The EU Conflict Minerals Regulation: Challenges for Achieving Mineral Supply Chain Due Diligence - By Daniel Iglesias Márquez

Editor’s note: Daniel Iglesias Márquez is an external researcher in Business and Human Rights at the Tarragona Centre for Environmental Law Studies. He holds a PhD from the Rovira Virgili University in Tarragona (Spain). Other main fields of interest include International Environmental Law, International Criminal Law and European law.


The EU and its Member States have largely endorsed the UN Guiding Principles on Business and Human Rights (UNGPs) in their Corporate Social Responsibility (CSR) strategy and have committed to supporting their implementation.[i] The UNGPs state that companies have a responsibility to respect human rights wherever they operate. Companies are therefore expected to take proactive steps to ensure that they do not cause or contribute to human rights abuses within their global operations and to respond to human rights abuses when they do occur. This implies establishing due diligence processes to identify, prevent, mitigate and record potential and actual adverse human rights impacts.

Although the EU has not played a constructive role at the Geneva negotiations for a UN Treaty on business and human rights,[ii] some modest developments in the right direction have been made at the EU level to foster a culture of ‘doing business right’ among companies in certain industrial sectors. Put differently, the EU has adopted regulations and directives that implement the UNGPs.

Due diligence requirements are the most common way of ensuring that business behavior meets social expectations. An example of this is the new EU Conflict Minerals Regulation (Regulation),[iii] which requires EU companies to ensure the responsible sourcing of minerals and metals. This EU law has an extraterritorial reach since due diligence requirements must be exercised by a company throughout its international supply chain. However, the Regulation raises a number of challenges ahead that may affect its purpose and implementation.


Conflict Minerals in the EU

In 2013, global trade in so-called 'conflict minerals' such as tin, tantalum, tungsten and gold (3TG) ores, concentrates, and metals was worth in excess of €123 billion.[iv] The EU has become one of the main destinations for these conflict minerals, which end up in products such as phones, computers, cars and jewelry.[v] Member States depend on the importation of mineral raw materials by European companies to sustain their modern-day high-tech societies. At the same time, the extraction of and trade in these minerals have been linked to corporate abuses (including human rights violations and environmental degradation) and have fueled some of the world’s most brutal conflicts in weak or unstable countries such as Colombia, the Democratic Republic of Congo (DRC), the Central African Republic (CAR) and Zimbabwe. In Colombia, the mining of tantalum, wolframite, coal and gold, which is controlled and taxed by armed groups, has cost the lives of millions and led to the forced disappearance of millions of others. This situation is also witnessed in the eastern DRC, where trade in tin, tantalum, tungsten and gold has provoked violent conflict in the provinces of North and South Kivu for almost a decade and a half. Similarly, in the CAR the trade in gold and diamonds has financed the conflict between the Seleka and the anti-Balaka.[vi] Although evidence shows that these minerals are associated with conflict, they are still used in products that are traded and sold on the European market.

Against this background, Guiding Principle 7 calls on States to assist businesses that are exposed to a greater risk of involvement in human rights abuses. Such assistance includes passing laws that require businesses to set in place adequate forms of human rights due diligence.


Responsible Mineral Supply Chain Efforts in the EU

In March 2014, the European Commission proposed a regulation to help reduce the financing of armed groups and security forces through mineral proceeds in conflict-affected and high-risk areas. The proposed regulation introduced a voluntary system of self-certification for 300 EU traders, 19 EU smelters/refiners, and over 100 EU manufacturers of components and semi-finished goods based on those minerals and metals. However, it lacked ambition, and the Commission’s non-legally-binding approach predominated in the text.

