Earlier this month, the European Parliament voted to adopt the final text of an EU Conflict Minerals Regulation (the “Regulation”), which will require smelters, refiners and importers into the EU of tin, tantalum, tungsten, gold and their derivatives to source them responsibly. The Regulation must first be formally adopted by the Council, and signed by the Presidency of the Council and the President of the European Parliament, before becoming legally binding.
In this client alert, we will explain the background to the Regulation and briefly describe its key features.
So-called “conflict minerals” – tin, tantalum, tungsten, gold and their derivatives (“3TG”) – are widely used in the electronics, motor, aircraft and other high-tech industries.
However, the supply chains from which these precious metals derive are well-known to be prone to human-rights abuses and the financing of armed conflict.
The Regulation is the result of several years of work. In 2010, after the U.S. adoption of the conflict minerals rules in the Dodd-Frank Act, the European Parliament passed a resolution calling for the EU to introduce a similar regulation.
The European Commission launched a public consultation in March 2013, seeking views on a possible conflict minerals law. In view of the findings of the consultation, the Commission proposed a voluntary self-certification scheme focused on direct importers of 3TG into the EU.
The Commission’s proposed voluntary regulation was submitted to the EU Parliament for scrutiny, which concluded that the Commission’s proposed regulation did not go far enough. Instead, the EU Parliament recommended mandatory certification of EU smelters and refiners, and voluntary compliance measures for importers of 3TG and downstream companies, including importers and manufacturers of components and finished products. When this was put to a vote in May 2015, the Parliament voted in favour of a mandatory conflict minerals scheme for all actors in the supply chain, not just smelters and refiners.
A lengthy period of informal “trilogue” negotiations between the EU Council, Parliament and Commission began in late 2015, which culminated in a “political agreement” in June 2016, later followed by a final – albeit informal – agreement in November 2016.
The trilogue negotiations were accompanied by an intense period of lobbying by industry insiders, stakeholders and other interested parties. As expected, NGOs and SER investors argued for a broad mandatory regulation applicable to the entire 3TG supply chain, while industry advocated for a more targeted, less onerous regime.
The “Final” Conflict Minerals Regulation
Metals and minerals covered
The Regulation will apply only to certain ores, concentrates and other forms of 3TG.
The Regulation includes an annex that gives a more detailed description of the specific metals and minerals that are covered by the Regulation, which comprises, for example, tin ores and concentrates, tungsten oxides and hydroxides, carbides of tantalum, and unwrought or semi-manufactured form gold.
The Annex descriptions are very similar to the definitions in the U.S. conflict minerals rule, but are broader in some aspects. For example, the inclusion of tin oxides and chlorides within the scope of the Regulation takes it wider than its U.S. counterpart.
Which actors are caught?
The Regulation will require EU smelters and refiners (“SORs”) that process 3TG to conduct due diligence if they are sourcing it from “conflict-affected and high-risk areas”. Direct importers of 3TG into the EU will also be required to conduct due diligence.
This differs from the U.S. approach under the Dodd-Frank Act, which imposes due diligence and disclosure requirements on public companies, which then in turn put pressure on their supply chains to conduct due diligence, provide information and source responsibly.
Small-volume importers will be exempt from the due diligence requirements. The details of applicable annual volume thresholds relating to specific minerals and metals are set out in an annex to the Regulation. The threshold figures are set at a level designed to ensure that at least 95% of the total volumes of each relevant form of 3TG which are imported into the EU are caught by the Regulation. The Commission also has powers to change the prescribed thresholds every three years after the effective date of the Regulation, 21 January 2021.
Specific obligations - due diligence and disclosure
3TG importers that are subject to the Regulation are required to undertake supply chain due diligence.
