
financial institutions shall collect the information, documents and data demonstrating that the provision of financial services to customers complies with the Regulation (see Amendment 127);
financial institutions shall exercise due diligence prior to providing financial services to customers whose economic activities consist, or are connected to, the trading or placing on the market of relevant commodities and products and, also in relation to customers with whom financial institutions have established an ongoing business relationship before the date of entry into force of the Regulation (see Amendment 148);
financial institutions shall verify and analyze information and any other relevant documentation collected, and on that basis, shall carry out a risk assessment to establish if there is a risk that the provision of financial services to a customer does not comply with the Regulation. If the financial institution cannot demonstrate that the risk of non-compliance is negligible, it shall not provide financial services to the customer concerned (see Amendment 149).
Strengthening of the penalty system
Concluding the overview of the main changes made by the European Parliament to the text of the Proposal approved by the Commission, it is worth noting those that have affected the penalties applicable to infringements of the Regulation’s provisions.
More in detail, the penalty system shows a renewed rigidity both as a result of the increase in the minimum of the maximum amount of fines – which rises from 4% to 8% of the operators or trader’s annual turnover in the Union – and due to the introduction of new sanctions resulting from infringements of the Regulation’s provisions. Indeed, without prejudice to the confiscation of the relevant commodities and products concerned, confiscation of revenues gained by the operator and/or trader from a transaction with the relevant commodities and products concerned and temporary exclusion from public procurement processes, the Regulation now also include: 1) the obligation to restore the environment; 2) the obligation to compensate for damage done to any natural or legal person that the exercise of due diligence would have avoided; 3) temporary exclusion from public procurement processes and from access to public funding, including tendering procedures, grants and concessions; 4) temporary or permanent prohibition from placing or making available relevant commodities and products on the Union market, or exporting them, in the event of a serious infringement or of repeated infringements; 5) prohibition from the use of the simplified due diligence procedure, in the event of a serious infringement or of repeated infringements (see Amendments 188 et seq.).
Finally, it is provided that Member States shall notify the Commission of operators and traders who failed to fulfill their obligations under this Regulation and the penalties applied to them. The Commission publishes a list of operators and traders concerned. The list shall be made publicly available on the website of the Commission and regularly updated (see Amendment 194).
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At this point, what should we expect?
It will now be up to the Council of the European Union to make a decision on the text approved by the European Parliament.
The Council could decide to accept the Parliament’s position, and, in this case, the Proposal will be considered as adopted; or it could modify the Parliament’s position, and, as consequence, the Proposal will return to Parliament for a second reading.
The process of approval of the Proposal will then follow the further stages in which the ordinary co-decision procedure is divided.
In the best perhaps overly optimistic scenario, the Proposal could be adopted within the current year or, at most, at the beginning of 2023.