Have you ever wondered why the lights stay on when you unplug an electronic device? The device has no power supply, but stays lit up for a few moments, then slowly dims. It's probably because the device uses one of the four “conflict minerals” – in this context, tantalum. Tantalum is the key material in various electronic components, including capacitors, which store tiny reserves of electricity. The lights stay on whilst the capacitors release their stores of power.
Tantalum is in almost every electronic device you can think of, then. And tantalum is just one of the metals that is regulated under forthcoming EU laws. The metals, tin, tantalum, tungsten and gold ("3TG") (and their ores) that are subject to these laws are in:
- the complicated hardware that supports our corporate, retail and private computer and telecommunications networks (including the internet);
- devices that we depend on in our hospitals, surgeries, schools and colleges;
- our vehicles and transport infrastructure;
- electronic toys, and devices that we wear, connect to the internet and play music and other media on;
- cables and light bulbs!
These metals are essential to the constituent electronic components, their internal connectors, and the “glue” that holds them together in electronic circuits.
Scope and objective of the Conflict Minerals Regulation
The EU Parliament and EU Council adopted the Conflict Minerals Regulation on 17 May 2017. Key elements of the Regulation, relating to due diligence and disclosure obligations, are due to come into force across the EU on 1 January 2021.
The Conflict Minerals Regulation covers 3TG and is similar to the US Dodd-Frank Wall Street Report and Consumer Protection Act 2010 (Chapter 1502). It is notable that the Dodd-Frank Act applies to conflict minerals mined in the Democratic Republic of Congo and its adjoining countries, whereas the Conflict Minerals Regulation is wider in geographical scope and applies to 'conflict-affected' and high risk areas.
The Regulation seeks to break the nexus between armed conflict and the illegal exploitation of minerals, and seeks to assist in the prevention of exploitation in local mining communities.
Where do conflict minerals originate, and who uses them?
Here is a broad summary of significant locations, globally, where 3TGs are extracted:
Ore or metal
Malaysia, Thailand, Indonesia, Bolivia, Nigeria
Australia, Brazil, Mozambique, Thailand, Portugal, Nigeria, Zaire, Canada
China, Russia, Portugal, Austria, Bolivia
Worldwide, and particularly Indonesia, South Africa, Papua New Guinea, Uzbekistan, Russia, Mongolia, the Dominican Republic, Australia, Ghana
Given the use of 3TG in almost all electronic devices, 3TG passes through several tiers of the supply chain.
The ore that is mined needs to be processed to extract the metals; the metals will be refined; refined metals will be used as the raw materials to produce tools and components that are required for assembling electronic hardware; the hardware will be assembled. Each of these steps may consist of several interim stages of supply and production, involving a number of suppliers and distributors.
Which supply chain participants will be affected by the Conflict Minerals Regulation?
The overarching aim of the Conflict Minerals Regulation is to ensure that EU importers of 3TG, whether in the form of ore or metal, achieve the OECD international sourcing standards. The Regulation does not make any assumptions about which stages or tiers within the electronic hardware supply chain will be importers: it simply applies to the import of 3TG as ore or metal.
In theory, it could apply at any stage and in any tier. In practice, for electronic hardware it seems likely that ore will be imported by metal refiners; metal will be imported by component manufacturers; contract manufacturers and assemblers are perhaps unlikely to import ore or metal.
The Regulation distinguishes between “upstream” and “downstream” organisations. In broad terms, the distinction turns on how close you are to ore or metal in the supply chain. If you import ore or metal, you are part of the “upstream” supply chain; otherwise you are “downstream”. Comments published by the EU suggest that the new law it is not intended to apply to transporters, intermediaries, investors or end users.
Volume thresholds apply, and the EU comments that its aim is to ensure 95% coverage by the Conflict Minerals Regulation of imports of 3TG ore and metal into EU member states.
What do importers have to do to comply?
The Conflict Minerals Regulation aims to effect responsible sourcing practices for 3TG. Responsible sourcing by importers is required, but the Regulation also establishes the means and “encouragement” for other supply chain participants to follow suit, without actually imposing specific requirements on them.
The Regulation requires importers to carry out due diligence on the ore and metals that they import. The due diligence needs to focus on ensuring that the source of the ore and metals is documented, and that risk assessments are carried out where the ore or metals are found to be sourced from conflict zones.
Organisations other than importers do not have any direct obligations under the Conflict Minerals Regulation, even if they are in the 3TG supply chain. However, importers are required to make available their due diligence documentation to their immediate “downstream” purchasers in the supply chain. From comments made by the EU, there is an expectation that “downstream” supply chain participants should seek out and scrutinise the due diligence records, and take action based on the documented sources of ore and metal. In practice, we expect that conflict mineral obligations will become common in many supply chain contracts. Indeed, the aerospace industry (which is heavily influenced by US standards) has been using conflict mineral compliance obligations in supply chain contracts for many years.
How will the Conflict Minerals Regulation be enforced?
Each member state will appoint a supervising authority to ensure compliance. These supervising authorities will examine documents and audit reports. They may also carry out “on the spot inspections” of an importer's premises.
If a supervising authority identifies non-compliance, it will issue an order which requires the business to address its failings within a set time period. It will then follow up to ensure that it does so.
Of course, the sanction of the supervisory authority may not, in practice, be the most significant risk. For many businesses, the risk of losing its preferred supply status with a customer and reputational damage may be the most significant risks in practice.
The Conflict Minerals Regulation also provides for the EU to maintain a “white list” of compliant importers. There is thus an element of “carrot” as well as “stick”, and perhaps a business opportunity for importers to differentiate themselves from the competition.
What should my immediate steps be?
- Work out whether you are caught by the Conflict Minerals Regulation: do you import 3TG ore or metal?
- If you import: seek to understand the OECD responsible sourcing framework, and the additional requirements and provisions of the Conflict Minerals Regulation.
- If you do not import ore or metal, but you are a “downstream” participant in the electronic hardware supply chain: work out whether you buy ore or metal directly from an importer and (if you do) consider how you will use the importer's due diligence records.
- Identify relevant industry initiatives and seek to engage with these initiatives.
To some extent the impact will depend on whether the organisation has choices about whether to import 3TG into the UK or the EU.
After Brexit, the application of the Conflict Minerals Regulation in the UK largely depends on any final exit “deal” between the UK and the EU. Negotiations between the UK and the EU to date have emphasised both the UK's and the EU's commitment to respecting human rights. That said, the UK government has made clear that post-Brexit, the UK Parliament will be able to scrutinise and amend domestic law as it sees fit (subject, of course, to the terms of any final “deal” between the UK and EU).
It is likely that the balancing act will involve weighing the impact of the Conflict Minerals Regulation (and human rights) against ensuring the competitiveness of UK business. If the UK were to remain in the single market, the Regulation would continue to apply largely unchanged. That said, at the time of writing, it seems increasingly unlikely that the UK will remain within the single market.
If the Conflict Minerals Regulation does not apply in the UK due to Brexit, then it remains to be seen whether the UK will introduce similar legislation. If no legislation is introduced, the UK could perhaps become attractive to importers of 3TG who (a) are able to choose whether to import into the UK or EU, and (b) wish to minimise the impact on them (and their supply chains) of the Regulation.
For more guidance on the application of the Conflict Minerals Regulation and next steps for your business, please get in touch.