Towards a ‘due diligence’ jurisprudence: The EU Timber Regulation’s requirements in courts - By Wybe Th. Douma

Editor’s note: Wybe Th. Douma is senior researcher in EU law and international trade law at the Asser Institute

 

Although the placing of illegally harvested timber on the EU internal market is prohibited already for over four years, the first court cases are appearing only now. Judges in Sweden and The Netherlands have recently held that the due diligence requirements of the EU Timber Regulation (EUTR) had not been met by two importing companies. The companies should have ensured that the timber from Myanmar and Cameroon was logged in compliance with the local legislation, should have provided extensive evidence of this, especially where the countries in question are prone to corruption and governance challenges, and should have adopted risk mitigation measures. Moreover, another Dutch court recently ordered the Dutch competent authorities to explain why they did not enforce the EUTR in cases where due diligence requirements concerning timber imported from Brazil were not met. In other EU member states, similar court decisions were adopted.[1]

The court decisions show that the EUTR system, aimed at ‘doing business right’ in the timber trade sector, is starting to take effect in practice. Could the ‘unilateral’ EUTR system form an example for other regimes that try to ensure that trade by the EU with the rest of the world contributes to sustainable development and the protection of human rights? And what role does the bilateral Voluntary Partnership Agreement (VPA) on Forest Law Enforcement, Governance and Trade (FLEGT) between the EU and Indonesia play in this respect?


The EU timber regime: FLEGT and EUTR

In 2003, the EU adopted the Forest Law Enforcement, Governance and Trade (FLEGT) Action Plan.[2] The Action Plan sets out a range of measures available to the EU and its member states to tackle illegal logging. In 2005, the FLEGT Regulation was adopted.[3] It formed the basis for a series of prolonged negotiations with major timber producing countries of so-called Voluntary Partnerships Agreements (VPAs). These bilateral agreements contain detailed rules on the regulation of logging, the enforcement of legislation, the licensing of timber by the exporting VPA country and the monitoring and verification of the functioning in practice of the system. The loggers and other traders need to meet all applicable laws and regulations of the VPA country that regulate origin and production process, subsequent processing, transport, and trade activities, and the licensing authorities are to verify that the timber has been legally produced in accordance with the applicable legislation. If it can be ensured in this manner that the law on paper is applied and enforced in practice throughout its territory, the exporting country can issue FLEGT licences for shipments of timber destined for the European Union. In their turn, the EU countries in principle will accept the FLEGT licensed timber as proof of legality.

Although a functioning VPA relationship thus opens the EU doors for timber from exporting countries, the VPA with Indonesia (discussed below) is to date the only one that started operating at the end of 2016. When it became clear that not all major producing countries would be willing to conclude VPAs, and existing instruments showed not to be very effective in tackling illegal logging and trade (in other words, it was easy to keep putting illegally harvested timber on the EU market, which did not make the conclusion of VPAs an urgent matter), pressure grew to adopt stronger measures. This resulted in the adoption of the EU Timber Regulation (EUTR) on 20 October 2010.[4]

As of 3 March 2013, the EUTR prohibits the placing on the EU internal market of illegally harvested timber and timber products. Whether the timber is legal depends on whether it was harvested in accordance with the applicable legislation in the country of harvest, even if it is not an EU country. Elements of the legislation to be taken into account are the rights to harvest timber within legally gazetted boundaries, due payments and duties, environmental and forest legislation, legal rights of third parties concerning land use and land tenure, and trade and customs formalities.

It is up to the companies that place timber on the EU market to verify that the timber from non-VPA countries is legal. They must implement what the EUTR describes as a due diligence system. The system requires that the company collects verifiable data on the origin of the timber, from the harvest to the moment it is placed on the European market, so that it can be established that it was legally harvested for the entire ‘chain of custody’.

