EU Timber Regulation: When is a product legal?

A key element of due diligence is assessment of the risk of illegally harvested timber being placed on the market.

Among other risk assessment criteria, the companies (‘operators’ or ’first placers’ in EU terminology) need to evaluate if there is sufficient assurance for compliance with 'applicable legislation'. This may be relatively straightforward for some categories of ‘first placers’, such as forest operations located inside the EU.

But for other first placers, such as companies importing products from non-EU countries, conducting this assessment can be a challenge.

Unless the importing company can establish that there is a negligible risk of illegal harvesting activities in the country of harvest, it will be necessary to take a closer look at the risks before a conclusion can be made.

To establish a meaningful conclusion about risk of illegality, the importing company will need to:

1. Define the applicable legislation 
2. Identify sources of information regarding legal compliance
3. Evaluate the level of legal compliance
4. Identify the best methods to check compliance and mitigate identified risk

However, the first step involves a tricky question: what does ’applicable legislation’ cover exactly? We asked a leading independent expert on the EU Timber Regulation, Emily Unwin of the activist lawyer organisation ClientEarth, to help clarify this question.

Which laws apply?

Ms Unwin explains: ”The first thing to note is that the EU refers to the country of harvest and to country-specific legislation. So the laws that apply in the country where the timber was harvested determine whether timber is seen to be legally harvested or not”.

It follows that in order to compile an overview of the applicable legislation, the importer first of all needs to determine from which country the products originate. Having access to this information is anyway required by the Timber Regulation.
The term “harvesting” covers the entire operations including planning; issuing of licenses; the felling of the trees; and transport and sales. The scope of the regulation thus goes beyond the question of whether the timber is stolen or not.

The Regulation defines ‘applicable legislation’ in five broad categories:

1. Rights to harvest timber
2. Payments for harvest rights and timber including duties
3. Timber harvesting, including environmental and forest legislation
4. Third parties’ legal rights concerning use and tenure
5. Trade and customs, in so far as the forest sector is concerned.

These categories potentially cover many types of legislation.NEPCon has prepared a tentative list of legislation types that should at minimum be considered.
 

Beware of grey zones

”While the identification of most of the national legislation within these categories is unproblematic, grey zones exist that buyers should be aware of”, says Ms Unwin. ”As an example, the regulation mentions trade and customs legislation concerning the forest sector. In my interpretation, if a trade or customs law is connected to or otherwise relates to the forest sector, it must be obeyed in order to fulfil the Timber Regulation including by the supply chain companies in the country. Legal violations outside of the country of origin are not covered by the EU Timber Regulation”.

It thus seems clear that customs and trade laws specifically covering forest products – for example requirements for classification of timber, or export codes and fees for timber products - are covered by the EU Timber Regulation. But what about general legislation covering timber and non-timber products alike, such as laws on offshore trading and transfer pricing?

This type of legislation can be crucial for halting illegal timber trade because wood is rarely exported directly from the forest. A trading company is often involved in transactions concerning wood of dubious origin, handling the black money and ensuring that the profit is funnelled into tax havens. Based on such a set-up, national export, income and profit taxes can be dodged. Do EU importers need to pay attention to such legislation as well?

“Sadly there is no clear line, it is a matter of interpretation and in practice it will depend. For transfer pricing for example, if the product traded is timber and mis-pricing practice means that the correct export tariffs are not paid to the country of harvest, then I would say that it falls within the scope”, ventures Ms Unwin.
 

Getting the overview 

Once you understand which types of legislation are involved, the next task is to gain an overview of all the specific ’applicable legislation’ in a country. Even after you have compiled the best possible list of applicable legislation, constant vigilance is required to discover if the laws are changing or if new legislation is adopted in the countries from which you are sourcing.

While compiling and maintaining such lists may seem like a daunting task for the individual buyer, Ms Unwin points out that help and advice may be forthcoming from umbrella organisations such as trade associations. ”However, confusion may still arise if the different actors involved – companies, national competent authorities, and Monitoring Organisations – end up using different lists of applicable legislation in a country. Maintaining the overview and ensuring consistency will certainly be a challenge”.