Briefing

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08

FLEGT Briefing NotesFOREST LAW ENFORCEMENT, GOVERNANCE AND TRADE

Market participant-based legality

assurance and FLEGT licensing

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Background

The European Union Forest Law Enforcement, Govern-ance and Trade (FLEGT) Action Plan provides for Volun-tary Partnership Agreements (VPAs) between timber-pro-ducing countries and the European Union. Under VPAs,Partner Countries will implement a licensing scheme thatattests to the legality of their timber exports to the EU,and EU border control agencies will allow shipments oftimber products from Partner Countries entry to the EUMarket only if they are covered by FLEGT licences. Inthis way EU markets can be assured that products theybuy from Partner Countries have been legally produced,thereby reducing commercial and reputational risk.

FLEGT licensing must be based on a Legality Assur-ance System (LAS)1, which provides a reliable means todistinguish between legal and illegally produced forestproducts. These consist of five elements: (1) a defini-tion of legal timber2; (2) verification of compliance withthe definition3; (3) verification of supply chain controlsfrom harvesting to export to ensure that no timber ofunknown or illegal origin is included in exported ship-ments4; (4) issuance of licences; and (5) independentmonitoring to ensure the LAS is working as intended5.

In most cases the verification of legal compliance andsupply chain control elements will be operated by Part-ner Country government agencies, or qualified privatesector verification organizations (e.g. providers of in-spection services) acting on a Partner Country govern-ment’s behalf. However it is also possible that the LASmay provide for one or both of these elements to beoperated by Verification bodies contracted by marketparticipants – i.e., any entity operating in timber pro-

duction in a Partner Country’s jurisdiction. The latterare called market participant-based legality assurancecontrols in this paper. They may operate throughout

the supply chain from timber harvesting, through trans-port and manufacturing to export.

The justification for market participant-based legality as-surance and licensing could include the following:

• It acknowledges the fact that many market partici-pants have already established control systems thataim to demonstrate timber legality and/or the sustain-able management of forests. In some cases, thesecontrol systems are certified by third-party conformityassessment bodies using standards that cover legalcompliance and material traceability.

• It aims to avoid increasing unduly the administrativeburden that might arise from implementation of thelicensing scheme, both for market participants thathandle large export volumes and Partner Countries’

licensing authorities.

This note is intended to provide guidance for those devel-

oping Legality Assurance Systems for EU FLEGT licensing.It describes how government and market participant-basedelements of legality assurance systems might work.

1 Responsibilities for legality assur-

ance and licensing

The ultimate responsibility for licensing lies with the VPAPartner Government. Under its VPA, each Partner Countrywill assign a Licensing Authority with the task of issuing

FLEGT licences. In all cases, licences will be issued on thebasis of evidence of acceptable control systems that as-sure that the timber covered has been produced in compli-

ance with the legality definition and that timber of unknownorigin, or illegally-produced timber, has been excluded fromits supply chain. Such control systems may be operatedby or on behalf of government agencies, or by market par-ticipants themselves. Market participant-based and ship-

ment-based licensing could operate concurrently in a Part-ner Country.

The titles of the eight briefing notes in thisseries are:1. What is FLEGT?2. What is legal timber?3. A timber legality assurance system4. Control of the supply chain: Wood tracingsystems and chain of custody5. Legality assurance systems: requirements forverification6. Voluntary Partnership Agreements (VPA)7. Guidelines for independent monitoring8. Market participant-based legalityassurance and FLEGT licensing

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Where a LAS includes market participant-based elements,the Partner Country government, not the EU, will be re-sponsible for approving those elements and ensuring thatthey remain effective.

The actual structure and mode of operation of each Part-ner Country’s LAS will form a key part of its VPA and willneed to be agreed during negotiations with the EU. It isexpected that details, including the role of market partici-pants, will vary between Partner Countries depending, forexample, on the context of their forest regulation, exist-ing and proposed control systems, the use of electronicexport/FLEGT licensing systems and characteristics of theirtrade.

