STRATEGIC ISSUES EUROPEAN UNION : DAVIES ET AL : (2017) 29 ELM 169 Strategic Issues Europea Uio The EU Coflict Mierals Regulatio: from iceptio to implemetatio Paul Davies, Michael Gree ad Ei Nge Htut Latham & Watkis, Lodo Itroductio Regulatio 2017/821 of the Europea Parliamet ad of the Coucil of 17 May 2017, which outlies the supply chai due diligece obligatios for importers of ti, tatalum ad tugste their ores ad gold origiatig from coflict-affected ad high-risk areas (Coflict Mierals Regulatio) was published i the Official Joural o 19 May 2017. 1 This publicatio follows the adoptio of the Coflict Mierals Regulatio o 3 April 2017. By way of backgroud, the Europea Commissio had issued the first draft regulatio i 2014. The Coucil of the EU ad the Europea Parliamet each cosidered the regulatio ad proposed their ow versios. Negotiatios were udertake to achieve a regulatio text that would be acceptable to all three istitutios. I Jue 2016, there was a sigificat breakthrough o the more cotetious elemets of the proposed text. O 22 November 2016, the trilogue egotiatios were successfully cocluded. The Coucil of the EU approved the regulatio i December 2016. O 24 Jauary 2017, the regulatio was approved by the Europea Parliamet s Iteratioal Trade Committee. Fially, o 16 March 2017, the Europea Parliamet formally approved the Coflict Mierals Regulatio by a sigificat majority of 558:17 (with 45 abstetios), the fial step before publicatio i the Official Joural. 2 What are coflict mierals? The term coflict mierals most commoly refers to four elemets (ti, tatalum, tugste ad gold, which are also kow as 3TG). Coflict mierals are mierals mied i coditios of armed coflict ad huma rights abuses, which may be sold or traded by armed groups. 3 This has bee a problem i coflict zoes ad, i particular, i the Democratic Republic of Cogo, where they have bee liked with fudig killigs, violece, rape ad other huma rights abuses. Key participats i the idustry ca kowigly or ukowigly be affected by havig coflict mierals withi their supply chai, whether they are dowstream, upstream, itermediaries or ivestors. 4 These coflict mierals ca the eter supply chais of multiatioals as they are widely utilised i the automotive, electroics, aerospace ad toolig idustries, ofte edig up i cosumer products such as cars, laptops, light bulbs, mobile phoes ad jewellery. How was this area iitially regulated? Various volutary ad regulatory measures were implemeted to esure the resposible sourcig of mierals ad prevetio of huma rights abuses. 5 I 2011, the Orgaisatio for Ecoomic Co-operatio ad Developmet published guidace o due diligece for resposible supply chais of mierals from coflict-affected ad highrisk areas (OECD Guidace). 6 This provided detailed recommedatios o effective mieral purchasig decisios ad practices to eable compaies to respect huma rights ad avoid cotributig to coflict. The OECD Guidace has bee recogised as a iteratioal framework for due diligece ad subsequet US coflict mierals regulatios have referred to it. I particular, the US Dodd-Frak Act s coflict mierals law was approved i 2012 ad required compaies to udertake relevat due diligece ad disclose the use of mierals origiatig i the Democratic Republic of Cogo or a adjoiig coutry. EU Member States had also separately edorsed this OECD Guidace. A report produced by a group of 59 o-govermetal orgaisatios, published i September 2013, 7 called o the Europea Commissio to pass a strog law to prevet Europea busiesses fuellig coflict ad huma rights abuses through their purchases of atural resources, such as ti, gold ad diamods. The NGO coalitio ecouraged the EU to build o existig legislatio such as the US Dodd Frak Act s coflict mierals law, requirig EU-based compaies to udertake the relevat supply chai checks that would meet the iteratioal due diligece stadards developed by the OECD. * Paul Davies is a parter, Michael Gree a Cousel ad Ei Nge Htut a traiee solicitor at Latham & Watkis. 1 Trade i coflict mierals: EU Coflict Mierals Regulatio published i the Official Joural PLC (23 May 2017). 2 Europea Coflict Mierals Regulatio: Details o what EU importers must do www.coflictmieralslaw.com. 3 Guidace: Coflict Mierals (19 Jue 2013) www.gov.uk/guidace/ coflict-mierals. 4 Trade i Coflict Mierals: risks ad regulatios PLC (16 March 2017). 5 Proposed EU Regulatio o Coflict Mierals: commetaries ad media coverage https://busiess-humarights.org/e/coflict-peace/coflictmierals/proposed-eu-regulatio-o-coflict-mierals-commetariesmedia-coverage. 6 OECD Due diligece guidace for resposible supply chais of mierals from coflict-affected ad high-risk areas www.oecd.org/corporate/ me/miig.htm. 7 Breakig the liks betwee atural resources ad coflict: the case for EU regulatio www.globalwitess.org/sites/default/files/breakigtheliks %28eg%29.pdf.
