The European Union has adopted the new EU Regulation on Deforestation (or the Deforestation Regulation, EUDR), according to which relevant companies must implement a rigorous due diligence process to ensure that specific products and commodities sold within or exported from the European Union have not resulted from deforestation or forest degradation.

The commodities covered by the regulation are cocoa, coffee, palm oil, cattle, soy and wood, as well as all products that contain these commodities, have been fed with them, or were manufactured using them (e.g., leather, chocolate, and beef). Once the regulation enters into force, large companies will have 18 months to comply with its requirements, while small and medium-sized enterprises will have 24 months. Failure to comply may result in fines of at least 4% of total annual turnover within the EU or the confiscation of revenue generated from the sale of these commodities or products.

Companies should review whether (and how) the new law applies to them and assess existing processes, management systems, and supply chain risks to ensure that new obligations (e.g., regarding due diligence) are met.

On 16 May 2023, the European Council officially adopted the EU Deforestation Regulation, which aims to reduce the EU's impact on global deforestation. The regulation essentially prohibits the sale of 'relevant commodities' and 'relevant products' (defined later in the text) in the EU or their export from it, unless the company and its product supplier can verify that the product was not sourced from deforestation or forest degradation and has not caused deforestation or degradation.

'Relevant commodities' covered by the regulation are cocoa, coffee, palm oil, cattle, soy and wood, as well as the 'relevant products' detailed in Annex I of the regulation, which are items that contain these commodities, have been fed with them, or were manufactured using them, such as leather, chocolate and beef.

The regulation will apply to:

'operators' – natural or legal persons who, in the course of a commercial activity, place relevant commodities and products on the EU market or export them from the EU market; and

'traders' – any natural or legal person in the supply chain other than the operator who, in the course of a commercial activity, makes relevant commodities and products available on the EU market or exports them from it.

Although the regulation establishes a specific sub-category for small and medium-sized enterprises (SMEs) to which certain exemptions apply, relevant companies wishing to sell their specific products within or from the EU will only be able to do so if the following conditions are met:

• the relevant product and its commodities were not produced on land that was deforested or subject to forest degradation after 31 December 2020;

• the relevant product has been produced in accordance with the legislation of the country of production;

• international human rights laws are respected;

• the rights of the affected indigenous peoples are protected;

Furthermore, a due diligence statement has been submitted to the designated competent authority of the relevant EU Member State, confirming that the necessary due diligence has been carried out and that no (or only a negligible) risk has been identified.

In addition, as part of the due diligence procedure, applicable companies must collect specific information (e.g., geolocation coordinates and supplier contact details) and subsequently conduct a risk assessment based on this information to determine whether there is a risk that the relevant commodities and products do not comply with the regulation's requirements. If the risk assessment reveals that a risk exists (that is not a negligible risk), applicable companies are expected to implement the necessary risk mitigation measures in accordance with Article 10a of the regulation to ensure that the risk is non-existent or negligible, including requesting additional information or conducting independent audits/inspections. The procedure and the volume of information to be collected will depend on the national risk assessment assigned by the European Commission within 18 months of the regulation entering into force, which will be classified as either 'low', 'standard' or 'high'; countries with a 'low' risk assessment will be subject to a simplified due diligence procedure.

The regulation is expected to be published in the Official Journal of the European Union in mid-2023, and it will enter into force 20 days later. Subsequently, an 18-month grace period will be set for large companies, and a 24-month period for SMEs, to achieve compliance.

Companies that violate the regulation will be subject to 'effective, proportionate and dissuasive' sanctions, including:

• fines (the maximum fine must be at least 4% of the operator's or trader's total annual turnover in the EU in the financial year preceding the decision to impose the fine);

• confiscation of the operator's or trader's revenue generated from the sale of the relevant commodities or products, as well as the confiscation of the commodities or products themselves; and

• temporary exclusion (for up to 12 months) from public procurement processes.

The regulation sets out a detailed and complex process that relevant companies must follow. This means that companies will be conducting in-depth reviews of existing processes and supply chain risks to ensure the application of the relevant changes. These measures require the necessary expertise to fulfil the forthcoming due diligence obligations. The European Commission is expected to publish support guidelines in preparation for their implementation.