Editorial Note: This article was published on African Law & Business’s website on July 14, 2015. The article can be found at: http://www.africanlawbusiness.com/news/5682-conflict-minerals-light-at-the-end-of-the-tunnel.  

On 20 May 2015, the European Parliament voted to reject the proposal of the European Commission and the Parliament’s Committee on International Trade (INTA) for a voluntary system of self-certification for importers of tin, tantalum, tungsten and gold (“conflict minerals”) into the European Union. The amended draft regulation marks a significant departure from the proposed draft regulation by calling for mandatory compliance by all importers of conflict minerals from conflict-affected and high-risk areas around the world. Instead of the voluntary system originally proposed, members of the European Parliament called for a mandatory system of due diligence for smelters and refiners.  Supporters argue that due diligence provides a method for companies to ensure that their purchasing practices do not fund armed conflict and human rights violations in areas that are prone to violence and that lack adequate protections from their governments.

In addition, the amended regulation includes downstream companies in the system – companies that purchase from the smelter or refiner all the way down the supply chain to the brand, retailer, or ultimate customer (including component manufacturers, product manufacturers, and original equipment manufacturers). According to the European Parliament, amending the regulation to apply to these downstream companies would expand the scope of the regulation from just 400 European importers, as originally proposed, to approximately 880,000 European companies. (See Article 16 of the draft INTA report on the Parliament website).

Objectives of the Regulation

There are many erroneous reports circulating in the media that the EU draft regulation would prohibit or limit the importation or use of conflict minerals altogether. That is simply not true. The regulation, as originally proposed and as amended, would require companies to disclose what steps they take to address risks in their supply chains for conflict minerals and ensure that their purchases of conflict minerals (or products or components that contain conflict minerals) are legitimate. It is important to note the impact that this kind of disclosure may have on consumers, investors and other interested parties. Customers and consumers may take account of this information in making their purchasing decisions. Investors may consider this information as they make their investment choices. And, non-governmental organizations and activists may use this information to inform their actions and campaigns to criticize (or support) a company and its responsible sourcing and human rights practices.

Due Diligence and Disclosure Obligations

According to the amended draft regulation, all importers established in the EU that bring conflict minerals into the EU would be required to conduct due diligence on the origin of those conflict minerals to determine whether they are from legitimate sources. These due diligence measures must be consistent with the Organisation for Economic Co-operation and Development Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas or an equivalent system. Proponents argue that these measures and this system of disclosure allow companies to share information and develop best practices to put pressure on suppliers throughout the supply chain to source responsibly.

In addition, after they undertake and describe their due diligence measures, the EU smelters and refiners would have to undergo an independent third-party audit of their due diligence practices, to confirm whether the parties are sourcing conflict minerals responsibly. The draft regulation provides that certified responsible importers of smelted and refined metals would not have to undertake audits if they are able to submit substantive evidence that all smelters and refiners in their supply chain comply with the requirements of the regulation. This relief from the audit will put additional pressure on the smelters and refiners to be ‘certified’ because their customers and customers down the supply chain will demand this more and more over time.

According to the amended proposed regulation, the downstream companies would also be required to take all reasonable steps to identify and address any risks that their conflict minerals finance conflict or human rights abuses and would be obliged to disclose information about the due diligence measures they perform to promote responsible sourcing of conflict minerals in their products.

Potential Impact

The US conflict minerals rule focuses on sourcing from the Democratic Republic of Congo and adjoining countries – a specific, identified list of countries. The draft EU regulation expands the focus to sourcing from any conflict-affected or high-risk area (not just countries) anywhere in the world. This broad geographic scope will lead to uncertainty for companies, and they may struggle to ensure that high risk areas are appropriately identified and that the EU member states, activists, and non-governmental organizations will be satisfied with the defined areas. Further, because what is considered to be a “conflict-affected or high-risk area” can change abruptly and often, it will not be possible for companies to focus their attention and responsible sourcing efforts on a specific list of countries.

The goal of the supporters of the amended regulation is that companies would engage in responsible sourcing throughout their entire supply chain and not just with respect to certain countries. But, what is certain is that applying the expanded geographic scope of the regulation to all the downstream companies whose products use or contain conflict minerals (the vast majority of them small and medium sized companies) would place a substantial increased out-of-pocket cost and administrative burden on these companies.

Next Steps

The INTA committee will meet on 13-14 July to vote on whether to enter into trialogue negotiations with the Council and the European Commission on the draft regulation. It is possible that these trialogue negotiations will result in some relief or financial assistance to help small and medium sized companies comply with the regulation. But it is unlikely that there will be changes to the mandatory nature and expanded geographic scope of the regulation as amended by European Parliament.