170 (2017) 29 ELM : STRATEGIC ISSUES EUROPEAN UNION : DAVIES ET AL Geeral backgroud to the Coflict Mierals Regulatio The EU udertook a public cosultatio betwee March ad Jue 2013, 8 which was followed by further detailed cosultatios ad a impact assessmet of a possible regulatio o coflict mierals. O 19 February 2014, the Europea Parliamet s developmet committee voted i favour of a report, 9 which stresses that a EU regulatio should create a legally bidig obligatio for all upstream ad dowstream compaies to udertake supply chai due diligece to idetify ad mitigate the risk of coflict fiacig ad huma rights abuse. This report was edorsed by various o-govermetal orgaisatios ad civil society groups ad the Europea Commissio was urged to follow its recommedatios. O 5 March 2014, the Europea Commissio aouced that it would be settig up a EU system of self-certificatio for importers of ti, tatalum, tugste ad gold ad published its draft regulatio (Draft Regulatio), which was accompaied by a joit Commuicatio o resposible sourcig of mierals origiatig i coflictaffected ad high-risk areas. 10 Reactio to the Draft Regulatio The Draft Regulatio was met with strog criticism from o-govermetal orgaisatios. 11 A coalitio of huma rights groups issued a statemet flaggig that a opt-i self-certificatio scheme available to a limited umber of compaies is likely to have a miimal impact o the way that the majority of Europea compaies source atural resources. 12 The Draft Regulatio desigated resposible importers volutarily to keep their supply chais free of materials used to fiace armed coflict (sourced primarily from the Democratic Republic of Cogo, Agola ad South Suda) through a self-certificatio scheme based o global ethical sourcig guidelies. It was questioed as to how much bite this would have, cosiderig that this was essetially a volutary opt-i scheme with o madatory obligatios. The Draft Regulatio also oly covered four key mierals (ti, tatalum, tugste ad gold) withi its scope. Campaigers questioed why the Europea Commissio 8 Public cosultatio o a possible EU iitiative o resposible sourcig of mierals origiatig from coflict-affected ad high-risk areas http://trade.ec.europa.eu/cosultatios/idex.cfm?cosul_id=174. 9 Report o promotig developmet through resposible busiess practices, icludig the role of extractive idustries i developig coutries www.europarl.europa.eu/sides/getdoc.do?pubref=-//ep//nonsgml+ REPORT+A7-2014-0132+0+DOC+PDF+V0//EN. 10 Regulatio of the Europea Parliamet ad of the Coucil settig up a Uio system for supply chai due diligece self-certificatio of resposible importers of ti, tatalum ad tugste, their ores ad gold origiatig i coflict-affected ad high-risk areas http://trade.ec.europa. eu/doclib/docs/2014/march/tradoc_152227.pdf. 11 Europe goes soft o coflict mierals, makig huma rights optioal (21 March 2014) www.theatio.com/article/europe-goes-soft-coflictmierals-makig-huma-rights-optioal/. 12 Proposed EU law will ot keep coflict resources out of Europe, campaigers war (5 March 2014) www.globalwitess.org/e/ archive/proposed-eu-law-will-ot-keep-coflict-resources-out-europecampaigers-war/. overlooked the fact that other atural resources were fuellig coflict ad huma rights abuses. It could be stated that the Europea Commissio missed a opportuity to ifluece the behaviour of a much broader cross sectio of global players o the supply chai. To esure that atural resources from coflict or high-risk areas did ot eter the EU market, it was argued that the Draft Regulatio should also target maufacturers ad compaies that import fiished products i the supply chai. Fiished products made i Asia, Africa or Lati America were ot caught withi the scope of the Draft Regulatio. The Draft Regulatio was also submitted to the EU Parliamet for scrutiy ad it was cocluded that it did ot go far eough. The EU Parliamet recommeded: madatory certificatio of EU smelters ad refiers ad volutary compliace measures for importers of 3TG ad dowstream compaies, icludig importers ad maufacturers of compoets ad fiished products. Whe this was put to the vote i May 2015, the EU Parliamet voted i favour of a madatory scheme for all stakeholders i the supply chai ad ot just smelters ad refiers, addressig a key criticism levelled at the Draft Regulatio. This started the log period of iformal trilogue egotiatios betwee the EU Coucil, the Parliamet ad the Europea Commissio. I the backgroud of these egotiatios there was a itese period of campaigig by idustry isiders, stakeholders ad other iterested parties. No-govermetal orgaisatios advocated for a wide madatory regulatio to be applied to the etire supply chai, whilst idustry represetatives argued for a more targeted ad less oerous regime. 