Depending on the circumstances in the country, or even in the specific region of the country where the timber originates, a risk inventory, analysis and assessment must also be made. Where necessary, risk mitigation measures must be taken - except where the risk identified in the course of the risk assessment procedures is negligible. There is not a single accepted system for risk assessment. Rather, the level of risk can only be assessed on a case-by-case basis, as it depends on a number of factors. As a general rule, the operator has to address the questions regarding the prevalence of illegal harvesting of specific tree species, the prevalence of illegal harvesting practices in the place of harvest, and the complexity of the supply chains.[5] Furthermore, specific information related to the timber or timber product itself needs to be used, notably a description, the country of harvest (and, where applicable, the sub-national region and concession), the supplier and trader, and documentation showing compliance with applicable legislation.[6]Although the EUTR covers all companies that put timber on the EU market for the first time, whether they are Transnational Companies (TNCs) or Small and Medium Sized Enterprises (SMEs), the scope of the EUTR is limited in other ways. Only certain types of timber and timber products are covered, while too many products made out of timber (including books, seats, clothes hangers, tools and musical instruments) are exempted from the regulation.[7]

The EU’s timber regime is an example of how the Union is creating regulatory mechanisms that foster CSR initiatives by making these legally binding. This is in line with the Lisbon Treaty’s provisions that demand that EU external trade policy takes fundamental rights and environmental protection issues on board. The dual system of due diligence on the one hand and VPAs on the other certainly can improve timber governance in producing countries, and thus contribute to the sustainable development of third countries—and of the EU itself.[8]

 

Swedish case: teak from Myanmar

On 5 October 2016, the administrative court of Jönköping confirmed that a timber importer called Almträ Nordic did not comply with the due diligence requirements of the EUTR when it imported teak from Myanmar.[9] What makes this case particularly interesting is the fact that the importer possessed a so-called ‘Green folder’ demonstrating that its purchase complied with Myanmar’s forest laws. Such folders are compiled by the Myanmar Forest Products Merchants’ Federation (MFPMF). They include permits issued by the state-owned company Myanmar Timber Enterprise (MTE), the sole official seller of forestry products from this country, and other official documents. Despite those papers, the Swedish Forest Agency (Skogsstyrelsen) was not convinced that the timber was legally harvested in the sense of the EUTR. While forest areas where the timber had been logged were identified, documentation clearly tracing the timber supply chain from MTE back to the forest of harvest was lacking in the ‘Green Folder’.

The Swedish agency was quite right not to trust the situation and demand for additional evidence. Several reports have shown that Myanmar exports huge quantities of illegally harvested timber, presumably with the help of employees of MTE.[10] The distrust is also in line with the Commission’s Guidance Document for the EUTR, which explains, inter alia, that shortcomings in governance can undermine the reliability of documents proving compliance with applicable legislation. It is therefore necessary to take into account the degree of corruption prevalent in a specific country, precisely the kind of circumstances relevant in Myanmar. No appeal was brought against the Swedish court ruling. The company in question announced that it would stop importing wood directly from Myanmar.

Meanwhile, the Swedish Forest Agency has now also banned another importer from importing teak from Myanmar due to the lack of improvement of its due diligence system. That importer even hired Bureau Veritas to visit MTE in order to clarify the origin of the teak, but still was not able to demonstrate that it was legally harvested because the visit did not bring forward any new information about the production process.[11] The Agency thus interprets the due diligence rules of the EUTR in a manner which raises the hurdles high for companies that import timber from countries with high degrees of corruption. This is in line with the EUTR’s unequivocal prohibition to place illegally harvested timber on the EU market, and the way in which the due diligence rules are formulated. Following these Swedish developments, in Denmark authorities released injunctions against all Danish operators to stop placing Myanmar teak on the country’s market.[12]

