Recently, the European Union added a new piece to the sustainability puzzle – Regulation (EU) No 2023/1115 (hereinafter, also the 'Regulation') – with the declared aim of combating deforestation, forest degradation, biodiversity loss and greenhouse gas emissions, to which the consumption and production of coffee, wood, oil palm, cattle, rubber, cocoa and soya would contribute (so-called relevant commodities).
The Regulation specifically lays down rules on the placing and making available on the European Union market, as well as on the export from the European Union of the relevant commodities and several products listed in Annex I of the Regulation – for example, wooden packing and furniture, leather and hides of cattle, chocolate, and pneumatic tyres of rubber – which contain or have been fed or have been made using the relevant commodities (so-called relevant products). These rules concern in particular:
«operators», that is natural or legal persons who, in the course of a commercial activity, first make available relevant commodities or relevant products on the European Union market (i.e. they place on the market) or export them;
«traders», that is natural or legal persons who in the supply chain and in the course of a commercial activity make relevant commodities and relevant products available on the European Union market for distribution, consumption, or use, whether in return for payment or free of charge, for the purpose of processing, for distribution to commercial (B2B) or non-commercial (B2C) consumers, or for use in the business of the operators or traders itself.
Depending on the size requirements of the operators and traders - which are distinguished between non-SME operators and non-SME traders and SME operators and SME traders - the Regulation provides for different obligations and timeframes for the entry into force[1].
In particular, as of 30 December 2024, non-SME operators and non-SME traders will not be able to place on or make available to the European market the relevant commodities and/or relevant products unless they comply with the requirements of Article 3 of the Regulation.
This article stipulates that the relevant commodities and relevant products shall fulfill the following conditions:
they are deforestation free, i.e. they shall be produced, used, harvested, and fed on land that is not subject to deforestation or forest degradation after 31 December 2020;
they are in compliance with the legislation of the country of production, concerning the legal status of the area of production in terms of, for example, land use rights, third parties’ rights and tax regulations;
preliminary to their placing or making available on the European Union market, they are covered by a due diligence statement, which shall be made available to the competent national Authority – in Italy, the Ministry of Agriculture, Food Sovereignty and Forestry – through the information system being implemented.
The submission of the due diligence statement requires the previous exercise of a due diligence which includes:
collecting and keeping relevant information, documents and data (including the geolocation of all plots of land) which demonstrate that the relevant commodities and relevant products comply with the Regulation;
carrying out a risk assessment to establish if the relevant products are non-compliant according to the Regulation criteria, for example the assignment of risk to the relevant country of production or the prevalence of deforestation or forest degradation in the latter;
adopting risk mitigation measures and procedures to achieve no or only a negligible risk where the risk was non-negligible;
drafting the due diligence statement if no or only a negligible risk was found.
The exercise of due diligence also requires the establishment and maintenance of a real due diligence system, that is procedures and measures to ensure the compliance of the relevant commodities and relevant products with the Regulation. That system shall be reviewed at least once a year and it shall be the subject of an annual report to which the widest possible dissemination shall be given, including via the internet.
From 30 June 2025, Regulation will also oblige SME operators and SME traders. The obligations laid down for these entities largely reproduce the already mentioned due diligence contents, albeit with certain simplifications, introduced in order avoid the increase of burden for small and medium-sized enterprises.
Clearly, the Regulation requires the addressees to conduct a rigorous analysis and management of their supply chain, thus impacting a considerable number of subjects, including manufacturers and suppliers located in third countries, who entertain or are interested in entering into business relations with EU operators and traders.
Breach of the obligations will result in the application of particularly severe sanctions, which the Regulation leaves to the Member States to determine. These include: fines, in the maximum amount of at least 4 % of the total annual turnover in the case of a legal person; confiscation of the relevant products and of the revenue gained from a transaction involving the former; temporary exclusion, for a maximum period of 12 months, from public procurement procedures and from access to public financing; temporary prohibition from placing or making available on the market or exporting the relevant commodities and relevant products.
This poses new (global) compliance (integrated) challenges such as deforestation-free for the addressees of the Regulation and their supply chains.
[1] In any case, the obligations apply only to operators and traders established in the territory of the European Union. Where the relevant commodities or the relevant products are placed on the market by a natural or legal person established outside the Union, the first natural or legal person established in the European Union who makes such relevant commodities or relevant products available on the market, i.e. the trader-importer, shall be deemed to be an operator within the meaning of the Regulation.
Author: Beatrice Facci
Contact: Avv. Luisa Romano l.romano@bergsmore.com