The proposal was a disappointment for civil society organizations and the European Parliament, which argued that a system of voluntary self-regulation would not be sufficient to convince EU upstream companies to take meaningful steps to improve their supply chain due diligence and demanded a strong mandatory law that would require all EU companies trading in minerals to undertake basic checks on their supply chains.[vii] In 2015 the European Parliament voted for radical amendments aimed at creating binding due diligence requirements on both upstream and downstream companies that bring minerals into the EU.[viii]

In 2016, after months of trilogue negotiations, EU institutions reached a political understanding on a law aligned with other landmark initiatives aimed at ensuring that minerals are sourced responsibly and do not fund conflict or human rights abuses, including the OECD Due Diligence Guidance for Responsible Supply Chain of Minerals from Conflict-Affected Areas and High-Risk Areas (OECD Due Diligence Guidance or OECD Guidance), Resolution 1952 (2010) endorsed by the UN Security Council, section 1502 of the US Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and various laws passed by several African countries, including the DRC and Rwanda, requiring companies to check their supply chains. The legal text of the EU Conflict Minerals Regulation was adopted and published early in 2017.


Aim, Scope and Obligations of the EU Conflict Minerals Regulation

The EU Conflict Minerals Regulation, which will enter into force on 1 January 2021, aims to ensure that minerals entering the EU do not finance conflict or result in human rights violations. The geographical scope of the EU Regulation is broader than its American counterpart, the Dodd-Frank Act,[ix] and targets imports not only from conflict zones and areas where a risk of armed confrontation exists but also from failed states and areas where widespread and systematic violations of international law, including human rights abuses, occur.[x] However, it excludes countries that are not conflict-affected or failed but in which documented links exist between grave human rights violations and minerals extraction, such as the use of child labor for hazardous work in Ghana’s gold mining industry.[xi]

The Regulation’s material scope comprises the 3TGs (article 1), since these are the resources that are most mined in conflict areas or in mines that rely on forced labor. However, this means that other minerals linked to conflicts and human rights abuses (such as diamonds, rubies, cobalt, coal and jade) are not subject to the same checks on their supply chains.

In line with the OECD Due Diligence Guidance, the EU Regulation combines mandatory and voluntary elements for implementing supply chain due diligence measures. This requires EU-based companies trading in the 3TGs (importers, smelters and refiners)[xii] to take responsibility for their supply chains and adopt the measures needed to prevent their trade being linked to conflicts or human rights abuses. These due diligence measures consist of five steps: establish strong company management systems, identify and assess risk in the supply chain, design and implement a strategy to respond to identified risks, carry out an independent third-party audit of supply chain due diligence, and report annually on supply chain due diligence (articles 4-7).

This five-step due diligence framework is not addressed at companies whose annual import volumes do not exceed the specified thresholds included in Annex 1[xiii] or to downstream companies that import the same minerals into the EU as part of electronic or other products (article 1). These are significant omissions since conflict minerals find their way into Europe mainly via the manufacture of tablets and smartphones, while the volume thresholds could leave the door open to trade in conflict minerals through small importers.


Challenges to Achieving the Aims of the EU Conflict Minerals Regulation

Adopting an EU Regulation on conflict minerals is just the first step to meeting the commitment to break the links between conflict, human rights abuses and the sourcing of minerals. Challenges must still be overcome to ensure that all EU companies source their resources responsibly. These challenges, which include, among others, engaging EU downstream companies, potential market distortion and lack of sanctions, may affect the implementation of the EU Regulation.

Arguably, due diligence is most effective when it involves companies throughout the supply chain. EU downstream companies are excluded from the scope of the Regulation and could create loopholes in the due diligence scheme by importing conflict mineral-derived products. It is expected that these companies comply voluntarily with the due diligence requirements and report on their sourcing practices. One of the main challenges in this regard is therefore to determine how to make sure that these companies do not import conflict mineral-derived products, by taking all reasonable steps to identify and address any risks arising in their supply chains for minerals and metals coming within the scope of this Regulation. The Commission has stressed that it will press large-scale manufacturers to disclose details of any products that may contain conflict minerals.[xiv] In line with the OECD Due Diligence Guidance that applies to all companies in the mineral supply chain that supply or use minerals sourced from conflict-affected or high-risk areas, EU downstream companies must therefore be provided with the tools they need to provide regular information on the source of their minerals and their trading routes. For example, the OECD Guidance suggests that downstream companies should visit the smelters and refiners in their supply chains and require them to source responsibly. Otherwise corporate complicity in human rights abuses may arise from a company’s business relationship with the entities in its supply chain. In this context, the UNGPs state that businesses should treat the risk of causing or contributing to gross human rights abuses as a legal compliance issue wherever they operate (Guiding Principle 23). Long supply chains and complex business relationships may therefore threaten the implementation of the EU Regulation.