A condition for the approval of market-participant basedlicensing systems is that they meet the same level of con-trols as applied by the licensing authority in its shipment-based licensing procedure.

2 Market participant-based legality

assurance

Controls operated by market participants should assurecompliance with the Partner Country’s legality definition,or control of supply chains in order to exclude unknownor illegally-produced timber. These are known as ‘inter-nal’ controls. Examples include:

• Systems for assuring compliance with forest manage-ment and timber harvesting regulations

• Systems for tracking logs from point of harvest toprocessing facility or export

• Chain of custody systems operating in a processing

facility linking inputs with outputs.

Verification that these systems are functioning can bethrough certification to a recognised external standard that

includes relevant principles and criteria, by a qualified bodyusing its own proprietary criteria or through direct verifi-

cation by the licensing authority. These are known as ‘ex-ternal’ controls. Examples include:

• Where a certification scheme is used for legality

assurance, it must be subject to approval by thePartner Country’s Licensing Authority. This will

involve ensuring that the standard, the system foraccrediting certification bodies, and the assessmentsystems they use all meet specified criteria.

• Where a proprietary assurance system, not coveredby a certification scheme is used, the criteria used bythe verification body, and their qualifications andassessment procedures, would be subject to similarapproval.

• A final option is where the Licensing Authority, or abody operating on its behalf, directly verifies

controls operated by a market participant.

In each case, criteria and the procedures used by the Li-censing Authority for assessing and approving certifica-tion schemes, proprietary assurance systems and individual

market participant controls would need to be established.These criteria and procedures would form part of the VPAtext.

Generally, eligible market participant control systemsshould include measures to demonstrate compliance withrelevant elements of the LAS. An acceptable internal con-

trol system is likely to include the following elements:

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• A detailed description of the system that covers allthe market participant’s relevant activities and,where applicable, those of its suppliers

• Accessible, verifiable records to demonstrate theeffective operation of the system

• Definition of qualifications, responsibilities andauthorities of personnel who operate the system

• Specification of regular audits of the system, andrecords of those audits

• Procedures for corrective actions to preventreoccurrence of non-compliances detected during

operational control or audits

• Regular management reviews for assessing theeffectiveness of the system and initiating actions for

its improvements.

3 Licensing

3.1 Shipment-based licensing

Shipment-based FLEGT licences may be employed wherethe Partner Country wishes to maintain direct controlover the system; some countries may wish to build onprocedures and institutions already in place for regulat-ing exports of shipments of timber. To obtain a ship-ment-based licence, an exporter would need to presentevidence to the Partner Country’s Licensing Authority thatan individual consignment of a product had been pro-duced in accordance with all elements of the country’sLAS. This evidence would have to be based on approvedcontrols covering each step in the production process.

A licence applicant could demonstrate the legality of anindividual consignment for instance through:

• Presentation of verified information produced by the

applicant’s internal control system and, whereapplicable, by the control systems of other partici-

pants in the supply chain

• Presentation of information generated by a verifica-

tion system operated by a government agency or an

approved private sector body, operating on the

government’s behalf

Approved controls would be needed at all stages of thesupply chain. Where shipments are of processed prod-ucts, verification of the effectiveness of these controlswould have to be implemented in the forest, at interme-

diate storage, in processing facilities and at the exportport. Verification of log shipments could be confined tothe forest, intermediate storage and port stages.

3.2 Market participant-based licensing

For example, a sawmill operator wishing to export a one-off

consignment of sawn timber to the EU might purchase logs

from a forest area that held a forest management certificate

under a scheme that the licensing authority had approved. To

obtain a licence for the shipment, the exporter would also

need to present evidence to the licensing authority that no

raw material used in its production was from sources other

than the certified forest area. Such evidence could be pro-

duced either by a government-operated national log tracking

system, or by the exporter’s own chain of custody system that

the licensing authority had approved.