13 The Coflict Mierals Regulatio: key provisios 14 Were the criticisms of the Draft Regulatio addressed? The fial form of the Coflict Mierals Regulatio treads the middle poit betwee these two coflictig views (a madatory obligatio across the whole supply chai as opposed to a opt-i scheme). The result is a madatory obligatio for compaies operatig i the EU that are miig, refiig or importig 3TG (upstream parties) to perform due diligece o their supplies ad certify that their supply chais are free from coflict mierals. This madatory obligatio will ot, however, cover large dowstream parties such as maufacturers, sellers or importers of fiished products cotaiig 3TG; istead, they will be ecouraged to report volutarily. 15 13 Sustaiable commodities: EU Coflict Mierals Regulatio (24 March 2017) www.reedsmith.com/e/perspectives/2017/03/sustaiablecommodities-eu-coflict-mierals-regul. 14 EU Coflict Mierals Regulatio fially published i the Official Joural (19 May 2017) www.coflictmieralslaw.com. 15 Trade i Coflict Mierals: risks ad regulatios ( 4).
STRATEGIC ISSUES EUROPEAN UNION : DAVIES ET AL : (2017) 29 ELM 171 Who is covered? All importers ito the EU of mierals or metals cotaiig or cosistig of ti, tatalum, tugste or gold fall withi the scope of the Coflict Mierals Regulatio. A importer is defied by referece to the EU Customs Code ad icludes ay metals or mierals that are declared for free circulatio i the EU. The volume threshold has bee set so that at least 95 per cet of the total imported volumes ito the EU of each metal ad mieral will be regulated. Importers whose aual import volumes are below a certai threshold amout are ot covered this exemptio was iteded to provide relief to smaller eterprises. The Europea Commissio will moitor the gold market ad EU gold imports to make sure that progress o resposible sourcig is ot impeded by these low volume exemptios. What metals ad mierals are covered? Recycled metals are ot covered by the Coflict Mierals Regulatio. The followig mierals ad metals (ad products cotaiig them) are covered: ti ores ad cocetrates tugste ores ad cocetrates gold ores ad cocetrates tugste oxides ad hydroxides tugste carbides tatalum carbides gold, uwrought or i semi-maufactured forms, or i powder form ti, uwrought ti bars, rods, profiles ad wires ti, other articles tugste, powder tugste, uwrought, icludes bars ad rods obtaied simply by siterig tugste wire tugste bars ad rods, other tha those obtaied simply by siterig, profiles, plates, sheets, strip ad foil tatalum, uwrought icludig bars ad rods, obtaied simply by siterig powders tatalum bars ad rods, other tha those obtaied simply by siterig, profiles, wire, plates, sheets, strip ad foil. Obligatios of EU importers EU importers will be required to carry out the followig actios: 16 adopt a supply chai policy (which must be cosistet with the OECD Guidace) ad commuicate iformatio about such policy to both suppliers ad the wider public icorporate supply chai policies ito cotracts with suppliers 16 Sustaiable commodities: EU Coflict Mierals Regulatio ( 13). esure that seior maagemet oversees supply chai due diligece ad maitais records relatig to iteral processes desiged to support it set out a grievace mechaism that deals with cocers i relatio to the due diligece process gather iformatio (evideced by documetatio) i relatio to the source ad ature of i scope 3TG, with additioal disclosure requiremets applicable to mierals from coflict-affected ad high-risk areas assess risks i their supply chai based o available third-party reports o EU smelters ad refiers ad, where o such reports are available, obtai idepedet third-party reports as part of the supply chai due diligece make aual public disclosures about their supply chai due diligece. Maufacturers, importers ad sellers of fiished products ad compoets that cotai 3TG will ot have madatory obligatios eforced upo them, although they may be required to provide volutary reports. There are also o obligatios placed o trasporters ad other