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Alert Summary
On 19 May 2017, the European Parliament and Council published Regulation 2017/821 in the Official Journal of the European Union, laying down supply chain due diligence obligations for EU importers of tin, tantalum and tungsten, their ores, and gold (3TG) which originate from conflict-affected or high-risk areas. The Regulation establishes "an Union system for supply chain due diligence" which requires importers of minerals or metals containing or consisting of 3TG to establish a management system related to the sourcing of 3TG in the supply chain, carry out risk management activities, and validate due diligence through third-party independent audits of smelters or refiners in the metal supply chain. This Regulation enters into force on 9 July 2017, and importer obligations apply from 1 January 2021.
3E Analysis
Management System
Importers of 3TG are required to:
- Adopt a supply chain policy for conflict minerals, and communicate it to suppliers and to the public;
- Strengthen engagement with suppliers by incorporating said policy into contract and agreements;
- Establish a grievance mechanism;
- Establish and operate a supply chain traceability system capable of providing the country of origin of the minerals and if possible the quantities and dates of extraction; and
- For metals requires a supply chain traceability system which provides information including the smelters and refiners of the metals with audit records, or the country of origin of the minerals in the supply chain of those smelters and refiners;
- Among other obligations as set out in Article 4.
Like the U.S. conflict minerals law (Dodd Frank Section 1502), the EU Regulation follows the OECD Due Diligence Guidance and requires the incorporation of these principles into said policy and practices.
Risk Management
Importers are also required to identify and respond to risks of adverse impacts in their mineral supply chain, consistent with the OECD Due Diligence Guidance, including the exertion of pressure on suppliers to prevent or mitigate found risk. These efforts may include suspending trade with a problem supplier. If an importer of minerals pursues risk mitigation efforts with a supplier while continuing trade or temporarily suspending trade, the importer is required to "consult with suppliers and with the stakeholders concerned, including local and central government authorities, international or civil society organisations and affected third parties, and agree on a strategy for measurable risk mitigation in the risk management plan."
Third-Party Audits
Where audits are not available concerning the due diligence practices of the smelters and refiners in the supply chain, the importer must carry out their own audits via an independent third-party. To help with this effort, the Commission will publish a list of compliant smelters and refiners.
Public Disclosure
Annual reports on supply chain due diligence must be published for public consumption, including a summary report of the third-party audits. Importers must also make available to member state competent authorities the reports of any third-party audit, or other evidence of compliance, and must provide due diligence information to their immediate downstream purchasers.
Recognition of Supply Chain Due Diligence Schemes
Industry associations, governments, or other groupings may apply to the Commission to have their supply chain due diligence scheme recognized by an implementing act that grants that scheme a "recognition of equivalence" with the requirements of this Regulation.
List of Affected 3TG
The specific metals and minerals affected are set out in Annex I along with the applicable volume thresholds. According to the Regulation, Annex I will be amended in 2020 by establishing the volume thresholds for tantalum or niobium ores and concentrates, gold ores and concentrates, tin oxides and hydroxides, tantalates and carbides of tantalum.
The Regulation also applies to minerals and metals that are obtained as by-products.
List of Responsible Smelters and Refiners
The Commission will adopt an implementing act which establishes the list of "global responsible smelters and refiners." These smelters and refiners will be deemed to be in compliance with this Regulation.
Exemptions
Low-volume exemptions are provided; see Annex I for thresholds. Recycled metals are exempted except that public disclosure must still be provided [following Article 7(4)]. Existing stocks are also exempted if they were created "in the current form" prior to 1 February 2013.
Enforcement
Member states must designate competent authorities responsible for the application of this Regulation by 9 December 2017. Such authorities must then carry out ex-post checks to ensure that importers are compliant with the Regulation.
Business Impact
Beginning in 2021, importers of 3TG into the European Union must be compliant with the provisions of this Regulation, including the establishment of a risk management system related to the sourcing of 3TG from conflict affected or high risk areas.
The EU Regulation, while hailed as a major step, has also been criticized for not including manufactured materials which contain 3TG. While the Regulation affects 95% of all imports of 3TG into the EU, it does not affect 3TG which is incorporated into products, components or other materials which are imported into the EU. With this in mind, the EU authorities have stated that future mandatory measures may be implemented to incorporate companies with products containing 3TG into supply chain due diligence requirements. Manufacturers have been encouraged by EU authorities to establish their own voluntary due diligence programs and to report on such programs via the EU's Non Financial Reporting Directive.
Impact on Companies subject to U.S. Conflict Minerals
The enactment of this EU Regulation should have a positive impact on companies subject to the U.S. conflict minerals law. The EU Regulation will create more pressure on smelters and refiners around the world to become compliant with conflict-free protocols, such as the Conflict Free Sourcing Initiative (CFSI). U.S. compliance efforts may also be favorably impacted by the fact that the EU Commission has committed to producing a list of the names and addresses of global responsible smelters and refiners; it will also note those that source from conflict areas. To the extent that EU importers of 3TG have suppliers in common with those affected by the U.S. law, obtaining compliance from the supply chain should also be easier with more pressure for conflict-free sourcing coming from European buyers as well.
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