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FLEGT Briefing NotesFOREST LAW ENFORCEMENT, GOVERNANCE AND TRADE

Market participant-based legality

assurance and FLEGT licensing

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Market participant-based licences would be issued bythe Partner Country’s licensing authority on the basis ofevidence provided by an exporter that it maintained suf-ficient controls to ensure that all its exports destinedfor the EU came from legal sources.

An exporter could demonstrate the presence of suchcontrols for instance through:

• Its internal control system certified under a recog-nised scheme that had been approved by theLicensing Authority

• Its internal control system assessed and approveddirectly by the Licensing Authority, or another bodyoperating on its behalf.

In either case, where the exporter relied on upstreamsupply chain controls, these would need either to bebased on government-operated verification of compli-ance and material traceability, or approved market par-

ticipant-based legality assurance controls.

Market participant licensing would allow issuance of FLEGT-licences covering all an exporter’s shipments without checkson individual shipments, as long as the exporter, and itsrelevant suppliers, maintain approved legality assurancecontrols.

Such authorisation would require regular assessments toensure that the systems for which approval has been givenwere still in place and that records of products passingthrough the system demonstrated that the controls werebeing effectively used. Market participants would have toadvise the licensing authority (or, where relevant, their cer-tification body or verification body) if they had made sig-

nificant changes to their controls between assessments as

1 Full government verification – this comprisesgovernment-operated legality verification and a

Some alternatives for shipment-based licensing are shown in Figure 1.

Figure 1: Examples of alternatives for shipment-based licensing (shaded cells are market participant-based)

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national timber tracking system capable of tracing all

logs harvested in a country or region back to theirforest of origin. An exporter would qualify for market

participant-based licensing as long as it could demon-strate that it only used logs that could be traced

using the national system.

2 Market participant-based legality verification withgovernment supply chain controls – for example, asawmill company exporting timber might purchase

logs from several forest areas, each of which heldforest management certification under an approvedscheme, while log movements were controlled by

means of a national tracking system. The sawmillcompany would qualify for market participant-basedlicensing if it could demonstrate that it only usedtimber from certified areas, traced through via thenational tracking system.

3 All control systems market participant-based – forexample, a plywood company with approved certifiedmanagement systems that covered its forest opera-

tions, log transportation, production of plywood andproduct deliveries to the export port would qualify formarket participant-based licensing as long as its logswere not sourced from outside this system, or from

other suppliers whose systems that had not beenapproved. In this case, maintenance of the validity of

each certificate would be sufficient for the company to

maintain its market participant status.

4 Issuance of licences

FLEGT licences must be issued in the name of the Partner

Country’s licensing authority to all applicable timber ship-ments prior to their export to the EU.

The EU FLEGT Regulation requires that a licence coveringeach shipment from a Partner Country is available to the EU

member state’s competent authority at the same time asthe customs declaration for the shipment. EU border con-trol authorities will verify that shipments are covered by validlicenses prior to authorising release for free circulation inthe EU.

For shipment-based licences, the Partner Country’s Licens-

ing Authority would issue licences to exporters on the basisof evidence of the legality of each individual shipment asdemonstrated by the presence of approved controls through-

out the supply chain.

It will be important that good information about licensingrequirements is available to exporters. This should aim toavoid situations where exporters apply for FLEGT licencesfor consignments that are ready to ship, only to find that

their raw material supplies had not been subject to approvedcontrols. Retrospective approval in such cases is unlikelyto be possible.

these would normally require re-assessment. Exporters applying market participant-based licensing wouldhave to provide the necessary information to be contained on the FLEGT license for each shipment and wouldalso have to provide records of each shipment to the licensing authority. There are several alternative meansby which a market participant could provide evidence of sufficient controls. Some examples are illustrated inFigure 2 and described below:

Figure 2: Examples of alternatives for market participant-based licensing (shaded cells are market partici-

pant-based)

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FLEGT Briefing NotesFOREST LAW ENFORCEMENT, GOVERNANCE AND TRADE

Market participant-based legality

assurance and FLEGT licensing

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For market participant-based licenses, there are anumber of approaches possible which would have to bedetailed and agreed during VPA negotiations. Possibleapproaches could be:

• The licensing authority could pre-issue standardFLEGT licenses to approved market participantsauthorising them to complete the necessary detailsand allocate licenses to individual shipments whenrequired. This could be on pre-numbered forms.The market participant would provide records ofeach shipment to the licensing authority. This typeof system would require stringent controls toensure that the right to issue licenses was notabused.

