EU Conflicts Minerals Regulation: guidance on implementation for companies
On 11 January 2019 the European Commission (Commission) adopted a text outlining methods for implementing its Conflict Minerals Regulation, which will enter into force in early 2021. Companies now have clearer guidelines on how to assess risks in their minerals supply chain.
The underlying regulatory framework
EU Regulation 2017/821 on conflict minerals (the "Conflict Minerals Regulation" or the "Regulation") was adopted by the European Union (EU) Parliament and Council in May 2017. It is to enter into force on 1 January 2021.
The Regulation aims to provide transparency and certainty in relation to the supply practices of certain EU importers of certain minerals and of smelters and refiners, by requiring them to scrutinise what they are buying and where from, to ensure that the relevant minerals have not been produced in a way that supports conflict. The Regulation mainly targets companies' due diligence mechanisms when sourcing minerals from conflict-affected and high-risk areas.
Am I affected?
The Conflict Minerals Regulation applies to:
- EU-established importers (the "Relevant Companies" – excluding companies that do not reach the volume-thresholds set out in Annex I of the Regulation)
- of certain specified raw materials: tin, tantalum and tungsten (as well as their ores) and gold (the "Relevant Materials");
- from conflict-affected and high-risk areas.
As set out in the Regulation, the countries or areas considered to be conflict-affected or high-risk are those (i) whose resources include minerals in high demand, either locally, regionally or globally and (ii) are either suffering from armed-conflict (civil war or post-conflict fragility) or are witnessing weak or non-existing governance and systematic violations of international law.
In August 2018, the Commission published Recommendation (EU) 2018/1149 which provides additional non-binding guidelines for identifying conflict-affected and high-risk areas. The document defines these areas following international law principles, elaborating on concepts such as "state of armed conflict", "fragile post-conflict" and "failed states". It also recommends sources of information to help companies identify these areas and lists so-called "red-flag" situations triggering the need for enhanced due diligence.
While only applying directly to EU-based importers of Relevant Materials, the Regulation will indirectly impact smelters and refiners based outside the EU. Relevant Companies concerned about sourcing from responsible third parties will check third parties' due diligence systems as well as manage and/or report on those systems found lacking. As such, third parties may be expected to report, even though they are not required to do so by the Regulation.
However, transporters or other intermediaries, investors and end-users in the relevant minerals sectors are outside the scope of the Regulation and should not be affected.
How do the new guidelines on implementation help?
Guidelines on compliance with the Regulation can be found in the supplemental Commission Delegated Regulation (the "Guidelines") adopted by the Commission on 11 January 2019. The Guidelines, which draw on a framework established by the Organisation for Economic Co-operation and Development in its "Due Diligence Guidance for Responsible Supply Chains from Conflict-Affected and High-Risk Areas" (the "OECD Methodology"), provide the methodology and criteria for the Commission to receive and assess applications by Relevant Companies for their due diligence schemes to be recognised, in compliance with the Conflict Minerals Regulation's requirements.
The Guidelines, among other matters, provide as follows:
- A Relevant Company's due diligence scheme will be recognised if aligned with the OECD Methodology (Articles 5 and 6). These steps require an importer to, among other measures:
- establish strong company management systems, by (among other things) adopting and communicating with suppliers and the public a company policy for the supply chain of minerals originating from conflict-affected and high risk areas; structure internal management to support supply chain due diligence; and establish a system of controls and transparency over the mineral supply chain;
- identify and assess risk in the supply chain, including by assessing risks of adverse impacts in light of the standards in the company's supply chain policy;
- design and implement a strategy to respond to identified risks, by (among other things) reporting findings of supply chain risk assessment to the company's designated senior management; and implementing a risk management plan, monitor performance of risk mitigation efforts and report back to designated senior management;
- carry out an independent third-party audit of supply chain due diligence (which may be verified by an independent institutionalised mechanism); and
- report annually on supply chain due diligence policies and practices, including possibly expanding the scope of their sustainability, corporate social responsibility or annual reports to cover additional information on mineral supply chain due diligence.
- In addition to receiving applications from companies, the Commission may request and review additional documents it considers relevant, interview key individuals within the companies and attend their third party audits (Article 6).
- Following assessment, a scheme will be rated "fully", "partially" or "not" aligned to relevant criteria, following which the Commission will produce a report (Articles 7 and 8). Relevant Companies will then be able to undertake remedial action if necessary and/or appropriate (Article 11).
- There is a limit to repeat applications, which may not be made within 12 months of a failed application (Article 10).
If a Relevant Company is found not to have complied with the Regulation, it will be ordered to address the problem(s) by a given deadline and the Commission will follow up with the Relevant Company to make sure it does so.
What next?
There are some 880,000 EU-based companies operating in manufacturing and potentially working with Relevant Materials. Of these, the Commission estimates around 600 to 1,000 EU importers to be directly affected by the Conflict Minerals Regulation and 500 smelters and refiners to be indirectly affected.
As such, and as a first step, companies should determine whether the Regulation applies to them, asking themselves: am I an importer of conflict minerals? This may require mapping their supply chains for Relevant Materials to understand their origins.
As a second step, bearing in mind the requirement to have due diligence schemes in place which comply with the Regulation from 1 January 2021, Relevant Companies are advised to examine their existing schemes and, if necessary, develop due diligence policies and programmes in line with the OECD Methodology.
Finally, Relevant Companies should start setting up and communicating their expectations to their suppliers (smelters and refiners). Such expectations may require them setting up and/or reinforcing their own due diligence mechanisms as well as implementing communication channels so Relevant Companies may fulfil their reporting obligations towards the Commission.
Key Contacts
We bring together lawyers of the highest calibre with the technical knowledge, industry experience and regional know-how to provide the incisive advice our clients need.
Keep up to date
Sign up to receive the latest legal developments, insights and news from Ashurst. By signing up, you agree to receive commercial messages from us. You may unsubscribe at any time.
Sign upThe information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.