Key takeaways
Businesses must check supply chain legality
Due diligence is key to staying compliant.
Regulations target high-volume commodity users
Thresholds apply to turnover and product weight.
UK and EU rules differ in scope
Traders may need to meet both standards.
The new Labour Government has recently confirmed its commitment to the targets included in the Environment Act 2021 (the “2021 Act”), which includes proposed regulations for the use of forest risk commodities (“FRC”) in commercial activities in the UK.
These regulations require implementing legislation, and it remains to be seen how and to what extent the Labour Government lives up to its stated commitments. In the meantime, in this article we review the regulations, including as compared to the EU Deforestation Regulation (the “EUDR”) which comes into effect at the end of the year.
From the perspective of commodities traders, as and when the UK FRC regulations come into effect, buyers of soy, cocoa, palm oil, and cattle products for import into the UK will need to ensure that their sale contracts protect them against falling foul of the regulations. In order to show that they have satisfied their due diligence obligations, buyers will likely need to oblige their sellers to provide certain information in good time. Buyers may also want to provide for indemnities and rights of termination if that information is not provided.
Current status
The UK’s FRC regime is set out at Schedule 17 of the 2021 Act, which requires implementing secondary legislation before the regime comes into force. The previous Government published the proposed scope of the regulations, but no timetable was set for implementation. The implementing legislation has been delayed due to the recent general election and it is not currently clear when parliamentary time will allow for it to be considered.
Aims
The UK FRC regulations will prohibit businesses that come within their scope from using illegally produced FRCs (including derivatives of FRCs). Those businesses must establish a due diligence system for ensuring compliance and must report on that system annually.
Application to businesses
The FRC regulations apply to businesses that carry on commercial activities in the UK and exceed a specified turnover. The last government proposed that the regulation apply to businesses with a global turnover of more than £50 million. The regulations will also apply to any subsidiary of an undertaking which comes within scope.
An exemption may be available to businesses that are covered by the regulations but do not use the specified commodities in their UK commercial activities in excess of a prescribed threshold. The threshold previously proposed was 500 tonnes of each commodity annually. In order to benefit from this exemption, a business must make a declaration that it will not exceed the prescribed threshold during the forthcoming reporting period.
A group of undertakings may be treated as one regulated entity in order to prevent the evasion of the regulations by corporate restructuring.
Commercial activity
For these purposes, commercial activity includes producing, manufacturing, processing, distributing, selling, and supplying the specified commodities. It also covers purchasing such commodities for the aforementioned activities, but not purchasing them as a consumer.
For example, a chocolate manufacturer based in the UK that purchases cocoa butter to create their product would be performing a commercial activity. However, an office buying chocolate biscuits for staff consumption would be purchasing as a consumer and would not come within the scope of the regulations.
The affected commodities
The term “forest risk commodity” is used to refer to the commodities that will fall under the regulations. Both the specified commodities themselves and products derived from them will be covered by the regulations.
The previous government announced that initial implementing legislation would apply to soy, cocoa, palm oil, and cattle products (excluding dairy). It is too early to say whether or not the new government will add more products to the FRC list. However, the use of illegally harvested timber is already subject to separate regulations.
A commodity covered by the regulation must be produced from a living organism (e.g. plant or animal). As such, commodities such as ores, even if the mine was on illegally deforested land, will not fall under the FRC regulation.
It was also previously reported that the government was considering the introduction of regulations to eliminate the financing of prohibited FRCs. Again, it remains to be seen what the new government will decide in this regard.
Scope of prohibition
The primary obligation under the UK regulations is the prohibition on using the specified commodities and their derivatives, if they were produced in contravention of local laws regarding ownership or use of land in the country where the commodity was grown.
Due diligence and annual reporting
The regulations require businesses within scope to implement a due diligence system in relation to the FRCs. The system must identify and obtain information about the relevant commodity, assess the risk that local laws were not complied with in relation to that commodity, and mitigate that risk.
There is an annual reporting requirement to assess whether an in-scope business has fulfilled its due diligence obligations. There is also provision for parts of these reports to be published, presumably in order to ensure transparency.
Enforcement
The consequences for failing to comply with the UK regulations have not yet been fully outlined. However, the government has suggested that there will be a “wide array of sanctions” available, including an unlimited monetary penalty.
EU Deforestation Regulation
We have considered the EUDR in some detail here: EU Deforestation Regulation: considerations for commodities traders | Hill Dickinson.
It will only be possible properly to compare the EUDR and the UK FRC regulations once the UK’s implementing legislation has been published. However, for the moment, it can be said that some differences between the two sets of regulations include:
the EUDR currently covers more commodities, including wood, rubber, coffee and dairy cattle products
the EUDR targets individuals, as well as businesses
the EUDR applies to “operators” and “traders”
the EUDR has no turnover threshold, but smaller businesses that are classed as SMEs have less onerous obligations
the EUDR prohibition is wider and extends to commodities that have been produced through legal as well as illegal deforestation - they must be deforestation-free, produced in accordance with local laws and covered by a due diligence statement
Comment
Potentially in-scope businesses should keep an eye out for the implementing legislation. As and when the scope and timing of the implementation of the regulations becomes clear, such businesses will need to start setting up systems to ensure compliance, including by amending their sale and purchase contracts in order to protect themselves.
Soft commodity traders will likely need to consider the requirements under both the UK’s FRC regulations and the EUDR and should not assume that compliance with one will also amount to compliance with the other.
This article was written with assistance from trainee, Catherine Ogilvy.
Hill Dickinson has been advising on issues arising out of the EUDR and UKFRC. In case of any query, please contact John McNeilly or your usual contact at Hill Dickinson.
