On March 5, 2014, the European Commission announced its proposed strategy for transparency in the trading of conflict minerals (minerals from regions affected by conflict and instability, such as the Democratic Republic of Congo [DRC]) – its effort to address issues similar to those targeted by the United States’ Dodd-Frank Act section 1502. However, unlike the Dodd-Frank Act’s mandatory reporting requirements, the draft EU Regulation[1] proposes a voluntary certification scheme for EU importers of conflict minerals, which would rely on reputational pressures from competitors and consumers to be effective.

The Proposed EU Scheme

The draft Regulation sets up a self-certification due diligence system for those who choose to sign up as “responsible importers” of tin, tantalum, tungsten, their ores, and gold. According to the scheme, EU importers of these metals would have to abide by the Organisation for Economic Cooperation and Development (OECD) Due Diligence Guidance[2].

The draft Regulation focuses on “conflict-affected and high risk areas” which are defined as “areas in a state of armed conflict, 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”.

Importers who sign on to the scheme would be required to adopt a supply chain policy for conflict minerals; establish management systems to support supply chain due diligence; incorporate supply chain policies into contracts with suppliers; establish grievance mechanisms as an early-warning risk-awareness system; operate a supply chain traceability system for the minerals and metals; and identify risks and implement a strategy to prevent or mitigate adverse impacts. Responsible importers must also carry out independent third-party audits.

Each year, responsible importers would be required to make a declaration of conformity with the obligations under the voluntary scheme and submit the proportion of minerals originating from conflict-affected and high-risk areas in relation to the total amount of minerals purchased, the names of each of the smelters or refiners in its supply chain, independent audits of the responsible importer and its smelters or refiners to the Member State. According to the draft Regulation, responsible importers must also make such information available to their immediate downstream purchasers and publish an annual report of its supply chain due diligence online.

The EU would also publish a report of EU and global smelters or refiners in the supply chain of responsible importers, identifying those smelters and refiners that source, at least partially, from conflict-affected and high-risk areas.

The Member States would be responsible for conducting ex-post checks on responsible importers to examine their implementation of and compliance with supply chain due diligence obligations, examine their audit obligations, and conduct on-the-spot inspections.

Along with the Regulation, the EU published other incentives it intends to establish to encourage due diligence by EU companies in the use of these minerals including public procurement incentives, financial support for small and medium sized enterprises to carry out due diligence, and raw materials diplomacy regarding multi-stakeholder due diligence initiatives[3].

Differences between the US’s Dodd-Frank Act and the Proposed EU Scheme

The EU’s draft Regulation takes a markedly different approach from the US’s mandatory reporting scheme. According to the Dodd-Frank Act companies that are publicly traded in the US, or that are otherwise US reporting issuers, are required to determine the source of the conflict minerals (tin, tantalum, tungsten, gold, and their derivatives) that they use. If any of those minerals originate from the DRC or any of its adjoining countries or if the companies are unable to determine the source of the minerals, they must report this publicly and provide a supply chain due diligence report, including an independent audit. The draft EU scheme, on the other hand, only targets importers of conflict minerals, rather than all companies using conflict minerals in their supply chains, and is voluntary rather than mandatory.

Another key difference between the US reporting system and the EU’s proposed scheme is that the proposed EU scheme is global in scope. Dodd-Frank limits the reporting requirements to the DRC and its adjoining countries, whereas the proposed EU Regulation would require responsible importers to conduct due diligence for the listed minerals and metals from a much broader land base: “conflict-affected and high risk areas”. Though the draft Regulation defines this term, it does not provide a list of exporting countries for which reporting is required. The EU’s stated reason for not providing a list of “conflict-affected and high risk areas” is that it wants to avoid companies removing their operations from those regions as an easy way of complying with the draft Regulation, since such actions may have harmful socio-economic impacts on local civilians in those areas. However, this lack of certainty may have a similar result if companies act cautiously to comply with the draft Regulation. The lack of certainty may also result in underreporting of the use of conflict minerals due to differences in the evaluation of countries’ risk levels by different companies.

Conclusion

Because the EU’s proposed scheme relies on importers to opt-in, the real teeth of the draft Regulation may be the report to be published by the EU which would raise public awareness of compliance by smelters and refiners both within the EU and globally. This report would allow downstream entities, whether they have signed up as responsible importers or not, to identify those smelters and refiners that are responsible smelters and refiners and which of those source, at least partially, from conflict-affected and high-risk areas.

The proposed Regulation has been passed from the Commission to the Council of the EU and the European Parliament for their positions regarding the draft Regulation.