The ‘conflict minerals’ regulation under preparation in the EU will likely go beyond the United States’ equivalent rules under the 2010 Dodd Frank Act. Hundreds of thousands of companies could end up being required to report on their sourcing of tin, tantalum, and tungsten. Better for them to get ready now, writes James Appleyard.
A ‘red-flagged’ bundle of emails has steadily been accumulating in many a sourcing and procurement professional’s inbox over the last two years. But as legislators iron out the finer points of the EU’s new conflict minerals law, how many companies can confidently say that they are fully up to speed with how the new regulations will affect their operations?
In potentially six months’ time, a whole range of businesses are likely to find themselves subject to an EU-wide mandatory system of self-certified supply chain due diligence for those who source 3TG (tin, tantalum, tungsten and gold) from ‘conflict-affected and high-risk areas’. Indeed, some of the wilder estimates suggest that the proposed regulation could apply to as many as 880,000 companies either in the EU or with EU interests. And of these, how many have done their homework, and how many will be playing compliance catch-up at the last minute?
Thanks to the conflict minerals reporting provisions of the US Dodd-Frank law, passed in 2010, a minority of EU-based companies now possess some experience of eliminating 3TG from their supply chain. For the majority of businesses, however, Brussels’ future mandatory reporting obligations will be their first attempt at tracing conflict minerals in the supply chain.
Discussions between the three central EU institutions are now underway to reach a final compromise on the draft law, and a final resolution is expected during Slovakia’s presidency of the Council of the European Union, in the second half of 2016. Businesses therefore need to act fast, to either develop an internal conflict minerals programme from scratch, or to scale up their existing compliance programmes to meet the responsible sourcing requirements that the EU is likely to introduce – potentially by the end of this year.
Widening scope of due diligence
Without a doubt, Brussels’ plan to widen the scope of conflict minerals due diligence beyond the limited geographical scope of Dodd-Frank will place severe strain on businesses’ nascent responsible sourcing capabilities. Many of the companies that have previously filed conflict minerals reports to the US Securities Exchange Commission have taken painstaking measures to ensure that the 3TG they source from the DR Congo comes from legitimate mines. However, Brussels’ decision to cast the compliance net further afield to include ‘conflict-affected and high-risk areas’ generates a fresh new wave of compliance headaches.
Shifting the geographical goalposts for conflict minerals supply chain due diligence could, in effect, mean not only tracing tantalum from DR Congo, but also tungsten from China, gold from Zimbabwe and tin from Myanmar. If past experience is anything to go by, the difficulties businesses encountered in meeting the reporting requirements of Dodd-Frank are highly likely to be replicated and indeed exacerbated by the EU’s more geographically far-reaching system. Therefore, now is the time for many businesses to rapidly take stock of the different actors along their supply chains from which they may be procuring tainted 3TG.
Identifying ethically tainted 3TG is not straightforward, however. As a precursor for responsible management, companies need to establish a dialogue with downstream and, if possible, upstream business partners to provide insight into their sourcing practices. On top of that, sourcing and procurement professionals must evaluate the degree to which the participation of their business partners in established certification schemes, such as the Conflict-Free Smelter Program, support their compliance with the EU’s proposed regulation.
Even if companies succeed in peeling back the layers of their mineral supply chains to the critical smelter/refinery level, further barriers to tracing conflict minerals may remain: the mixing of ores from different locations during the smelting process, threadbare supplier documentation, the smuggling of 3TG in areas of weak governance – the list goes on.
Although the finer points of the EU’s proposed conflict minerals law remain subject to Member State review, its entry into force is only a matter of time, and responsible businesses must rapidly gear up to ensure compliance with its provisions. Companies that have learnt the lessons from the initial roll-out of the Dodd-Frank reporting process may have a head start; however, the adoption of the right risk management programmes is going to be absolutely critical to meeting the EU’s conflict mineral due diligence obligations.