European conflict-minerals compliance set to be toughest yet
Members of the European Parliament (MEPs) have voted in favour of a draft law that will require European Union (EU) importers of ‘conflict minerals’ to be certified. Under the proposal, importers of tin, tantalum, tungsten and gold will need to certify with the politico-economic union that their goods are not sourced from conflict zones or mines that violate human rights before they can be used in the manufacturing of consumer goods. ‘Downstream’ companies that use the minerals will also have to provide information on how they monitor supply-chain risk.
MEPs also called for smelters and refiners to be subjected to independent audits from third parties to determine whether they conduct sufficient due diligence.
Downstream companies are those that purchase from the smelter or refiner further down the supply chain (before the brand, retailer or final customer), and can include manufacturers of components, products and original equipment. By amending the draft regulation so that it also applies to such companies, MEPs argued that the scope of the regulation expands from approximately 400 European importers to almost 880,000 companies.
The amended draft regulation is a significant departure from the proposal made by the European Commission (EC) and European Parliament Committee on International Trade for a voluntary system of self-certification for importers. That proposal was rejected by MEPs on 20 May, and, while the draft law is much stricter, it will not completely prohibit or limit the importation or use of conflict minerals. Rather, it simply obligates companies to be transparent over the various measures they have taken to manage risks in their supply chains to ensure that their conflict-mineral purchases are legitimate.
Cleveland-based Squire Patton Boggs Partner Dynda A Thomas notes the impact that such disclosure could have on consumers, investors and others: ‘Customers and consumers may take account of this information in making their purchasing decisions,’ she wrote. ‘Investors may consider this information as they make their investment choices. And, non-governmental organisations and activists may use this information to inform their actions and campaigns to criticise (or support) a company and its responsible sourcing and human rights practices.’
The amended draft regulation is also a considerable step up on Section 1502 of the United States Dodd–Frank Wall Street Reform and Consumer Protection Act, which was implemented in 2011 and was the first piece of legislation that attempted to ensure that supply chains were free of conflict minerals. Dodd–Frank only focuses on sourcing from the Democratic Republic of the Congo and nine specific adjoining countries, while the European Parliament proposal expands the focus to any ‘conflict-affected or high-risk area’ in the world.
The amended draft regulation also proposes the new idea of the general public having access to a list of ‘responsible importers’, to be published by the EC.
Finally, according to the proposals, the due diligence practices of EU smelters and refiners would be subjected to independent audits from third parties to ensure that they are consistent with the Organisation for Economic Co-operation and Development’s ‘Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas’.
Such audits can be avoided by certified importers of smelted and refined metals, however, if they are able to prove that all smelters and refiners in their supply chain comply with the requirements of the regulation. It is hoped that such relief will add to the pressure to get certified.
As this edition of Compliance Insider® went to press, the European Parliament had requested that the EC provide financial support to those micro-businesses and small- and medium-sized businesses that want certification. This would be through the EU’s programme for the Competitiveness of Enterprises and Small and Medium-Sized Enterprises. However, it is extremely unlikely that the mandatory nature and expanded scope of the amended draft regulation will change.
That said, the draft regulation only passed through the European Parliament with a slim majority and still has a long way to go before becoming law. EU member states are set to review the draft regulation before the Parliament, the Council and the Commission negotiate the final version.
Whatever the outcome, the proposals are currently causing concern for multinational corporations. If passed into law, the comparatively-broad geographic scope will challenge these companies to appropriately identify ‘conflict-affected and high-risk areas’ – particularly as the situation in these areas can swiftly change.
Multinational corporations face many challenges when it comes to discovering conflict minerals in their supply chains, and the amended draft regulation seeks to ensure that they engage in responsible sourcing throughout their entire supply chain – not just in specific countries. This in itself shows the real value in having a robust supplier compliance programme.
At the end of the day, the market will dictate the supply chain. If collective buyers take a stance on compliance, it will trickle back to the mines and corrupt officials.
Companies should continue to conduct due diligence on their conflict-minerals suppliers. This due diligence should not be limited to a simple questionnaire – companies must dig deeper and focus on the real owners and operators and their reputations.
Areas of concern
‘Conflict-affected and high-risk areas’ are defined by the draft law as locations in a state of armed conflict, with:
- widespread violence
- the collapse of civil infrastructure
- fragile post-conflict areas and areas of weak or non-existent governance and security, characterised by ‘widespread and systematic violations of human rights’.
Conflict minerals are used in a wide range of consumer products, such as electronics, packaging, lighting and industrial machinery. The mining of minerals in developing economies is often the cause of human-rights abuses and poor working conditions. Adults, and even children, often spend days underground digging up the metals used to make computers and mobile phones. While this creates billions of dollars in profits for companies, it also generates approximately US$185 million each year for armed groups responsible for various war atrocities.