The Regulation compliance is not limited to EU economic operators. Companies in third countries are de facto obliged to comply with the OECD Guiding Note for Upstream Companies Risk Assessment[xv] in order to access the EU market. This may create market distortion in the formal sector in the form of less demand and lower prices for minerals from certain conflict regions due to EU importers disengaging with upstream companies from those regions that fail to mitigate the risk of dealing in minerals.[xvi] Indeed, this unintended impact occurred after the implementation of the Dodd-Frank Act[xvii] when countries covered by the law suffered an immediate collapse of their formal 3TG exports, affecting the people that the Act was intended to help. The Regulation is greater in scope, as it covers all conflict-affected and high-risk areas, making it much more difficult to create an uneven regulatory landscape that may cause market distortions. However, it should be accompanied by measures to be deployed through political, diplomatic, and development cooperation means in order to ensure the effective implementation of the Regulation. In March 2014, the European Commission and the European External Action Service (EEAS) published, at the same time as the Commission proposal, a Joint Communication entitled Towards an Integrated EU Approach for the responsible sourcing of minerals originating in conflict-affected and high-risk areas, proposing measures covering different areas of intervention (incentivizing measures for the private sector, measures for policy dialogue with third countries and development cooperation measures) in order to alleviate some of the unintended consequences of the Regulation, like the creation of de facto embargos from certain conflict regions. These actions aim to assist and build the capacity of relevant stakeholders to transpose the due diligence requirements into a national framework and legislation to formalize the informal and small scale mining sector in areas like the Great Lakes region. The implementation of these ‘accompanying measures’ is essential to ensure not only a uniform approach towards mineral supply chain due diligence but also a positive socio-economic impact in conflict-affected and high-risk areas.[xviii]

Nationally, implementing the Regulation depends on the responsible authorities designated by Member States. These authorities should conduct ex-post checks on companies (article 10-11), be engaged, and have enough resources to fully implement the Regulation, otherwise the whole process involved in the responsible sourcing of minerals may slow down. It is noticeable that the Regulation focuses on compliance rather than on punishing companies (since it lacks sanctions). Member States set the rules that apply to infringements of the Regulation. When an infringement occurs, the competent authorities issue a notice of remedial action to be undertaken by the company (article 16). This hardly affects the conduct of EU upstream companies at all. Effective, dissuasive and proportionate sanctions would send out a clear message that failure to comply with the Regulation’s obligations will not be tolerated.


The Value of Experience with Other EU Due Diligence Law

Due diligence laws already exist at the national (French duty of vigilance law) and EU levels. This is not the first time that the EU has pursued due diligence systems through trade measures aimed at conditioning market access from third countries on compliance with EU values and standards. The EU Timber Regulation (EUTR), which aims to combat illegal logging, unilaterally extends obligations to all importers in order to prevent the placement of illegally harvested timber and its derived products in the EU market. Whether the timber is legal depends on whether it was harvested in accordance with the legislation applicable in the country of origin, even if that country is not a member of the EU.

The EUTR covers all companies that bring timber into the EU market for the first time. It requires companies to collect verifiable data on the timber’s origin so that it can be established that it was legally harvested for the entire chain of custody. Sometimes companies are also required to compile a risk inventory, analysis and assessment. However, as with the Conflict Minerals Regulation, certain types of timber and timber products are covered while other manufactured products such printed books, newspapers, manuscripts, musical instruments and seats with wooden frames are excluded.