• The licensing authority could issue a FLEGT licenseat the time of export of each shipment, based onpresentation by the market participant of evidenceof the approved verification of its control system(e.g., its certification to a scheme approved by thelicensing authority).

• The issuing of electronic FLEGT licenses by marketparticipants could be another modality to beexplored.

The information describing each shipment included onthe FLEGT licence would be the same, regardless ofwhether a license were shipment or market participantbased, and procedures for handling shipments and li-cences within the EU would be identical for both licencetypes.

5 Actions on system failure

Each VPA will need to include the steps to take in case

of systemic problems with the legality assurance sys-tem. The independent monitoring provided for under

each VPA will check periodically whether the LAS isworking as intended and report any weaknesses or fail-

ures detected to the Joint Implementation Committee.The Joint Implementation Committee in turn would be

responsible for recommending steps to address failuresreported by independent monitoring.

In the case of legality assurance systems where verifica-tion in the forest and log tracking is carried out by or on

behalf of the partner government, correcting problemswould be the responsibility of the relevant governmentagency and failure to do so would risk the validity of

FLEGT Briefing Notes are prepared by an expert group convened by the European Commission andare intended to inform discussion of the EU FLEGT Action Plan. They do not reflect official posi-tions. They are intended to provide useful information for potential FLEGT Partner countries and

others with an interest in the initiative. (March 2007)

the entire licensing scheme.

Where a LAS included market participant-based elements,the Licensing Authority through its approval process, wouldhave the primary responsibility for checking whether thecontrols provided by those elements were being main-tained. If checks revealed problems in an element, theLicensing Authority would have to decide, on the basis ofthe severity of the failure, whether to require correctiveaction to be taken, or to immediately withdraw its ap-proval of that element.

If the Licensing Authority withdrew its approval of any el-ement in a supply chain, this could risk the validity of allmarket participant-based licences that depended on thatelement. The Licensing Authority would therefore need topublish promptly information concerning the suspensionor withdrawal of its approval of any legality assurance ele-ment. It would also need to suspend future issuance ofmarket participant licences that depended on LAS elementsfor which its approval had been withdrawn.

For example, withdrawal of the accreditation of a certifica-tion body operating an approved scheme should concur-rently result in withdrawal of the Licensing Authority’s ap-proval of that body. This would affect all certificates is-sued by that body as well as issuance of FLEGT licencesthat depended on the certificates it had issued. Failures inthe overall operation of a certification scheme, for examplethrough weaknesses in its accreditation procedures, wouldjeopardise its approval for legality assurance, and henceall certificates that had been issued through the scheme.

Should independent monitoring detect problems in marketparticipant-based elements of a LAS, this could also indi-cate a failure of the licensing authority’s own approval proc-ess. Such failure would then need to be addressed promptlyto maintain the credibility of all operator-based systems inthe Partner Country. The Joint Implementation Committeewould be responsible for recommending a course of actionif market participant-based elements were failing to meetthe requirements agreed in the VPA.

Endnotes)

1 See FLEGT Briefing Note 03 - a timber legality assurance system

2 See FLEGT Briefing Note 02 - what is legal timber?

3 See FLEGT Briefing Note 05 - legality assurance systems: requirements for verifi-

cation

4 See FLEGT Briefing Note 04 - control of the supply chain

5 See FLEGT Briefing Note 07 - guidelines for independent monitoring

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