On 16 March 2017, the European Parliament approved a draft EU regulation intended to ensure that trade in certain minerals and metals from high-risk or warn-torn areas does not fund conflict and human rights abuses. The regulation would apply to trade in tin, tantalum, tungsten and gold which are used in a variety of industries ranging from electronics, automotive, jewelry, aerospace, packaging, construction, lighting, industrial machinery and tooling.

The regulation is expected to come into effect as of 1 January 2021, at which time it would apply to up to 95% of EU imports. Although this presents a substantial delay in implementation, the scope of impact means that this regulation bears watching and merits advance compliance consideration.

New due diligence obligations

Under the regulation, EU importers of minerals or metals will have to undertake a thorough due diligence of their supply chains to ensure that supplies of tin, tantalum, tungsten and gold from conflict-affected or high-risk areas do not provide opportunities for armed groups to engage in and profit from the trade in these metals and minerals. An adequate due diligence plan will need to incorporate due diligence standards set out in either the Organization for Economic Co-operation and Development’s Due Diligence Guideline or from a due diligence scheme otherwise recognized by the European Commission.

The regulations further provide that –

  • Senior management of companies will be required oversee the due diligence process as well as maintain records for 5 years;
  • Due diligence policies must be shared with the public;
  • Companies will be required to inform and strengthen their engagement with suppliers by incorporating their supply chain policy into contracts and agreements; and
  • Grievance redressal mechanisms are required, which can allow for whistle-blowers to identify risk prone contracts.

New traceability systems

As part of the process, companies will also be required establish supply chain traceability systems.

Operationalizing a traceability system for mineral and metals will require companies to document such information as country of origin and date of extraction of the mineral, the name of the supplier of the metal or mineral, information on refiners and smelters of the metal and available third-party audit reports of smelters and refiners that are in the chain of supply for the importer.

Where minerals originate from conflict areas, importers also will have to document the name of the mine, location where the minerals were consolidated, traded or processed and information on taxes, fee and royalties that were paid.

Importantly, any information gained from the supply chain due diligence will have to be shared with the importer’s immediate downstream purchaser.

New third party audit rights and risk mitigation

EU importers also will have to open their risk management processes to audits by an independent third party.

The scope of the audit will be broad ranging covering importer’s activities, processes, supply-chain due diligence systems, risk management and information disclosure protocols with a view to determining whether the importer’s supply chain due diligence conforms with the regulatory requirements. The regulation places a special emphasis on the role of smelters and refiners and provides for certain audit exemptions for responsible smelters and refiners appearing on a planned list to be drawn up by the Commission in consultation with Member States.

When supply chain due diligence identifies risk in the supply chain, importers will also need to have a strategy which responds to those risks, or under some circumstances may have to disengage with such suppliers.

Oversight by Member State competent authorities

Importers will have to make available third-party audits that have been conducted to respective Member State competent authorities. Supply-chain due diligence systems will be subject to ex-post checks by Member State authorities who can also conduct on–site inspections and issue penalties for non-compliance.

Conclusion

The regulation is expected to become law in the coming weeks once the draft is voted on by the Council of the European Union. It will then come into effect from January 1, 2021, when the due diligence, risk management, disclosure and other reporting obligations become operational.