The Myanmar Ministry of Natural Resources and Environmental Conservation (MONREC) reacted to these developments with a statement, acknowledging that their current systems may be complex for external parties and may present challenges for operators to demonstrate the chain of custody required for due diligence under the EUTR. They stated that they are committed to streamlining their systems, and have been working on developing a comprehensive Timber Legality Assurance System (MTLAS) that will meet international best practice standards.[13] Furthermore, in August 2016 the Myanmar government imposed a nationwide temporary logging moratorium that lasted till the end of March 2017.[14]

 

Dutch cases: timber from Cameroon and Brazil

According to the Dutch competent authorities (NVWA),[15] a timber importer did not comply with the EUTR rules when introducing a shipment of Azobé timber from Cameroon on the Dutch market. They therefore adopted a measure whereby the operator would forfeit € 1,800 for each cubic meter of wood and / or timber products from Cameroon placed on the European market up to a maximum of € 90,000. The Authority reasoned that because of the high level of corruption in Cameroon, there is a high chance that the wood was not legally harvested, and the company should have exercised more caution.

The importer appealed against the penalty decision, but the appeal was rejected in a ruling of 24 May 2017.[16] According to the District Court in Noord-Holland, the importer collected insufficient verifiable information. It did not identify the origin of the shipment of timber, and the risk inventory did not meet the requirements of the EUTR. Moreover, none of the risk-limiting measures required by the situation in Cameroon was taken. The Court therefore agrees with the NVWA that the due diligence requirements of the EUTR have not been fully complied with. Because of this infringement, the competent authority was allowed to sanction the company.

In a more recent ruling of 4 July 2017, the Amsterdam District Court found that the competent authorities failed to enforce the EUTR without a proper reason in a number of cases where companies had imported timber from Brazil, without abiding by the EUTR due diligence requirements.[17] Greenpeace Netherlands had requested the Dutch competent authority to inspect a number of companies that were importing timber from the Brazilian Amazon region, and to prosecute those noncompliant with the EUTR. Upon this request, inspections were carried out showing that several Dutch companies were indeed not complying with the EU due diligence system. The request to prosecute these companies was rejected, however. Instead, merely written warnings were issued to them. The authorities refused to sanction the companies notably because the rules were still rather new. They found it reasonable to give them the chance to bring their business operations in line with the new legal regime. A guidance document on the enforcement policy under nature protection legislation also prescribed warnings to first offenders.[18]

Greenpeace successfully appealed this decision. The Amsterdam Court notably found the Dutch enforcement policy to be unreasonable where it classified violations of articles 4(2) and (3) and 5 EUTR as minor issues, resulting in warnings only for first time offenders. Furthermore, the Court recalled that the EUTR was adopted on 20 October 2010 and entered into force on 3 March 2013, allowing market participants a considerable amount of time to prepare for meeting the Regulation’s requirements. Finally, the Court set out that when companies violate the law, the law ought to be enforced. Authorities can decide not to do so only in special circumstances. In view of the lack of such circumstances, the decision not to prosecute companies violating the EUTR was deemed insufficiently motivated and was therefore quashed. The authorities were ordered to take a new decision within six weeks, in which they are to demonstrate all the facts on the basis of which they decide to enforce the law or not to and, if so, in which manner they plan to take enforcement action.

 

VPAs - the bilateral approach

As indicated above, the 2005 FLEGT Regulation aimed at concluding so-called Voluntary Partnership Agreements (VPAs) with countries that export considerable amounts of timber to the EU. In spite of their name, the VPAs place a legally binding obligation on partners to implement a licensing scheme for timber within the schedule stipulated in each VPA, and ensure that sufficient enforcement activities take place.

