Technology, armed conflict and the illegal exploitation of minerals - new EU regulation

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4 min read

The EU Conflict Mineral Regulation has been adopted by the EU Parliament and EU Council with key elements relating to due diligence and disclosure obligations due to come into force on 1 January 2021.

The conflict minerals covered by the EU regulation are tin, tantalum, tungsten, their ores and gold ( 3TG).  The EU Regulation 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 EU Regulation is wider in geographical scope and applies to conflict-affected and high risk areas.

Where do conflict minerals typically appear?

3TG appears in a variety of consumer electronic devices, for example, mobile phones, laptops and MP3 players.  In the context of the automotive sector, 3TG can be found in a range of component.  Tantalum is used in audio equipment and climate control systems.  Tin is often found in fuel tanks, wiring and radiators.  Gear teeth and bearing components frequently use tungsten and gold is sometimes used in on-board electronics and fuel cells.  The development of smart car technology is likely to result in further use of 3TG.  Given the use of 3TG in the automotive sector, 3TG passes through several tiers of the supply chain.

What are the key features of the EU Regulation?

The overarching aim of the EU Regulation is to ensure that EU importers of 3TG achieve the OECD international sourcing standards.  It also seeks to ensure that smelters and refiners adopt responsible sourcing practices for 3TG.  It is considered that these measures will help to break the nexus between armed conflict and the illegal exploitation of minerals and will  assist in the prevention of exploitation in local mining communities.

A notable feature of the EU Regulation is the requirement on certain businesses in the supply chain to carry out due diligence to ensure that they are sourcing 3TG responsibly. 

Who does the EU Regulation apply to?

Different obligations apply depending upon where a business is in the 3TG supply chain.  The EU Regulation distinguishes between “upstream” businesses and “downstream” businesses.

“Upstream” businesses are those that extract, process and refine raw materials.  These are mining companies, raw material traders, smelters and refiners.  “Downstream” businesses are those that process metals further along in the supply chain to manufacture a product.  Typically, downstream companies will be a trader, a component producer, a contract manufacturer/assembler and OEMs. 

The obligations as between upstream and downstream businesses are different.  Upstream businesses are required to comply with mandatory rules on due diligence when they import into the EU.  With respect to downstream companies, these are divided into two categories:

  1. those businesses importing “metal stage” products.  These businesses are also required to meet the mandatory due diligence rules; and
  2. those businesses operating beyond the “metal stage”.  These businesses do not have direct obligations under the EU Regulation, although they are expected to use reporting so as to seek to ensure that the due diligence carried out on their supply chain is transparent. 

How will the EU Regulation be enforced?

Each member state will appoint a supervising authority to ensure compliance with the EU Regulation.  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. 

What should my immediate steps be?

  • Work out whether you are caught by the EU Regulation.  Even if you aren’t, consider whether any of your customers fall within the scope of the EU Regulation.  If they do, they may well seek to flow-down obligations onto your business.
  • Seek to understand the OECD responsible sourcing framework.
  • Identify relevant industry initiatives and seek to engage with these initiatives.

Brexit impact?

With respect to the status of the EU Regulation post-Brexit, this largely depends on the 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 be weighing the impact of the EU Regulation (and human rights) against the ensuring the competitiveness of UK business.  If the UK were to remain in the single market, the EU Regulation would remain largely unchanged.  That said, at the time of writing, it seems increasingly unlikely that the UK will remain within the single market.

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