Affected EU importers must:
- Adopt and communicate to suppliers and the public, information on their supply chain policy – the policy must be consistent with the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (“OECD Guidance”);
- Incorporate supply chain policies into contracts with suppliers;
- Ensure that senior management oversee supply chain due diligence and maintain records relating to internal processes designed to support it;
- Set out a grievance mechanism dealing with concerns relating to the due diligence process;
- Collect information (evidenced by documentation) relating to the source and nature of in scope 3TG, with additional disclosure requirements applicable to minerals from conflict-affected and high-risk areas;
- Assess the risks in their supply chain based on available third-party audit reports on the SORs in their supply chain, or where no such reports are available, procure independent third-party audits as part of the supply chain due diligence; and
- Make annual public disclosures about their supply chain due diligence.
SORs and importers will be required to adopt the OECD Guidance framework for their due diligence.
The Regulation will not impose mandatory due diligence obligations on manufacturers, importers and sellers of finished products and components that contain 3TG, although such persons are increasingly likely in practice to be able to provide voluntary reports. There are also no obligations placed on mere transporters and other intermediaries.
Unlike the U.S. conflict minerals rule (whose application is limited to the Democratic Republic of the Congo and adjoining countries), the Regulation will apply worldwide to 3TG sourced from any “conflict-affected and high-risk areas”, in line with the OECD Guidance.
The Regulation contains general principles about what is meant by “conflict-affected and high-risk areas”. The definition is broad and is intended to cover any “areas in a state of armed conflict or fragile post-conflict as well as areas witnessing weak or non-existent governance and security, such as failed states, and widespread and systematic violations of international law, including human rights abuses”.
The Commission has also indicated that it will develop an indicative and non-exhaustive list of such areas and other non-binding guidelines in a handbook for operators. A draft of the handbook was published in 2015.
Enforcement of the Regulation will be delegated to EU member state competent authorities. Therefore, while the Regulation is directly applicable, member states are required to enact domestic legislation setting out the potential sanctions for non-compliance within their jurisdiction.
Excluded Mineral Content
Recycled metals are exempt from the Regulation. For these purposes, “recycled” means reclaimed end-user or post-consumer products, or scrap processed metals created during product manufacturing, including excess, obsolete, defective, and scrap metal materials which contain refined or processed metals that are appropriate for recycling in the production of tin, tantalum, tungsten or gold. Minerals that are partially processed, unprocessed, or a by-product from another ore are not considered to be “recycled”.
Existing stocks of minerals held before 1 February 2013 will be grandfathered, meaning they will not fall within the Regulation.
The Regulation will, however, apply to minerals and metals listed in Annex I of the Regulation that are obtained as by-products, i.e., that have been obtained from the processing of a mineral or metal falling outside the scope of the Regulation, and which would not have been obtained without the processing of the primary mineral or metal falling outside the scope of the Regulation.
List of global responsible SORs
The Regulation requires the Commission to maintain a list of “global responsible” SORs that are deemed to fulfil the requirements of the Regulation.
The process for establishing this list is not contained within the Regulation, but will be set out in secondary legislation made under the Regulation.
The Regulation will become effective 1 January 2021.
This effective date is later than was expected, as originally a two-year transition period had been proposed. An extended transition period until 2021 should give member states and those companies caught by the Regulation plenty of time to establish domestic measures and procedures to achieve compliance with the rules.
In practice, the reputational risks associated with conflict minerals mean that most of those covered will have already taken/be taking steps to achieve compliance with the OECD Guidance, or similar guidance such as the LBMA Responsible Gold Guidance, on a voluntary basis, and as a practical business necessity well in advance of this deadline.
The Commission will be required to review the functioning and effectiveness of the Regulation every three years, taking into account its impact on the ground and on EU economic operators. The review will assess the adequacy and implementation of the due diligence schemes put in place by EU operators, and the potential need for additional mandatory measures to ensure sufficient leverage of the total EU market on the responsible global supply chain of 3TG.
The final Regulation will now be put to the EU Council for adoption, which is the last stage in the legislative process before publication of the Regulation. This is expected to happen by May 2017.
As an EU regulation, the Regulation will be directly applicable in all EU member states when it takes effect in January 2021; however, member states will have to bring in local laws to enforce compliance with the Regulation.
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Client Alert 2017-087