On March 5, 2014, the European Commission (“EC”) proposed legislative measures designed to encourage the responsible sourcing of conflict minerals (the “Proposed Regulation”).1 The draft European Union (“EU”) legislation remains subject to approval by the EU Parliament and the EU Council (and is expected to be voted on later this year). However, if approved, the measures will (i) set up an EUwide system of self-certification for importers of tin, tantalum, tungsten, and gold (“3TG”), (ii) lead to the publication by the EU of a list of EU and ex-EU “responsible smelters and refiners,” and (iii) provide for incentives to encourage supply chain due diligence.
The EU Proposed Regulation stands in contrast in many respects to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rule promulgated by the U.S. Securities and Exchange Commission (“SEC”) thereunder (the “Conflict Minerals Rule”), which requires certain filing companies to determine whether they “manufacture” or “contract to manufacture” any “product” containing certain conflict minerals that originated in the Democratic Republic of Congo and its adjoining countries (“DRC Region”) for which the conflict mineral is necessary to the product’s functionality or production. For more information on the specifics of the Conflict Minerals Rule, please read our memorandum dated September 25, 2012.
The Proposed Regulation is discussed in detail below, along with an analysis of the differences between the EU’s Proposed Regulation regarding 3TG and the U.S.’s Conflict Minerals Rule.
Key Differences between the U.S. and Proposed EU Conflict Minerals Rules
Conflict Minerals Framework
The Proposed Regulation envisages a voluntary supply chain due diligence “responsible importer” selfcertification process for EU importers of 3TG. While self-certification pursuant to the Proposed Regulation is voluntary, to encourage participation, the EC plans to provide financial support to EU importers that elect to self-certify under the Proposed Regulation and to organizations promoting transparency and due diligence practices among smelters and refiners. Further, to lessen the burden of self-certifying under the Proposed Regulation, the EC will publish and update, in consultation with the Organisation for Economic Cooperation and Development (“OECD”), a list of smelters and refiners that have been identified in the supply chains of responsible importers.2
Critics of the Proposed Regulation have taken issue, in particular, with the voluntary nature of the certification process.3 Therefore, it is likely that this, and other issues, will continue to be debated prior to the legislation being approved by the EU Parliament and the EU Council.
According to the Proposed Regulation, EU importers wishing to self-certify as a responsible importer should:
- adopt and clearly communicate to suppliers and the public its supply chain policy for 3TG;
- incorporate into its supply chain policy the standards against which supply chain due diligence is to be conducted;
- assign responsibility to senior staff to oversee the supply chain due diligence process, as well as maintain records for a minimum of five years;
- incorporate its supply chain policy into contracts and agreements with suppliers;
- establish a company-level grievance mechanism as an early warning risk awareness system or provide such mechanism through collaborative arrangements with other companies or organizations, or by facilitating recourse to an external expert or body (e.g., ombudsman); and
- operate a chain of custody or supply chain traceability system to provide the description of the mineral or metal, with supporting documentation.4
In addition, the Proposed Regulation requires responsible importers to apply the supply chain risk management procedures described in the due diligence guidance for responsible supply chains of minerals from conflict-affected and high-risk areas published by the OECD (“OECD Guidance”),5 and to conduct an independent third-party audit of the responsible importer’s compliance program and procedures.6
Responsible importers will be required to provide to the competent authority within its EU member state details regarding the smelters or refiners in its supply chain, as well as certain administrative information. Importantly, the Proposed Regulation notes that all information acquired as a result of a responsible importer’s 3TG supply chain due diligence should also be made available to immediate downstream purchasers, having regard to business confidentiality and other competitive concerns.7 In addition, responsible importers will be required to make publicly available information regarding their conflict minerals supply chain due diligence policies and procedures. As a result, it is expected that the Proposed Regulation will eventually ease the burden of downstream companies purchasing 3TG that is imported into the EU.
In contrast to the Proposed Regulation, the U.S. Conflict Minerals Rule establishes significant mandatory due diligence and disclosure requirements for filing companies that are subject to the rule. The Conflict Minerals Rule sets forth a very specific framework for complying with the rule, including the requirement to conduct a reasonable country of origin inquiry and, in certain instances, additional supply chain due diligence.
