Worldwide: Global Compliance: Supply Chain Due Diligence And Conflict Minerals

Conflict Minerals is a term which usually refers to cassiterite (tin), columbite-tantalite (coltan), wolframite (tungsten) and gold mined in areas of conflict and traded by armed groups to fund their activities.

These minerals have a wide range of commercial applications including use in consumer electronics, aerospace and automotive industries.  The global demand for increasingly sophisticated electronic equipment has fuelled commercial demand for the minerals as well as concern about where and how they are sourced.

Although concern about the sourcing of Conflict Minerals has not yet resulted in specific UK or EU legislation, European companies may be caught by section 1502 of the Dodd-Frank Act where they are supplying US companies.  Instead there have been a number of voluntary initiatives in the EU and the UK such as the Electronic Industry Citizenship Coalition ("EICC") code of conduct, which encourages responsible sourcing of minerals, and the exercise of due diligence around the source and custody chain.

The EU's voluntary approach is about to change.  Earlier this summer the European Parliament voted in favour of passing a detailed regulation to tackle the trade in Conflict Minerals with a view to stopping Conflict Minerals entering the supply chain and ultimately the European market.  This approach differs significantly from the voluntary scheme proposed by the European Commission in March 2014, which focused on voluntary self-certification for direct importers of ores and metals and would affect approximately 400 European companies.  This is limited in scope and effect and achieves little more than the voluntary schemes which already exist.

In contrast, the regulation proposed by the European Parliament expressly acknowledges that the difficulties posed by Conflict Minerals are the responsibility of the whole supply chain and sets out separate obligations for (a) EU based importers of raw minerals, smelters and refiners which process and import minerals and concentrates and (b) downstream companies (traders of products/components which incorporate these minerals).  It is also aimed at bringing the standards set for European companies in line with those already in place under the Dodd-Frank Act for US companies.

The main elements of the proposal for EU based importers of raw materials are, to develop a corporate policy setting out commitments to responsible sourcing, implementing chain of custody strategies and systems to identify and address risks posed by importing conflict minerals.   The draft also proposes that a company's due diligence process be audited by an independent third party and be made publically available.  Smelters and refiners, regarded as being key points in the supply chain system owing to their being the last point at which the origin of materials can be traced, are subject to similar due diligence and third party audit obligations.

Downstream companies will be expected to take reasonable steps to identify and address risks arising in their supply chain before products containing the minerals/metals caught by the regulation end up in the European market.

While the proposal from the European Parliament is some way off being adopted, there are clear moves afoot to increase transparency in supply chains and to encourage companies to engage in responsible sourcing and ethical practices, whether by force of law or through public opinion.  Increased transparency, in particular due diligence processes which are audited, will result in increased costs to business.  However companies should consider whether, as with the Modern Slavery Act, these additional costs may mitigate the risk of what could potentially be a much higher reputational cost should a company be found to be buying its material from sources which ultimately fund conflicts.

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