A Due Diligence Scheme for Conflict Minerals

The demand for certain minerals, such as tin, tungsten, tantalum (and their ores) as well as gold continues to increase as digital technology becomes ever more prevalent. Collectively known as “3TG”, they are used in the manufacturing of mobile phones and other electronic devices. In many cases these materials are mined in poor and politically unstable parts of the world, which has led to a growing demand for more transparency about the way they are obtained by the manufacturers, in order to avoid financing armed groups and thus further destabilising these regions.

After a long institutional struggle, the EU is now on the verge of establishing a scheme to monitor the supply chain of these so-called “conflict minerals”. The system would cover all but the smallest importers of 3TG (such as dentists or jewellers, representing less than 5% of all imports), and would require them to ensure that they are not financing, directly or indirectly, armed groups present in conflict-affected and high-risk areas.

The initiative gained a foothold at European level when, in 2011, the United Nations published a document on conflict minerals, establishing guidelines on a so-called “due diligence scheme”, which set up principles for importers to disclose detailed information on their sources of these materials in order to identify and address the inherent risks for vulnerable regions. In subsequent years, there have been more and more calls for stronger action until eventually, in 2014, the Commission published a proposal for a Regulation. Due to the controversial nature of the topic, it took the Parliament and the Council almost three years to agree on the text. It was finally adopted this year by the Council on 3 April, after the Parliament’s first reading on 16 March.

This briefing will divide the Regulation into two distinct types of measures; binding (entering into force straightaway) and non-binding (which will apply from 2021).

Scope and non-binding Actions

This Regulation aims to establish an EU system for supply chain due diligence imposed on EU importers of tin, tantalum and tungsten, their ores and gold to ensure that these minerals and metals are imported from responsible sources only. Only the smallest importers, representing a maximum 5% of all imports, will be exempt from the requirements, according to the threshold to be set (and regularly updated) by the Commission. This exception should ensure that the viability of small businesses is not compromised by unnecessary administrative burdens. In addition, the Regulation would not cover recycled metals, but would apply to minerals and metals that were recovered as by-products.

In the short term, the Regulation would not establish compulsory schemes for traders. Instead, it would offer to Government, industry associations and groupings of interested organisations the possibility of obtaining a so-called recognition of “equivalence”, acknowledging that their supply chain due diligence schemes fulfil the criteria laid down in the Regulation. If a scheme is recognised by the Commission, it will be published in a register available online and will be periodically reviewed to ensure that it continues to perform adequately. An additional database will be set up with the names of responsible global smelters and refiners that participate in Commission-recognised schemes.

During the first six months after the Regulation enters into force, Member States will be tasked to designate an authority to ensure the application of the Regulation. The Commission will also prepare (non-binding) guidelines for these authorities (as well as for economic operators) to ensure they are consistent in applying the Regulation. However, Member States will be free to decide on the rules and penalties applicable to infringements, as long as they are effective and proportional.

Binding Actions – Obligations for importers from 2021

The Parliament felt that, in the long term, voluntary schemes alone will not be sufficient to ensure market-wide conformity with the due diligence schemes. For this reason, legally binding elements were added to the Regulation, with necessary time given to businesses to prepare for these obligations. Starting from 1 January 2021, companies above the threshold will have to comply with the supply chain due diligence obligations in the Regulations, and will be responsible for keeping documentation that proves their compliance. Non-complying businesses would risk fines imposed by the designated Member State authorities. The obligations to be followed by the importers of 3TG materials will be fourfold:

  1. Management system obligations (Article 4)
  2. Risk management obligations (Article 5)
  3. Third-party audit obligations (Article 6)
  4. Disclosure obligations (Article 7)

First of all, EU importers of 3TG will have to conform to several management system obligations. Importers will be obliged to communicate up-to-date information on their supply chain policy for the relevant minerals and metals to suppliers, and will have to assign due diligence responsibility to senior management. They will also have to incorporate the OECD’s due diligence guidelines in their own supply chain policy standards, as well as in their contracts with suppliers. To avoid potential shortfalls, EU importers of 3TG, either alone or in collaboration with other economic operators or organisations, will have to set up so-called “grievance mechanisms”, which would be early-warning risk awareness systems for any interested party to voice concerns regarding any aspect of the trader’s supply chain.