itermediaries. Locatios covered It should be oted that there is o accepted defiitio for coflict-affected ad high-risk areas. It has previously bee defied as a operatig eviromet that may icrease the risks of eterprises beig complicit i gross huma rights abuses committed by other actors. The Geeva Academy is developig criteria ad idicators to idetify coflict-affected areas (i lie with iteratioal humaitaria law), as well as high-risk areas i specific zoes withi a coutry. Such areas may be idetified by, for example, (i) the presece of a iteratioal or oiteratioal armed coflict, (ii) widespread or serious huma rights violatio ad/or (iii) political ad social istability or repressio. 17 The Coflict Mierals Regulatio focuses o coflict mierals from all coflict-affected ad high-risk areas aroud the world. This is i direct cotrast to the US rule, which has a focus o coflict mierals from the Democratic Republic of Cogo ad adjoiig coutries oly. Which due diligece framework applies? It is left up to the Europea Commissio to establish the specific supply chai due diligece schemes that will apply but it is expected that the due diligece reviews will be udertake i accordace with the OECD Guidace, uless other frameworks are also accepted by the Europea Commissio. 17 Cocept ote for a side evet at the Busiess ad Huma Rights Forum 2013 www.ohchr.org/documets/issues/busiess/forumsessio2/ Evets/3Dec.1.SideEvetProposal_GeevaAcademy.pdf.
172 (2017) 29 ELM : STRATEGIC ISSUES EUROPEAN UNION : DAVIES ET AL Reactios to the Coflict Mierals Regulatio The Europea Parliamet had scored a victory over the madatory due diligece requiremets for importers from all coflict-affected ad high-risk areas ad ot just Cetral Africa. However, some criticism remais over the fial versio. For example, smaller importers of mierals ad metals (jewellers ad detists) will ot be required to comply with madatory due diligece requiremets ad will be required to regulate themselves. However, the volume thresholds for the exemptios appear to be relatively high (up to 100 kg of gold), potetially eablig serious mieral traders to avoid adequate regulatio. EU Member States also maaged to push for the iclusio of a series of import thresholds that would further decrease the umber of compaies required to comply a represetative for Amesty Iteratioal labelled these volume thresholds as dagerous loopholes. Furthermore, compaies that brig i the same mierals but i compoets or fiished products will ot be covered, arguably leavig aother loophole. It is evisaged that the three-year review clause (see The Coflict Mierals Regulatio i the log term below) will fill i this regulatory gap but it remais to be see how effective this scrutiy will be. 18 Outstadig issues A list of resposible smelters ad refiers will be published by the Europea Commissio so that compaies ca ascertai if ay of these source their metals or mierals from coflict-affected ad high-risk areas. 19 Oe the mai items also still expected from the Europea Commissio is a o-bidig hadbook, which will assist compaies i ascertaiig what costitutes a coflict-affected ad highrisk area. The cotets of this hadbook might be surprisig to may as it will flag areas that iclude may parts of the world from which importers source their mierals ad metals. Iterestigly, eve havig sigificat commercial relatioships i such regios could subject o-importers to questios about their sourcig ad operatios. 20 Furthermore, the Coflict Mierals Regulatio calls for the Europea Commissio to adopt several Delegated Acts, which will create implemetig provisios. Uder these legislative istrumets, the Europea Commissio will amed thresholds for certai cocetrates ad for certai ti-related ad tatalum-related substaces. These Delegated Acts will also set out the methodology ad criteria to determie if other due diligece schemes comply with the Coflict Mierals Regulatio. The Europea Commissio is to cosult with the OECD i order to develop this framework. The Coflict Free Sourcig Iitiative (CFSI) is carryig out a pilot assessmet to 18 Various articles o the Lodo miig etwork http://lodomiig etwork.org/2016/11/eu-agrees-madatory-law-o-coflict-mieralsbut-exemptios-cause-cocer/. 19 EU Coflict Mierals Regulatio fially published i the Official Joural ( 14). 