The European Union may soon join the United States in requiring certain companies to investigate and disclose whether certain minerals used in their products originated in conflict-affected or high-risk areas. On June 26, 2013, the European Commission (the Commission) closed its public consultation on the development of a conflict minerals regulation.1 While the information culled from responses to the Commission’s consultation questionnaire will have a significant impact on the nature of the regulations, we have analyzed the Commission’s statements and requests for information to anticipate the kind of regulations that will ultimately be put in place. Based on the information accompanying the public consultation, it is clear that the EU initiative may draw on the 2010 conflict minerals regulations in the United States as well as the 2011 Organisation for Economic Co-operation and Development (OECD) guidance related to conflict minerals.2 Our initial thoughts are below.
European Commission Public Consultation
In an increasingly interdependent world with a globalized economy and supply chain, a lack of physical proximity to conflict does not prevent consumers from contributing to foreign struggles and civil unrest. Many products that consumers use on a daily basis – computers and cell phones, for example – include components made from resources such as gold, tin, tungsten and tantalum that armed groups mine to fund their conflicts. Thus, supply chain transparency and diligence are vital if companies and consumers wish to avoid contributing to civil unrest in areas such as Central Africa, and being the targets of unwanted media and NGO attention as a result.
In 2011 and 2012, the Commission released official communications regarding responsible resource acquisition, and the Commission now appears ready to move from discussion to action.
The European regulations may feature an expanded scope compared to the U.S. regulations, as the Commission generally references “resource-rich developing countries” and “conflict-affected or high-risk areas” rather than just the Democratic Republic of the Congo or an adjoining country.3 Such language suggests an alignment with the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.4 The Commission also appears open to moving beyond simply imposing regulations, as it identifies its aims as “exploring potential new policy options to assist resource-rich developing countries and to promote due diligence” as well as “looking into possible appropriate incentives to sustain trade and allow for continued EU access to these mineral markets.”5
Notably, the Commission appears focused on promoting social responsibility without unnecessarily hindering industry.6 The EU public consultation requests input regarding the sufficiency of existing guidance from the United Nations and OECD, hopefully so that the Commission can avoid creating duplicative or conflicting regulations.7 Overall, concerns of practicality and market realities appear central; the Commission appears to be trying to devise a workable solution, which addresses the concerns of stakeholders inside and outside the supply chain.
Drawing from Dodd-Frank
Though the goals of U.S. and EU conflict minerals regulations are aligned to a certain extent, the Commission intends to learn from, but not directly adopt, the Dodd-Frank provisions. The public consultation calls for an analysis of advantages and disadvantages, and indicates a desire to avoid encouraging certain strategies businesses have taken in response to the Dodd-Frank changes, such as abandoning Central Africa as a source of minerals.
As with Dodd-Frank, the Commission appears willing to consider exempting some companies from the regulations, though the Commission suggests basing such exemptions on size rather than whether the company files reports with the SEC.8
As was the case with timber regulation (adopted in 2008 and 2010 in the United States and EU, respectively), the EU will not simply mimic U.S. rules. The Commission appears to be considering adopting different standards for specific industry sectors or products, which would permit more flexibility for some companies in terms of compliance measures.9 Another flexibility-focused concern is whether the regulations should be binding or compulsory.10
The EU regulations may build on the Dodd-Frank disclosure requirements by providing clean trade incentives, perhaps intended to boost “brand image and consumer recognition.”11
In addition, the Commission may draw influence from the timber regulations passed in October 2010, which focus on three elements of due diligence: information, risk assessment, and risk mitigation.12 Incorporating those elements would move a step beyond the Dodd-Frank disclosure requirements.
If the EU elects to closely mimic U.S. regulations, companies that manufacture or contract to manufacture products for which conflict minerals are “necessary to the functionality or production” would be subject to the rules.13 Such companies must then make a reasonable inquiry into the minerals’ country of origin and disclose whether the minerals came from any of the relevant countries.14
If companies find conflict minerals in their products have originated from the covered countries, they must disclose this information to the SEC in an annual conflict minerals report and post it online.15 Those companies that can conclude the minerals did not come from a covered country or that can show the minerals were from recycled or scrap sources do not have to create such a report but have to describe their country-of-origin inquiries.16 Finally, companies may also be required to report their due diligence efforts regarding source and chain of custody of conflict minerals and include an independent audit of those measures.17 Following this process, appropriate products can be classified as “DRC conflict-free.”18
With the closing of the public consultation period the Commission will begin piecing together insights based on the full scope of submitted questionnaires. That information may be incorporated into a proposal to be prepared for submission to the European Parliament and Council. Although the pace of the legislative process can be difficult to predict, preparing for changes sooner rather than later, will promote a smooth transition to a more transparent supply chain. Our experience shows that the optimal time to influence the shape of the future EU law and policy is the current stage, before new proposals are reduced to draft legislation.
1. Public Consultation on a Possible EU Initiative on Responsible Sourcing of Minerals Originating from Conflict-Affected and High-Risk Areas, EUROPEAN COMMISSION, http://ec.europa.eu/yourvoice/ipm/forms/dispatch?form=EuMin&lang=en.
2. See Conflict Minerals, Rule 34-67716, SEC Final Rules, U.S. SECURITIES AND EXCHANGE COMMISSION (Jan. 14, 2013), http://www.sec.gov/rules/final/finalarchive/finalarchive2012.shtml.
3. Public Consultation, supra note 1.
4. See OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, OECD, http://www.oecd.org/fr/daf/inv/mne/mining.htm.
5. Public Consultation, supra note 1.
6. Id. For example, question 4.3 asks, “what could an EU initiative do to support both market access and due diligence concerns?”
8. Id. Question 3.4 asks, “Should an EU initiative include exemptions for Small and Medium-sized Enterprises (SMEs)?”
9. See id. at questions 3.1 to 3.3.
10. Id. at question 5.1.
11. Id. at question 7.1 to 7.3.
12. Timber Regulation, EUROPEAN COMMISSION (April 26, 2013), http://ec.europa.eu/environment/forests/timber_regulation.htm.
13. Conflict Minerals Final Rule, Securities and Exchange Commission 12 (2012), available at http://www.sec.gov/rules/final/2012/34-67716.pdf
15. Id. at 13.
16. Id. at 13-14.
Client Alert 2013-190