Mar 4, 2024
Conflict Minerals Compliance in the EU and the US: What Companies Should Know
Explore key insights on ensuring compliance
Introduction
Many of the products we use in everyday life, such as smartphones, jewelry, and electric cars, require minerals that are found in conflict-affected and high-risk areas of the world. This can lead to our innocent purchases inadvertently funding nefarious activities as demand increases for these resources.
It is estimated that six million people have been killed in the Democratic Republic of the Congo as a result of warfare related to the extraction and export of minerals. And this is one reason why legislators around the world are enacting laws related to how we source and manufacture certain minerals.
This article provides insight into conflict minerals compliance in the European Union and the United States of America. Find out which minerals the legislation refers to, how to comply with the laws, and discover best practices to follow if these substances form part of your supply chain.
What are conflict minerals?
In a general sense, conflict minerals are any such resources that are in high demand and which derive from countries that are affected by armed conflict or are still in a weakened post-conflict state. It also includes nations where there is weak governance or reports of international law violations, such as human rights abuses.
The EU has created a list of conflict-affected and high-risk areas (CAHRAs) as a guide.
The legislation in both the EU and the US concentrates on the four most commonly identified conflict minerals:
Tin – Used as a coating for other metals, for creating alloys, or to prevent corrosion. Also included in soldering and plating. You find tin in electronics, batteries, cable coating, roofing, and a range of other items.
Tantalum – A strong mineral, used in the manufacture of electronic components, particularly smartphones. Can be used for surgical implants such as skull plates as well as aircraft parts in alloy form.
Tungsten – Incredibly hard, allowing tungsten carbide to be used for drilling or cutting in industrial settings. It is also used in electrical, heating, and welding applications and as ballast in racing cars and airplanes.
Gold – Well-known for its use in the jewelry sector and as a precious metal for investments, gold is also highly conductive and can be used in electrical components and computer chips.
These four minerals are referred to as 3TG in the industry.
Why are conflict minerals important?
Conflict minerals are important because the purchase of the 3TG minerals throughout the supply chain from conflict-affected countries can fund violence, armed conflict, and human rights abuses.
In some nations, there are battles fought over the ownership of the minerals, with slave and forced labor often used in their extraction. Armed gangs or corrupt governments with control over their supply can use the payments from their purchase to cause further harm to others. Armed groups are said to profit by up to $180 million from the sale of conflict minerals, much of which is spent on weapons and facilitating further combat.
Other issues with minerals originating from CAHRA countries include smuggling of the resources out of the country, taking the funds away from that nation’s economy, and contributing to poverty for millions of people. There is also the widespread use of child labor in countries such as the Democratic Republic of the Congo, as well as the negative environmental impact of the trade.
Conflict minerals compliance in the EU and the US: Overview
The EU Conflict Minerals Regulation
The EU Conflict Minerals Regulation came into force in January 2021 with the aim of promoting the responsible sourcing of the 3TG minerals throughout the supply chain. EU Trade Commissioner Cecilia Malmström said of the regulation:
"The rules we agreed upon today are a huge step forward in our efforts to stop human rights abuses and armed conflict financed by trade in minerals. I'm convinced that it will have real impact on the ground, for the people suffering from such conflicts. I sincerely hope that the EU model will now set an example for other countries to follow,"
The regulation seeks to break “the nexus between conflict and illegal exploitation of minerals” and lay the groundwork for “peace, development, and stability,” specifying obligations for European importers of 3TG minerals that originate in CAHRAs.
Compliance requirements
EU importers must carry out robust due diligence on the movement of these minerals by:
Creating company management systems that are fit for purpose
Identifying and assessing the risk of conflict minerals from affected areas passing through their supply chain
Designing a strategy to mitigate risks identified and implementing that plan
Implementing an independent third-party audit of due diligence in the supply chain
Reporting on the measures taken regarding supply chain due diligence.
Importers of minerals need to confirm when and in which country the minerals were mined, as well as the quantities they import. Both mineral and metal importers should list the trade name and type of the minerals they import and list the names and addresses of their suppliers.
Those importing from at-risk countries should report the mine the minerals came from, where the minerals were consolidated, traded, and processed, as well as details of the taxes, fees, and royalties they have paid on them.
However, the rules are different, depending on where you are in the supply chain:
Upstream – Must comply with the regulation’s due diligence requirements on imports
Downstream importing metal-stage products – Must comply with the regulation’s due diligence requirements on imports
Downstream importing beyond the metal stage – No need to comply with the regulation’s due diligence requirements, but should make their due diligence reporting more transparent. They may need to report on their due diligence regarding conflict minerals as part of the Corporate Sustainability Reporting Directive (CSRD) if they fall in scope.
Note: “Upstream” refers to those companies involved in extracting, processing, and refining raw materials, such as smelters and mining firms. “Downstream” refers to those organizations that further process the metals, including those that make the finished product.