The EUTR’s due diligence system affects business operations if the businesses wish to access the EU market, especially if they are from countries with high levels of corruption. Full implementation of the EUTR has been slow because the competent authorities in EU member states have been unwilling to begin enforcement.[xix] However, the situation is changing. Today, according to the Commission’s EUTR scoreboard, all 28 Member States have begun to conduct checks on companies and designated a competent authority, while only one Member State (Slovakia) has no legislation on penalties for breaching the EUTR.[xx] In recent rulings in Sweden[xxi] and the Netherlands[xxii], competent authorities sanctioned companies for not collecting enough verifiable information to demonstrate that the purchase complied with the laws of the country of origin. These cases both prove this paradigm shift is occurring and help to clarify the practical aspect of the due diligence requirements for companies. However, there is a need to increase efforts and priorities to correctly and constantly implement and enforce the EUTR[xxiii] and to expand its scope so that all wood-based products are covered.

Despite the notable differences between the Conflict Minerals Regulation and ETUR in terms of regulatory goals and design, both regulatory regimes require importing companies to provide information on the behavior of their suppliers. Experience gained from implementing and enforcing the EUTR should be taken into account for the Conflict Minerals Regulation in order to secure traceability and transparency in the global mineral supply chains of EU companies. The EUTR proves that mandatory due diligence measures are enforceable and therefore more pressure can be mounted onto EU companies and non-EU companies. Many national authorities have a good understanding of the flexible, progressive nature of the EUTR’s due diligence system. Despite its recent full implementation, companies are taking significant steps to meet the due diligence standards (trade association materials and dialogue with authorities).[xxiv] Therefore, this experience should provide mineral-trading companies with the insights they need to fully meet their due diligence requirements, especially since the Conflict Minerals Regulation will not enter into force until 1 January 2021.


Concluding Remarks

The EU Conflict Minerals Regulation is to be welcomed as an important step towards the responsible sourcing of minerals and metals. It may also be seen as the EU’s response to translating the UNGPs into effective legislation and policies that may significantly influence business conduct and, therefore, to support businesses meeting their commitment to implement the Guiding Principles, especially with regard to the second pillar. Arguably, the positive effects of the Regulation may eventually pave the way for greater legally binding due diligence obligations for EU companies in other sectors that outsource their production to third countries. These may include measures aimed at securing traceability and transparency since the European Parliament has repeatedly requested that the Commission should include rules on corporate liability for violations of human rights in all trade and investment agreements.

However, despite the Regulation’s positive aspects and opportunities, several challenges must be seriously taken into account before it enters into force. To achieve the responsible sourcing of 3TG and mitigate the risk of incomplete due diligence chains, legally binding obligations on disclosing information about sources of minerals and trading routes must be extended to EU downstream companies. The EU should also take political and diplomatic measures to avoid market distortion and involve crucial third countries in supporting the implementation of the Regulation. The first review on the functioning and effectiveness of the Regulation, scheduled for 2023, is another opportunity to afford responsible authorities the competence to impose penalties on companies that do not comply with their obligations. Indeed, the three-yearly reviews should play an important role in establishing a more ambitious Regulation that broadens its scope to other minerals that are linked to conflicts and human rights abuses and its obligations to downstream companies.

Given that the Conflict Minerals Regulation does not enter into force until 2021, the EU, its Member States, and companies have both the awareness and the time to overcome some of the obstacles it presents. Experience with similar instruments in other jurisdictions should provide a reference for improving its implementation and enforcement. There are therefore no excuses for not fully meeting supply chain due diligence requirements at this first stage of the process towards the responsible sourcing of minerals and metals in the European Union.


[i] Directorate-General for External Policies, Implementation of the UN Guiding Principles on Business and Human Rights, http://www.europarl.europa.eu/RegData/etudes/STUD/2017/578031/EXPO_STU(2017)578031_EN.pdf.

[ii] Friends of the Earth, EU Fails to derail UN Treaty Negotiation, http://www.foeeurope.org/un-binding-treaty-eu-derails-311017.

[iii] Regulation (EU) 2017/821 of the European Parliament and of the Council of 17 May 2017 laying down supply chain due diligence obligations for Union importers of tin, tantalum and tungsten, their ores, and gold originating from conflict-affected and high-risk areas, L 130/1.

