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Sonal Sinha

Quality Insider

An Analysis of the EU Conflict Minerals Proposal

How does it differ from the Dodd-Frank Act, and what does it mean for EU companies?

Published: Thursday, June 5, 2014 - 15:55

While public U.S. companies were preparing to meet their first conflict minerals reporting deadline, their European counterparts were taking their first steps toward implementing a conflict minerals law.

On March 5, 2014, the European Commission proposed a draft regulation to stop the sale and import of minerals used to fund armed conflicts. European Union importers of tin, tantalum, tungsten, and gold (3TG) will now be required to voluntarily self-certify that they have exercised due diligence on the trade of 3TG in line with the guidelines of the Organisation for Economic Cooperation and Development (OECD).

The new proposal has met with its fair share of criticism—for its opt-in, voluntary self-certification approach; its narrow focus, primarily on raw material importers; and rather ambiguous scope covering all global regions that produce conflict minerals. It’s evident that, in framing the proposal, the commission sought to overcome some of the challenges faced by the U.S. Securities and Exchange Commission (SEC) in implementing Section 1502 of the Dodd-Frank Act. Prolonged debates around this law, even lawsuits against it, as well as complaints about the costs and difficulties involved in compliance, surely have prompted the European Commission to go a different way with its own EU proposal.

But how effective is the European Commission’s approach? How does the EU law compare with the provisions of Dodd-Frank Section 1502? And where does it fall short?

Dodd-Frank Section 1502 vs. the European Commission’s proposal on conflict minerals

Both regulations apply to the same four minerals—3TG—which are widely used across industries such as electronics, aerospace, manufacturing, automotive, jewelry, retail, medical devices, and energy. Both laws also strongly recommend that due diligence around the source and chain of custody of conflict minerals be aligned with the OECD five-step due diligence framework. Most important, both laws share a similar objective: to encourage responsible sourcing, and to end violence funded by conflict minerals extraction, production, and trade.

But that’s where the similarity between the two laws ends. The EU draft regulation proposes a few fundamental shifts.

Focus: More upstream than downstream

While Section 1502 applies to all publicly traded companies that manufacture or contract to manufacture products containing conflict minerals, the EU proposal is limited to European importers of 3TG. That’s about 400 companies, a rather limited number, considering that there are about 880,000 EU companies that deal with 3TG in some form or other. No doubt, many of these companies are small businesses, so why burden them with extra regulation? It also seems logical to go upstream to eliminate the problem altogether, by asking importers to ensure that 3TG minerals sourced in conflict-free regions do not enter the country. This approach is a stark contrast to the more complex Section 1502, which puts the onus on downstream companies to trace the source of conflict minerals all the way up to the source or smelter.

However, the European proposal has been criticized for focusing solely on importers of raw materials, and failing to target companies that import finished products such as mobile phones, which may already have had materials containing conflict minerals installed.

Scope: Global, not local

Section 1502 of the Dodd-Frank Act targets conflict minerals sourced from the Democratic Republic of Congo and surrounding regions. Yet, as the European Commission pointed out, one of the “unintended consequences” of the act is that companies wanting to avoid the litigation risks and costs of compliance will stop using African-sourced minerals altogether, and instead look to other mineral-rich regions such as Australia or Canada. As a result, many African miners could lose their source of livelihood.

The commission aims to counter this challenge by expanding the scope of the law to apply to minerals sourced from all “conflict-affected” or “high risk” areas. In theory, this approach is commendable. Yet practically, the scope is immense—tantalum alone can be sourced from Saudi Arabia, Egypt, Greenland, China, Africa, Canada, Australia, the United States, Finland, and Brazil. What would make any of these regions high-risk? How does one measure and quantify the risks associated with each region? These are a few of the questions that will need to be answered during the coming months.

Enforcement: voluntary, not mandatory

Perhaps the biggest difference between Section 1502 of the Dodd-Frank Act and the EU proposal is that one is mandatory and the other is not. The European Commission believes that by making the EU conflict minerals law voluntary, importers will not feel compelled to take their business out of Africa. Besides, many EU importers already comply with the Dodd-Frank Act due to their partnerships with U.S. companies, so why force them to comply with yet another, similar regulation?

This intention is sound. Yet, as human rights groups have pointed out, voluntary schemes don’t often have the desired effect. In the past, EU governments have endorsed voluntary due-diligence frameworks such as OECD, but how many companies have actually followed suit? Only a few visionaries like Intel and Apple have proactively implemented conflict-free sourcing practices. But for others, conflict minerals due diligence may not rank high on their corporate agenda—unless they are bound by law to do so. No doubt, one’s reputation can be affected by a lack of conflict-free sourcing practices. However, by making the EU law voluntary, the commission appears to be sending out the message that it’s OK to not source responsibly.

In answer, the commission insists that public procurement incentives will help ensure that companies comply with the rule. The commission promises to provide financial support for small and medium-size enterprises to carry out due diligence. In addition, it will make sure that EU companies that source responsibly are recognized. These are stronger incentives than those currently offered to organizations by the SEC in the United States. The commission also aims to publish an annual list of EU and global responsible smelters and refiners to help importers identify which smelters and refiners to source from.

What next?

If all goes according to plan, the EU conflict minerals law will become operational in 2015. Here are a few steps that EU companies can take to prepare for conflict minerals compliance:
Become familiar with the OECD framework. This go-to document for responsible sourcing lays out a five-step approach to conflict minerals due diligence:
1. Establish strong company management systems.
2. Identify and assess risk in the supply chain.
3. Design and implement a strategy to respond to the identified risks.
4. Carry out independent third-party audits of supply-chain due diligence at identified points in the supply chain.
5. Report on supply-chain due diligence.
Collect relevant supplier data. To understand the source and chain of custody of conflict minerals, it’s best to conduct surveys and self-assessments across the supply chain. Get a clear picture of the number of products that contain 3TG, as well as the suppliers associated with these products or components. Review and address unreasonable or unclear supplier responses.
Assess conflict minerals risks. A risk-based approach enables companies to prioritize their due diligence efforts, resources, and costs based on high-risk suppliers (e.g., those located in regions with limited regulation of minerals), as well as high-risk products (e.g., those containing a high percentage of tungsten).
Study CFSI reports. The Electronic Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI) have set up the Conflict-Free Sourcing Initiative (CFSI), which provides a wealth of information on prevalidated, conflict-free smelters and compliance best practices. The CFSI smelter list is a great guide for Reasonable Country of Origin Inquiries (RCOIs). It saves companies the time and effort of independently auditing their suppliers.

Conclusion

Conflict minerals have fueled some of the world’s most brutal human rights violations. The EU’s proposal is an important initiative that could make a significant difference in how conflict minerals are mined and used. There is a lot of debate—primarily about the proposal’s voluntary compliance scheme, which could prove ineffective, but as the proposal takes shape, it will be important for EU companies, both upstream and downstream, to start collaborating with each other, sharing information around minerals sourcing, and implementing measures to make their supply chains conflict-free. A proactive and well-planned conflict minerals management process that is initiated now could make a huge impact on future compliance efforts, especially once the EU law is rolled out.

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About The Author

Sonal Sinha’s picture

Sonal Sinha

Sonal Sinha is the vice president of industry solutions at MetricStream Inc., developer of enterprisewide governance, risk, and compliance (GRC) solutions. Sinha is responsible for driving solutions and strategy for MetricStream in consumer packaged goods, retail, and technology industries. She has more than a decade of experience as a risk management, audit, advisory, and compliance leader for consulting and technology companies including Google, Visa and KPMG.