Minerals from Conflict Zones

Armed groups in conflict-affected areas should not be able to finance their activities through the mining and trade of minerals, such as gold and tin, says the Commission, which last week proposed legislation that, it says, will combat such trade.

Conflict minerals come from areas of armed conflict and human rights abuse, where they are used for financing the purchase of supplies by armed groups, affecting the duration and intensity of the conflict. These minerals are later transformed into metals, which are then processed in the downstream section of the supply chain into components for a vast number of globally used end products including cars, electrical and electronic products, construction, aeronautics and jewellery.

The problem of conflict minerals is particularly worrying in Africa, and specifically in the Great Lakes Region (Democratic Republic of Congo, Kenya, Rwanda, Tanzania and Uganda). The Heidelberg Institute for International Research estimates that the combination of natural resources and conflict is present in about 20% of global conflicts, particularly in Africa and America.

According to the UN Industrial Development Organisations reports, mining output accounts for 24% of Africa’s GDP, 9.9% in Latin America and 20.4% in Asia. Africa hosts 30% of the world’s mineral reserves and an even higher proportion of deposits of gold, platinum, diamonds and manganese.

The EU has therefore presented a proposal for a Regulation and a Communication on conflict minerals. The EU aims (a) to break the link between minerals extraction and trading and the financing of armed conflicts, (b) to create an EU market for responsibly traded minerals from conflict regions (as the objective is not to stop obtaining minerals from these areas, but to ensure the trade of minerals is not used for perpetuating conflicts) and (c) to improve EU operators ability to comply with existing due diligence frameworks.

The EU response has already been criticised by certain sectors for its limited scope, as many conflict minerals have been left out of the text such as coltan and diamonds; as well as for not proposing an obligation, but only a voluntary system.  

The Proposal for a Regulation

The Commission has proposed a Regulation to set up an EU system for supply chain due diligence self-certification system for importers.  Supply chain due diligence is an on-going process through which business operators monitor and administer their purchases and sales with a view to ensuring that they do not contribute to conflict and adverse impacts. Due diligence is further defined by the Organisation for Economic Cooperation and Development (OECD) in its Due Diligence Guidance.

Scope (Article 1 and 2)

The Regulation targets tin, tantalum and tungsten ores and gold, from all conflict-affected and high-risk areas. Conflict-affected and high-risk areas are areas in a state of armed conflict, fragile post-conflict, areas with non-existent governance and security (such as failed states) and areas where there are widespread and systematic violations of international law, including human rights.

Self-certification as a responsible importer (Article 3)

Any importer of the four covered minerals or metals could self-certify as responsible importer by declaring to a Member State competent authority that it adheres to the supply chain due diligence obligations set out in the Regulation.

Management System Obligations and Risk Management Obligations (Article 4 and 5)

Self-certified responsible importers would (i) adopt and communicate to suppliers and the public its supply chain policy for conflict-minerals, (ii) strengthen its engagement with suppliers by incorporating its supply chain policy into contracts and agreements with suppliers consistent with the OECD Due Diligence Guidance, and (iii) operate a chain of custody or supply chain traceability system for minerals and metals, with supporting documentation, such as name and address of the supplier to the importer, and country of origin of the minerals.

Self-certified responsible importers would (i) identify and assess the risks of adverse impacts in its mineral supply chain, and (ii) implement a strategy to respond to the identified risks designed so as to prevent or mitigate adverse impacts by reporting findings, adopting risk management measures and implementing a risk management plan.

Third-party Audit Obligations (Article 6)

Self-certified responsible importers of minerals and metals would carry out audits via an independent third-party. The independent third party would (i) include in its audit all of the responsible importer’s activities, processes and systems used to implement supply chain due diligence regarding minerals and metals, including the responsible importer’s management system, risk management and disclosure of information; and (ii) determine as the objective of the audit the conformity of the importer’s practices with the Regulation.

Disclosure Obligations (Article 7)

Every year, the responsible importer would submit to the Member State competent authority documentation on the previous year regarding (i) details of its commercial activity, (ii) a declaration of conformity with the requirements of the Regulation, and (iii) independent third-party audits. The responsible importer would submit to the competent authorities the documentation on the proportion of minerals originating from conflict-affected and high-risk areas relative to the total amount of minerals purchased.

A self-certified responsible importer would also provide (i) the name and address of each of the responsible smelters or refiners in its supply chain, (ii) independent third-party audits regarding the smelters or refiners in its supply chain, and (iii) the proportion of minerals originating from conflict-affected and high-risk areas.

A responsible importer would make available to its immediate downstream purchasers all information gained pursuant to its supply chain due diligence. A responsible importer would report on its supply chain due diligence policies and practices for responsible sourcing.