[iv] European Commission, Website for DG Trade, http://ec.europa.eu/trade/

[v] See “A conflict minerals regulation that works. Strengthening the European Commission’s proposal for a ‘Regulation 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’”, https://www.globalwitness.org/en/campaigns/conflict-minerals/conflict-minerals-shaping-eu-policy/.

[vi] See, “Breaking the links between natural resources and conflict: The case for EU regulation. A civil society position paper”, https://www.globalwitness.org/en/campaigns/conflict-minerals/conflict-minerals-shaping-eu-policy/.

[vii] For more information on these issues, see also Steffen van der Velde, The End of Conflict Minerals on the EU Market?, Asser Institute Policy Brief 2017, pp. 1-11.

[viii] European Parliament. Conflict minerals: MEPs secure mandatory due diligence for importers, http://www.europarl.europa.eu/news/en/press-room/20161122IPR52536/conflict-minerals-meps-secure-mandatory-due-diligence-for-importers.

[ix] The Dodd-Frank Act applies only to the Democratic Republic of Congo (DRC) and nine adjoining countries.

[x] The European Commission is preparing guidelines to help firms identify conflict-affected and high-risk areas. The guidelines should be ready by the end of 2017.

[xi] Chiara Macchi, The Draft EU Regulation on Conflict Minerals: “Smart Mix” or Missed Opportunity? http://rightsasusual.com/?p=1106.

[xii] According to Commission estimates, the regulation applies directly to between 600 and 1,000 EU companies.

[xiii] The threshold for tin ores and concentrates is set at 5,000 kg, and for tungsten and concentrates at 250,000 kg. The threshold for tantalum or niobium and ores is to be determined through a delegated act of the Commission pursuant to article 1(2)(a) and article 15(b) Regulation.

[xiv] European Parliament. Conflict minerals: MEPs secure mandatory due diligence for importers, http://www.europarl.europa.eu/news/en/press-room/20161122IPR52536/conflict-minerals-meps-secure-mandatory-due-diligence-for-importers.

[xv] See OECD Guiding Appendix to Supplement on Tin, Tantalum and Tungsten, Guiding Note for Upstream Company Risk Assessment, p. 54.

[xvi] For more information on these issues, see Enrico Partiti and Steffen van der Velde, Curbing Supply-Chain Human Rights Violations Through Trade and Due Diligence. Possible WTO Concerns Raised by the EU Conflict Minerals Regulation, T.M.C. Asser Institute for International & European Law 2017-02.

[xvii] Commission staff working document impact assessment, SWD (2014) 53 final, Brussels, 5 March 2014, pp. 26-28.

[xviii] EurAc, Accompanying Measures to the EU Regulation on the Responsible Sourcing of Minerals. Towards a strengthening of the governance of the artisanal mining sector in the DRC, https://www.tecnologialibredeconflicto.org/wp-content/uploads/2017/04/EurAc2017-executive-summary.pdf.

[xix] See Wybe Th. Douma, Towards a ‘due diligence’ jurisprudence: The EU Timber Regulation’s requirements in courts, Doing Business Right Blog, 27 July 2017.

[xx] See EUTR newsletter from ClientEarth: https://www.clientearth.org/eutr-news-march-2016-to-march-2017/

[xxi] Förvaltningsrätten Jönköping (Jönköping Administrative Court), 5 October 2016, case nr. 2095-16, Almträ Nordic AB v Skogsstyrelsen.

[xxii] B.V. X v de staatssecretaris van Economische Zaken, Rechtbank Noord-Holland 24-05-2017, AWB - 16 5358, ECLI:NL:RBNHO:2017:4474. 

[xxiii] For more information about how Member States implement and enforce the EUTR, see https://www.clientearth.org/eu-timber-regulation-implementation-and-enforcement-updates/.

 

[xxiv] Timber Design and Technology, Big brands back battle against illegal timber, http://www.timberdesignandtechnology.com/big-brands-back-eu-battle-against-illegaltimber/.

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