The VPA with Indonesia  entered into force on 1 May 2014. Over 80 pages long, it sets out detailed requirements that are to be met before FLEGT licenses can be issued by Indonesian authorities, a definition of legally-produced timber (i.e. timber harvested and produced in accordance with the legislation as set out in Annex II to the VPA), rules on control of the supply chain, verifications procedures, and rules on independent monitoring. The entry into force did not mean that Indonesia could start issuing FLEGT licenses. The FLEGT licensing scheme started operating on 15 November 2016 after an evaluation of the compliance of the Indonesian Timber Legality Assurance System (TLAS) with the criteria set out in the VPA.[19] From that moment on, EU importers from Indonesia no longer needed to apply the EUTR due diligence system, because the EUTR exempts timber originating from partner countries listed in Annex I FLEGT Regulation.[20] This timber shall be considered to have been legally harvested. Indonesia profited from its new status by issuing 11817 licenses for shipments to the EU worth a total value of US$ 409 million in the period 15 November 2016 – start of April 2017.[21]

The VPA contains an obligation to periodically have an independent third party evaluate whether the TLAS is functioning as described (Article 15 sub (a) and Annex VI). The evaluation is to include visits to forest harvesting areas, offices, forest checking stations and export points, as well as sampling and spot check methods to evaluate the work of the forest regulatory agencies in Indonesia. Evaluations are to take place at least once every year and are to be released to the public. In this manner, it is to be ensured that the exporting country continues to meet the requirements of the VPA and keeps the right to issue FLEGT licences.

Five other countries have already signed a VPA with the EU and are currently developing the systems needed to control, verify and license legal timber. These countries are Cameroon, the Central African Republic, Ghana, Liberia, and the Republic of the Congo. Negotiations with nine more countries are ongoing.

 

Concluding remarks

Until recently, it seemed that the competent authorities in EU Member States were not very willing to start enforcing the EUTR. In the Netherlands, the Greenpeace case highlights the reluctance to fully apply the law even when traders are found not to be in compliance with the due diligence system. The court decisions from Sweden and the Netherlands show that the situation is slowly changing. These cases could help companies, competent authorities and the judiciary in other countries better understand the manner in which the EUTR can be applied and enforced in practice. What is more, they support the instrumental role that NGOs play in ensuring that the EU member states enforce the requirements of the due diligence system as laid down in the EUTR.

They also highlight that any company that places timber on the EU market for the first time falls under the scope of the EUTR, be it a TNC or a local SME. The cases contribute to the creation of a body of jurisprudence able to clarify the details of the due diligence obligation for importers. While operationalisation of due diligence could take place by reference to several instruments such as the OECD Guidelines or specific tools devised by auditors, the system lacks a centralised authority determining under which circumstances companies procedure suffice, and which specific actions are required. The Guidance Document does bring about more clarity on practical aspects of the due diligence system. The manner in which due diligence is interpreted in the context of the EUTR could also spill over to other regimes where due diligence obligations are imposed on EU importers, such as the Conflict Minerals Regulation.

At the same time, with the very first VPA starting to operate, timber exports from Indonesia no longer fall under the EUTR’s due diligence system. The VPA system could expand in the future if the handful of other VPA countries manage to set up an effective control, verification and licensing system for legal timber. Those that started issuing FLEGT-licences will need to manage to upkeep this system. Future developments will tell us which of the two mechanisms - i.e. relying on EU importers or on exporting countries’ administrative authorities - are more effective in ensuring that only sustainably harvested wood reaches the EU market.


[1] In Germany for instance, an administrative court dismissed an action against the confiscation of shipments of wenge wood imported into Germany from the Democratic Republic of Congo. The court agreed with the findings of the German competent authority (the German Federal Agency for Agriculture and Food, BLE) that the falsified supporting documents justified the confiscation. See Briefing Note for the Competent Authorities implementing the EU Timber Regulation, April – May 2017, p. 1.  

[2] COM(2003)251 final of 21.3.2003.

[3] Council Regulation (EC) No. 2173/2005 of 20 December 2005 on the establishment of a FLEGT licensing scheme for imports of timber into the European Community, OJ L 347/1.

[4] Regulation (EU) No 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market, OJ L 295/23.

[5] Article 6(1)(b) EUTR and explanations in the Guidance Document (p. 4, 5).