In practical terms, the information to be collected by the companies engaged in the importing or collecting of 3TG are the following:

Conflict Minerals

In addition, if the minerals originate from an area that is regarded as being high-risk or conflict-affected (or for any other reason supply risks have been reported), additional information may be required, such as the name of the mine and the locations where the minerals were consolidated, traded or processed, or financial information (such as taxes, fees and royalties paid). As for metals, where the records are unavailable from the third-party audit and the conformity with a supply chain due diligence scheme is impossible to ascertain, the system in place at the company should also provide the records proving the integrity of the upstream part of the supply chain, as described above. This means identifying the countries where the original minerals were mined and, in the event that they involve high-risk or conflict affected areas, ensuring compliance with the OECD Due Diligence Guidance. To avoid circumvention of these rules by importing materials that do not fit into these categories but could produce any of the 3TG materials as by-products, the Commission obliges businesses to provide information on the point of origin of all by-products (where the material was first separated from the product in question).

Secondly, EU importers of 3TG will have to comply with risk management obligations. The objective is to identify and assess the supply chain of the company, and in the event that a potential hazard is found, to implement a strategy responding to the risk, following the OECD guidelines and the recommendations in the Regulation’s second Annex. In this regard, EU importers might undertake one of the following actions: continue to trade while implementing risk mitigation efforts, suspend trade temporarily while pursuing risk mitigation efforts or disengage with the supplier if attempts at risk mitigation failed. If a company implements mitigation efforts while continuing or suspending trade temporarily, it will have to start consultations with the stakeholders (suppliers, government authorities, civil society organisations, etc.), and agree on a common strategy to eliminate the risk, as described in the OECD Due Diligence Guidance, while measuring the improvements achieved over time.

Thirdly, importers of minerals and metals will be obliged to hire independent third parties to carry out comprehensive audits on the company’s activities, processes and systems used to implement supply chain due diligence; in other words, whether it duly complies with the obligations of this Regulation and with the OECD Guidance. The auditor will be able to propose recommendations to the importer about potential measures for improvement. The only case in which the importer of metals can be exempted is if they can prove that all the smelters and refiners in their supply chain are complying with the Regulation. In the event that one or more of the smelters and refiners in the importer’s supply chain do not have independent audit reports, importers will have to examine the upstream part of the supply chain as well, including via third-party audits of their own.

Lastly, importers of minerals or metals have strict disclosure obligations in order to ensure transparency. All third-party audit reports have to be made available for the Member States’ competent authorities, and all information gained concerning the supply chain due diligence of importers has to be communicated to the immediate downstream purchasers (although only to an extent that it does not endanger business confidentiality or other competitive concerns). At the same time, companies are encouraged to make their findings publicly available to the highest extent possible, including documents from all three of the aforementioned obligations (supply chain analysis, risk management, third-party reports). Where importers claim that they obtain all their metals from recycled or scrap sources, they should still show the definitive steps taken in reaching this conclusion.

In 2021, the competent authorities of the Member States will also begin to safeguard the provisions of the Regulation. First and foremost, they will be responsible for ensuring the effective implementation of the Regulation throughout the EU. Secondly, they will carry out ex-post checks to ensure that importers comply with the Regulation, based on their own discretion and on third-party tips regarding non-compliance. These checks will have to include the importer’s implementation of the Regulation as well as documentations and audit records, and may even include on-the-spot inspections. Competent authorities will have to keep records of these checks as well as notices of post-infringement remedial actions.

The authorities would also be in charge of ensuring a satisfactory information flow and reasonable cooperation levels among the stakeholders, including with other competent authorities. For example, if during an ex-post check shortcomings are found regarding an importer’s due diligence practices, it should notify the authorities of other Member States as well as the Commission. Any information exchange must respect existing legislation on data protection, such as the General Data Protection Regulation (GDPR), the Regulation on the Processing of Personal Data by EU Institutions.

The Commission, according to the reports sent by the authorities by the end of June every year (such as notices of remedial action and third-party audit reports), will review the functioning and the effectiveness of the Regulation every three years, starting in 2023. The review should pay particular attention to the obligations’ effects “on the ground”, such as the costs for small and medium-sized enterprises.

In the spirit of covering at least 95% of all imports while leaving out the smallest importers, the Commission is authorised to change the volume thresholds for the various minerals and metals every three years. Nevertheless, the Commission is not authorised to expand the list of minerals and metals subject to due diligence rules, and the Council and the Parliament have the right not to renew the delegation of powers to the Commission as well as, in certain cases, to revoke said delegation.

Additional Facts

Official title: Regulation of the European Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas.

Proposal Date: 5 March 2014

Type of Procedure: Ordinary Legislative Procedure

Legal Basis: TFEU Art. 207

Date of Adoption in Parliament: 16 March 2017

Date of Adoption in Council: 3 April 2017