As will be discussed in further detail in the sections below, there are a number of other meaningful differences between the scope of the Proposed Regulation and the U.S. Conflict Minerals Rule.
Given the greater specificity and mandatory nature of the Conflict Minerals Rule, it is clear that the Conflict Minerals Rule (rather than the Proposed Regulation, as drafted) is likely to continue to be the driving force behind conflict minerals compliance programs and procedures.
The Proposed Regulation targets EU importers of 3TG and not manufacturers or sellers of finished products or importers of finished products containing 3TG. The EC estimates that there are more than 400 importers of 3TG ores and metals into its territory, making the EU one of the largest markets for 3TG metals and minerals, accounting for about 35% of the global trade in tin, tantalum, tungsten and gold.8 In contrast, the U.S. Conflict Minerals Rule targets a broader range of companies: any SEC filer that manufactures or contracts to manufacture a product containing conflict minerals that are necessary to the functionality or production of such product. As a result, the SEC estimates that nearly 6,000 filing companies will be directly affected by the Conflict Minerals Rule.
Relevant Conflict Minerals
The Proposed Regulation clearly delineates the specific minerals and metals that are covered by the regulation (the Proposed Regulation is limited to EU imports of 3TG – tantalum, tin, tungsten, and gold, as well as their ores, concentrates, oxides, hydroxides, and carbides, including in unwrought or powder form, in bars, rods, profiles and wires).9 While the U.S. Conflict Minerals Rule also targets 3TG, the conflict minerals definition is broader than 3TG and the ores from which such metals are extracted; it also includes “any other mineral or its derivatives determined by the Secretary of State to be financing conflict” in the DRC Region.
The Proposed Regulation covers the import into the EU of 3TG regardless of the source of such conflict minerals. Specifically, the Proposed Regulation applies to 3TG sourced from any conflict-affected or high-risk area globally. The Conflict Minerals Rule focuses more narrowly on conflict minerals that are sourced, or the filer has reason to believe are sourced, from the DRC Region. In this important respect, the Proposed Regulation is broader than the Conflict Minerals Rule, and thus, it will be important for EU importers of 3TG (particularly those electing to self-certify under the Proposed Rule) to ensure that their conflict minerals programs are broad enough to cover and elicit information regarding 3TG sourced both within and outside the DRC Region.
Other EU Conflict Minerals Initiatives
In addition to the Proposed Regulation, the EU also indicated that, as a part of its public procurement contracts for finished goods containing 3TG, it will require that vendors comply with the OECD Guidance. As the Proposed Regulation does not apply only to the sourcing of 3TG from the DRC Region, but rather applies to the import into the EU of 3TG that is sourced globally, companies that wish to bid on EU public procurement contracts should ensure that their conflict minerals compliance programs and procedures are tailored to capture information about the purchase of imported 3TG, even when sourced outside the DRC Region. The EC will also encourage EU Member States to include performance clauses in procurement contracts signed by their authorities as also foreseen by the EC. Further details on this point will be provided through recommendations and implementing guidance at a later stage.10
In addition, the EC has undertaken initiatives relating to consumer information and labeling. The EC has stated that it will, at a later stage, publish recommendations and implementing guidance to assist EU Member States in developing complementary initiatives in the area of consumer information and labeling, and to provide further incentives for responsible corporate behavior.11
As drafted, the Proposed Regulation will only directly impact a limited number of companies who are importing 3TG into the EU. However, it is unclear to what extent companies operating in the EU will be indirectly impacted by the legislation. Therefore, companies operating in the EU should consider keeping and maintaining records regarding the purchase of any 3TG from EU importers in connection with a global conflict minerals or responsible sourcing compliance program.
As described above, there has been criticism by interested parties that the Proposed Regulation, as drafted, is too narrow to accomplish the intended objectives and, specifically, that the supply chain due diligence and self-certification processes should not be voluntary. Therefore, it is likely that the Proposed Regulation will continue to be subject to review and scrutiny, and may be amended before a final regulation on conflict minerals is approved in the EU. Regardless of whether the Proposed Regulation undergoes further revisions, it is clear that companies will face increased pressure by the government and consumers, both within the United States and the EU, to avoid the use of identified conflict minerals that directly or indirectly finance or benefit armed groups.