The European Union is bringing forward new rules on the sourcing and import of conflict minerals.
The European Parliament approved the draft conflict minerals regulation (the Regulation) on 16 March 2017 by a large majority, and the final regulation is expected to be published in the Official Journal of the European Union and enter into law by the end of May 2017.
However, there is no immediate cause for concern. The substantive obligations required by the Regulation will be familiar to many companies as they draw on existing best practice, including the OECD Due Diligence Guidance for Responsible Supply Chains from Conflict-Affected and High Risk Areas (the OECD Guidance). Moreover, they will not come into effect until 1 January 2021 giving companies almost four years to adapt and put in place the policies and procedures required to ensure effective due diligence in their supply chains.
The new rules
The Regulation is targeted at the four key minerals used to finance armed conflict in high-risk areas - gold, tin, tungsten and tantalum (3TG minerals). The provisions apply to EU-based importers of these minerals, whether in the form of ores, concentrates or processed metals, whose annual import volumes exceed specified thresholds. It is expected that it will capture the largest companies responsible for about 95% of total imports into the EU, but that small-scale importers will fall below the threshold.
Although the object of the Regulation is to disrupt the financing of armed groups and forced labour in conflict-affected areas, many of the new rules will apply to 3TG minerals exported into the EU from any country, and not just those originating from high-risk regions.
The obligations imposed on importers are focused on due diligence within the supply chain. Some of the requirements include:
- Adopt a supply chain policy that is consistent with the OECD Guidance
- Incorporate this policy into contracts with suppliers
- Establish a grievance procedure mechanism
- Put in place traceability systems identifying the name and type of minerals, quantities imported, any suppliers, and the country and date of origin
- For minerals from conflict-affected and high-risk areas further information will be required including the mine of origin, places of consolidation, trading and processing, and the taxes, fees and royalties paid
- Identify and assess risks through third-party audit reports
It is worth noting that the new rules are aimed at upstream companies, such as mining companies, traders in raw materials, smelters and refiners. This reflects the fact that smelting and refining is the last stage at which it is possible to verify information on the mineral’s origin and chain of custody. Downstream companies trading in transformed 3TG minerals, manufactured goods incorporating 3TG products, or recycled metals will not be subject to specific due diligence requirements under the Regulation, but will be expected to use reporting and other tools to make their due diligence more transparent.
Compliance with the rules
The Regulation contains a two-pronged approach to compliance. Firstly, importers will be required to disclose to downstream purchasers the results of their due diligence exercises, and also issue a public report each year on their activities. Secondly, the competent authorities of EU Member States will carry out ex-post checks on importers, including checks of documents, third-party audits and any on-the-spot inspections. They will be granted the power to issue notices of remedial action to importers who are in contravention of the Regulation. Under the proposed legislation competent authorities will not have the power to impose financial or other penalties, though this position will be reviewed by the European Commission every three years starting in 2023.
The European Commission will also put in place a number of measures to support companies in complying with the Regulation. It will publish a handbook of non-binding guidelines, maintain an indicative list of conflict-affected and high-risk areas, and draw up a global white list of responsible smelters and refiner. The Regulation also provides for official recognition to be granted to supply chain due diligence schemes run by Governments or industry associations which meet the requirements of the Regulation.
The impact of Brexit for importers in the UK
Brexit is likely to introduce some short-term uncertainty as to the application of the rules to importers based in the UK. On current plans the UK is expected to have withdrawn from the EU before the Regulation’s substantive obligations have come into effect. However, on the basis that the UK Government has supported the development of the Regulation and the OECD Guidelines, it is likely that the UK will ensure that domestic legislation is in place after Brexit which ensures that UK companies must, at a minimum, operate to equivalent standards and obligations as set out in the Regulation.
Comparison with US rules
Although the new rules are based on the global OECD Guidance, importers with experience of operations in the US will need to take particular care as the Regulation is different in a number of key aspects to the US domestic conflict minerals rules (as set out in section 1502 of the Dodd-Frank Wall Street Reform and Consumer Act of 2010).
- The US rules are limited to the Democratic Republic of Congo and contiguous countries, while the EU rules cover all countries exporting 3TG minerals into the EU
- The US rules cover a broad range of companies, including those that manufacture products incorporating 3TG material. However, the EU rules are restricted to upstream importers of 3TG minerals at the metal stage and so do not extend to importers of products such as electronic devices containing 3TG
- The US rules apply to all importers, while the EU measures only target those whose annual import volumes exceed a specified threshold
- The US rules contain high-level due diligence obligations backed up by disclosure requirements, while the EU rules are much more prescriptive and the competent authorities in each Member State have more extensive powers to verify compliance, including through checks and inspections
Please note that there are some indications that the US rules may soon be repealed or targeted by an executive order on the basis of national security, but at the timing of writing the Dodd-Frank disclosure rules are still in effect.