List of responsible smelters and refiners (Article 8)

Based on the information provided by Member States, the Commission would adopt and make publicly available a decision listing the names of responsible smelters and refiners of minerals, identifying those sourcing from conflict-affected and high-risk areas.

Ex-Post Checks (Article 10)

The competent authorities would carry out ex-post checks in order to ensure that self-certified responsible importers comply with the obligations laid down in the Regulation. The checks would be conducted taking a risk-based approach. They could include (i) examination of documentation and records that demonstrate the proper compliance with the supply chain due diligence obligations, (ii) examination of audit obligations and (iii) on-the-spot inspections.

Cooperation between authorities (Article 12)

Competent authorities would exchange information on matters pertaining to self-certification and ex-post checks, and in particular on shortcomings detected through the ex-post checks.

Infringements (Article 14)

Member States would lay down the rules applicable to infringements of the provisions of the Regulation.

The Communication

The Commission presented a Communication along with the Regulation. The Communication presents the overall comprehensive foreign policy approach on how to tackle the link between conflict and the trade of minerals extracted in affected areas.

The Communication presents a series of initiatives, based on the view that responsible behaviour by companies operating in these affected-areas can play a positive socio-economic role. The Commission addresses three main issues: (a) reducing the opportunities for armed groups to trade in tin, tantalum, tungsten and gold in conflict-affected areas, (b) improving the ability of EU operators to comply with existing diligence frameworks and (c) reducing distortions in global markets for the covered four minerals sourced from conflict affected and high-risk areas.

The Communication introduces elements on:

Natural resources as a driver for development

Mining extractive industries could significantly contribute to economic development around the world. Due diligence should be encouraged in a way that does not deter legitimate mining activity and related trade in conflict-affected and high-risk areas.

Existing international responsible sourcing initiatives

The OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights refer to the concept of responsible sourcing, aiming to encourage businesses to proactively and reactively verify, through an ongoing process known as due diligence, that their commercial activities are not contributing to conflict and adverse impacts. 

The UN Security Council issued a Resolution (Resolution 1952 (2010)) targeted at the Democratic Republic of Congo and its GLR neighbours calling for due diligence in supply chain management. G8 leaders also expressed their commitment to make extractive industries more transparent and to support responsible sourcing of conflict-free minerals from conflict regions.

The EU is actively engaged in the OECD initiative on conflict minerals (the Due Diligence Guidance) and made a commitment to promote its observance.

The US passed the Dodd Frank Wall Street Reform and Consumer Protection Act in 2010. Its Section 1502 requires companies listed on US stock exchanges using in their production processes tin, tantalum, tungsten and gold originating in the Democratic Republic of Congo and neighbouring countries, to declare the origin of such minerals and perform due diligence. The legislation is formally restricted to US-listed companies, but has considerable effects abroad, including in the EU, as suppliers to US-listed companies are being asked to contribute due diligence information.

Operating environment for EU companies

The supply chain for minerals and metals includes the upstream activities: extraction, trade and smelting, which are performed in the producing country, and the downstream activities:  trade, further transformation and assembly into final products sold to consumers. Potentially this would include some 880,000 EU companies, the majority SMEs.

Smelter and refiners are considered to be well situated in the supply chain to identify the origin of the purchased minerals.  Although the OECD Due Diligence Guidance provides a framework for action, current compliance efforts are fragmented and interested companies are offered limited incentives to act

Existing EU foreign, development and other policy action

In order to break the link between resource extraction and conflict, the root causes should be addressed: conflict, weak governance and lack of development. Tackling these problems is part of the EU’s external action policy.

EU accompanying measures to promote responsible sourcing

Along with the proposal for a Regulation, a number of accompanying measures have been foreseen to encourage the responsible sourcing of minerals

Incentives for companies to promote responsible sourcing: Such as promotion of responsible practices by smelters and refiners through EU financial support; funding possibilities for SMEs for the voluntary certification scheme and public procurement incentives through the inclusion of performance clauses in the Commission’s own public procurement contracts.

Policy dialogues with third countries and other stakeholders: The EU would use its dialogues with governments in mining, producing and consuming countries to further develop a common understanding; and would engage with the countries where the majority of the smelters/refiners are located (China, Malaysia, Indonesia, Thailand and Russia) to promote its integrated approach for responsible sourcing.

Development cooperation with third countries: The EU would use its existing cooperation relations with Africa, Asia, Latin America and the Caribbean to address conflict-free and responsible mineral extraction and commercialisation.

Next steps

The proposal for a Regulation will be sent to the European Parliament and Council for examination.

The EU is expected to keep on working on the conflict minerals issue as part of its external action policy.