by Cydney Posner
Last week, the European Parliament approved, by a vote of 558 to 17 with 45 abstentions, new rules on conflict minerals, 3TG—tin, tungsten, tantalum and gold. Proceeds from the sale of conflict minerals, which are used in the production of products such as mobile phones, cars and jewelry, are sometimes used to finance armed conflict in high-risk areas. The rules are designed to prevent the sale of conflict minerals from continuing to fuel this violence. According to the press release, the rules impose supply chain due diligence requirements based on the OECD Guidance on companies importing 3TG into the EU. The rules are expected to cover up to 95% of imports as of January 1, 2021. Following the European Parliament vote, the EU conflict minerals regulation will be finalized when formally approved by EU member countries and published in the EU Official Journal and will go into effect in 2021.
Sound familiar? It should (see this Cooley Alert), but, according to the Policy, the Guide and a draft of the EU regulation, there are also a lot of significant differences from the domestic version of the conflict minerals rule, such as:
- The U.S. rules cover conflict minerals only from the DRC and contiguous countries. The EU rules cover all countries that export conflict minerals into the EU, whether they export raw materials or metals; however, since more information is required for minerals from conflict-affected and high-risk areas, the Commission will ask experts to develop a list of these areas, which it will regularly update. The areas may extend beyond Central and West Africa to include some regions in South America and East Asia.
- Unlike Dodd-Frank, which applies to companies that manufacture, or have manufactured, products that contain necessary 3TG, the EU rules apply to EU-based “Union importers” of 3TG at the “metal stage,” whether in the form of mineral ores, concentrates or processed metals — they will not apply to companies that import products, such as electronic devices, that contain the minerals. As in the U.S., the rules will not apply to recycled metals or stock created before February 2013.
SideBar: According to a draft of the EU regulation, “‘Union importer’ means any natural or legal person declaring minerals or metals for release for free circulation within the meaning of Article 201 of Regulation (EU) No 952/2013 of the European Parliament and of the Council or any natural or legal person on whose behalf such declaration is made, as indicated in data elements 3/15 and 3/16 in accordance with Annex B of Commission Delegated Regulation (EU) 2015/24462….” “Release for free circulation” involves the collection of import duties and compliance with other policy measures and formalities applicable to imported goods, which ultimately confers on non-Union goods the customs status of Union goods.
- The regulation will apply directly to between 600 and 1,000 EU-based importers and indirectly affect about 500 smelters and refiners of tin, tantalum, tungsten and gold, whether they are based inside the EU or not. Large product manufacturers with more than 500 employees will be encouraged to join a voluntary EU registry that will be set up for companies to report on their sourcing practices.
- In contrast to the U.S. rules, which had no de minimis exceptions, the EU rules contain annual import threshold levels for the various minerals and metals. For example, under the current draft, importers of tin are required to comply only if they import more than 5000 kilograms per year.
- The European Commission will create a “white list” of global smelters and refiners that it has confirmed source responsibly, applying supply chain due diligence schemes recognized by the Commission.
- Unlike Dodd-Frank, which is primarily disclosure-based, EU Member State authorities will verify compliance by EU importers by examining documents and audit reports and, if necessary, carrying out on-the-spot inspections of an importer’s premises.
- The EU rules are largely more prescriptive than the U.S. rules, even though both look to the OECD due diligence framework. Importers will be required to adopt and communicate a supply chain policy (including standards consistent with the OECD model), to incorporate the policy into supplier agreements, to structure their internal management systems to support supply chain due diligence and to establish grievance mechanisms. In addition, the EU regulation requires EU importers to operate a chain of custody or supply chain traceability system with regard to minerals to:
- identify the imported minerals by trade name and type
- identify their suppliers by name and address
- indicate the country of origin of the minerals and
- indicate the quantities imported and when they were mined.
In addition, for minerals from conflict-affected and high-risk areas, importers must provide extra information on:
- the mine of origin of the minerals
- where the minerals were consolidated, traded and processed and
- the taxes, fees and royalties paid.
Similar requirements apply to metals.
Importers will also need to identify and assess the risks in their supply chains based on third-party audit reports and to implement risk-mitigation strategies and risk-management measures. In addition to reporting to EU Member State authorities, Union importers must make available to their immediate downstream purchasers the results of their supply-chain due diligence and must report publicly on an annual basis as prescribed by the rules.
Ironically, while the EU is adopting conflict minerals rules, the U.S. is looking at eliminating them. In February, Acting SEC Chair Michael Piwowar issued two statements — available here and here — on the conflict minerals rules, which advise that he had directed “the staff to consider whether the 2014 guidance is still appropriate and whether any additional relief is appropriate in the interim.” In addition, one of his statements includes his observations that the impact of the rule might undermine U.S. national security interests in the region. In that regard, Reuters has reported that the President “is planning to issue an executive order targeting [the conflict minerals disclosure rule],” based on the national security waiver provision in Dodd-Frank. (At the end of February, Acting Corp Fin Director Shelley Parratt reminded companies that, notwithstanding the two statements issued by Piwowar, the conflict minerals disclosure rules are still in effect. See this PubCo post.) In addition, it is anticipated that the Financial CHOICE Act 2.0, if adopted, would repeal the conflict minerals section in Dodd-Frank. (See this PubCo post and this PubCo post.)