The US Dodd-Frank Act Section 1502
The Dodd-Frank Wall Street Reform and Consumer Protection Act became law in 2010 with the intention of improving accountability in the financial system in the US. As part of the act, there were a number of specialist sections added regarding specialized corporate disclosures.
Section 1502 deals with conflict minerals, relating to the same 3TG minerals as the EU legislation. Often referred to as the conflict minerals provision, it aims to encourage companies to seek out precious resources where the proceeds have not been used to fund armed groups or human rights abuses.
The law places the responsibility on companies to ensure they source minerals responsibly.
Compliance requirements
Publicly listed organizations must check their supply chains for any 3TG minerals that originate in the Democratic Republic of the Congo or neighboring countries. If they do appear, the company must address any risks of these resources being used for funding combat and ensure human rights have not been abused in their extraction or export.
This involves implementing a due diligence framework and reporting on the measures taken to the Securities and Exchange Commission (SEC) on an annual basis. The company must also prove that the minerals are “necessary to the functionality or production” of a product the company makes or of which the company contracts the manufacture.
The legislation does not prevent the company from sourcing minerals from these countries but rather demands they do so with due care and attention. There are three different outcomes of the due diligence possible:
DRC Conflict Free – For items originating in the Democratic Republic of the Congo or other nearby nations but which do not benefit armed groups. The company must appoint an independent auditor to confirm this.
Not Been Found to Be “DRC Conflict Free“ – the company must carry out an audit and identify the facilities that processed the minerals, the country of origin of the minerals, and the efforts made to determine the specific mine in its SEC report.
DRC Conflict Undeterminable – larger companies have two years and smaller firms four years to determine whether the minerals benefited armed groups. This means they must report on the products that contain the undeterminable minerals, the facilities that processed them, the country and specific mine of origin, if known, as well as the steps that will be taken to mitigate risks.
Who is required to comply with conflict minerals regulations?
In the US, it is any publicly listed American company that trades in 3TG minerals from the Democratic Republic of the Congo and surrounding nations, wherever they appear in the supply chain.
In the EU, the regulation applies to all EU importers of 3TG minerals, as well as smelters and refiners within the union. However, it also affects non-EU smelters and refiners, as EU importers must check on the processes in place at these organizations within their supply chain, wherever they are based. If they do not apply a sufficient level of due diligence in their processes, EU importers may not want to trade with them in the future.
The European Commission is developing a white list of refiners and smelters who source minerals responsibly that importers can refer to.
Best practices for conflict minerals compliance
Conduct thorough due diligence: Both the US and EU legislation take their lead from the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. Use this as a framework to identify and assess the risks in your supply chain, creating mitigation strategies.
Supply chain transparency: Map your supply chain to gain a clear understanding of where minerals are sourced and the journey they take from mine to product. This will help you effectively monitor where the risk factors are in your supply chain.
Supplier engagement and communication: Work closely with suppliers to ensure they understand your conflict minerals policy and compliance requirements. You should also understand how they establish the origin of the minerals they import. Provide guidance and support to help them meet the required standards.
Third-party audits: Use independent third-party audits to verify the source and chain of custody of minerals, ensuring they are conflict-free. This adds gravitas to your reporting and prevents accusations of cover-ups or misdirection.
Reporting and disclosure: Prepare and submit the reports required by the legislation in your jurisdiction. This could be the Conflict Minerals Report for the SEC or relevant disclosures under the EU Conflict Minerals Regulation. Report back in a transparent and timely manner.
Leverage technology: Utilize technology solutions, such as supply chain management software, to enhance traceability and manage compliance data more efficiently. This helps you engage directly with your supply chain and gain a better understanding of practices across its entirety.
FAQ
Why does the EU regulation only cover four minerals?
The 3TG minerals – tin, tantalum, tungsten, and gold – are the four minerals most likely to be associated with high-risk areas where armed conflict and human rights abuses are rife. This is why both the EU and the US legislation focus on these minerals alone.
What challenges do companies face in achieving conflict minerals compliance?
Gaining a clear understanding of the entire supply chain journey of the minerals is challenging for companies who are obliged to report on the source of their resources. It can take a great deal of time to manually uncover the information needed.
What happens if a company discovers conflict minerals in its supply chain?
Companies that discover the relevant conflict minerals in their supply chain must add this information to their report. They should list details about the mine the minerals came from, as well as where they were consolidated, traded, and processed. The taxes, fees, and royalties they paid on them must also be documented.
Conclusion
Conflict minerals compliance relies on a deep knowledge of your supply chain and the ability to analyze transactions and shipments to ascertain where the products came from and how they were extracted. In both the EU and the US, there are a range of reporting requirements for companies to ensure they use only sustainably sourced minerals.
Using Beebolt’s supply chain management platform helps in finding the information you need by tracking and recording the journey of the item and improving the collaboration opportunities with your suppliers. By working better together, you can gain a better understanding of the due diligence processes each company employs and the expectations on the sourcing of minerals. Start using Beebolt for free today.