20 Fial EU Coflict Mierals Regulatio: oly the publicatio step remais (3 April 2017) www.coflictmieralslaw.com. ascertai how the idustry s stadards, systems ad implemetatio alig with the existig OECD Guidace. It should be oted that the CFSI s coflict mierals reportig template (CMRT) has become the due diligece iformatio gatherig tool of choice for all idustries ad importers withi the scope of the Coflict Mierals Regulatio will most likely use this tool as well. 21 Immediate ext steps The Coflict Mierals Regulatio etered ito force o the 20th day followig its publicatio i the Official Joural ad therefore applied from 9 July 2017 owards. However, certai articles (specifically, the due diligece obligatios) are oly due to apply from 1 Jauary 2021. I the iterveig period, adherece to due diligece guidelies (icludig the OECD Guidace ad Lodo Bullio Market Associatio Resposible Gold Guidace (LBMA Guidace)) is more a issue of compliace rather tha a legal requiremet. 22 Despite this, importers are ecouraged to apply the due diligece procedures as soo as possible as there could potetially be egative fiacial ad reputatioal cosequeces of havig relatioships with smelters ad refiers that do ot comply with the required cosultatios ad approved third-party audit process requiremets. Therefore, importers should be proactive ad start maagig their supply chais well i advace of the Jauary 2021 cut-off date, as these processes ca be time cosumig ad expesive. 23 Compaies that fall withi the scope of the Coflict Mierals Regulatio will be required to use the OECD Guidace (or ay other guidelies that may be approved i the future) as the framework for the supply chai due diligece procedures. 24 I relatio to the UK ad i light of the Brexit decisio, the legislatio will apply to UK compaies withi the scope of the Coflict Mierals Regulatio for at least as log as the UK is part of the EU, although the applicatio of the legislatio after this poit is ot certai. O 10 October 2016, the Secretary of State cofirmed that the Great Repeal Act will covert existig EU law ito domestic law. I the iterveig period ad to the extet ot already doe so, it would make sese for the relevat compaies to start makig preparatios to comply with the framework. 25 Regulatio should cosider the followig prelimiary actios: 26 amig iteral coflict mierals team developig coflict mierals policy mappig supply chais ad gather product recipes ad materials cotet data 21 ibid. 22 Trade i Coflict Mierals: risks ad regulatios ( 4). 23 EU Coflict Mierals Regulatio fially published i the Official Joural ( 14). 24 Fial EU Coflict Mierals Regulatio: oly the publicatio step remais ( 20). 25 Trade i Coflict Mierals: risks ad regulatios ( 4). 26 Europea Coflict Mierals Regulatio: details o what EU importers must do ( 2).
STRATEGIC ISSUES EUROPEAN UNION : DAVIES ET AL : (2017) 29 ELM 173 developig supplier egagemet iformatio moitorig the adoptio of Delegated Acts by the Europea Commissio reviewig the outcome of the CFSI OECD pilot assessmet (results are expected i 2017) 27 ad moitorig ay geeral developmets that may limit, weake or susped the US coflict mierals rule. The Coflict Mierals Regulatio i the log term By 30 Jue each year, Member States will be required to report to the Europea Commissio o the implemetatio of the Coflict Mierals Regulatio ad specifically o otices of remedial actio issued by their competet authorities, as well as o third-party audit reports. The Europea Commissio will also, by 1 Jauary 2023 ad every three years afterwards, review the fuctioig ad effectiveess of the Coflict Mierals Regulatio. It will take ito accout its impact o the groud, icludig the promotio ad cost of resposible sourcig of the mierals from coflict-affected ad high-risk areas ad the impact o EU ecoomic operators. A importat additioal cosideratio will be the accompayig measures outlied i the Joit Commuicatios of 5 March 2014, which could determie if additioal madatory measures will be required. 28 It is expected that with these moitorig measures i place the true efficacy of the Coflict Mierals Regulatio ca be determied ad the huma rights abuses at the cetre of these coflict mierals ca be addressed, which is arguably the overarchig aim of this legislatio. 27 CFSI welcomes Europea Uio Coflict Mierals Regulatio www.coflictfreesourcig.org/about/media-ews/ews/cfsi-welcomeseuropea-uio-coflict-mierals-regulatio/. 28 Sustaiable commodities: EU Coflict Mierals Regulatio ( 13).