[6] Article 6(1)(a) EUTR and

[7] See Charles Drew and Tim Barker, Analysis of potential European Union Timber Regulation product scope changed, WWF 2016, who demonstrate that by value, 67% of products that contain or may contain wood do not fall under the scope of the EUTR, and 20% by volume.

[8] See for more information on these issues also Wybe Th. Douma, The promotion of sustainable development through EU trade instruments, European Business Law Review (EBLR) 2017, nr. 2, pp. 197-216 and Wybe Th. Douma and Steffen van der Velde, Protection of fundamental rights in third countries through EU external trade policy: The cases of conflict minerals and timber, in: V. Lazic a.o. (eds), ‘Fundamental Rights in International and European Law’, The Hague, pp. 101-122

[9] Förvaltningsrätten Jönköping (Administrative court Jönköping) 5 October 2016, case nr. 2095-16, Almträ Nordic AB v Skogsstyrelsen.

[10] See for instance Environmental Investigation Agency, Overdue diligence. Teak exports from Myanmar in breach of European Union rules, October 2016.

[11] Skogsaktuellt, Biltemas logistikföretag förbjuds att sälja teak från Burma, Skogsaktuellt.se, 22 March 2017. It can be noted that the Guidance Document explains that the higher the risk of corruption in a specific case, the more it is necessary to get additional evidence to mitigate the risk of illegal timber entering the EU market, and mentions third-party-verified schemes as a means of obtaining such additional evidence (p. 7).

[12] Mizzima, Denmark sanctions entire Myanmar teak industry, 16 March 2017.

[13] Ministry of Natural Resources and Environmental Conservation (MONREC), Statement of Progress in Timber Legalitv Assurance in Mvanmar, 16 March 2017.

[14] Jacob Goldberg, With logging ban lifted, Myanmar timber policy falls flat, Coconuts Yangon, 28 April 2017.

[15] The Netherlands Food and Consumer Product Safety Authority (Nederlandse Voedsel- en Warenautoriteit, NVWA).

[16] B.V. X v de staatssecretaris van Economische Zaken, Rechtbank Noord-Holland 24-05-2017, AWB - 16 5358, ECLI:NL:RBNHO:2017:4474.

[17] Stichting Greenpeace Nederland v de staatssecretaris van Economische Zaken, Rechtbank Amsterdam 4-7-2017, AMS 15/5067, ECLI:NL:RBAMS:2017:4926.

[18] NVWA, Specific Intervention Policy Nature Protection Legislation (Specifiek interventiebeleid natuurwetgeving), IB02-SPEC08 natuur, version 2.1 of 16-07-2015.

[19] Decision No 1/2016 of the Joint Implementation Committee set up by the Voluntary Partnership Agreement between the European Union, of the one part, and the Republic of Indonesia, of the other part of 15 September 2016 concerning the start date of the Forest Law Enforcement Governance and Trade (FLEGT) licensing scheme [2016/1797], OJ 22.10.2016, L 274, p. 62.

[20] Indonesia was placed on the Annexes to the FLEGT Regulation, indicating that certain timber and timber products from the country would be able to be placed on the EU internal market on the basis of Indonesian licenses. See Commission delegated regulation (EU) 2016/1387 of 9 June 2016 amending Annexes I and III to Council Regulation (EC) No 2173/2005 following a Voluntary Partnership Agreement with Indonesia for a FLEGT licensing scheme for imports of timber into the European Union, OJ EU of 18.8.2016, L 223, p. 1.

[21] ClientEarth, EUTR News – March to May 2017, Newsletter, 19 June 2017.

Comments (1) -

  • dr Frederik Kistenkas

    8/29/2017 10:04:31 AM | Reply

    The EUTR and its DDS indeed places itself in the centre of concurring forest regulations and might turn out to be a smart policy mix. See: FH Kistenkas, Concurring regulation in European forest law. Forest certification and the new EU Timber regulation, Gaia 22/3 (2013): 166-168. We are currently doing research on concurring forest legislation her at Wageningen University.

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