New EU legislation will enforce mandatory supply chain checks on importers of four minerals sometimes used to fund armed groups in conflict areas. But while many companies have already made significant investments in responsible sourcing and transparent supply chains, more regulation could come at a cost, Sanne Wass reports.


When the White House drafted an executive order to suspend its conflict minerals law earlier this year – part of US President Donald Trump’s plans to de-regulate America – technology companies such as Apple, Intel and HP were quick to respond, saying that they would continue to uphold the high standards, regulated or not.

Broadly speaking, the conflict minerals rules of the 2010 Dodd Frank Act impose mandatory supply chain due diligence and annual reporting obligations for US companies using what has been dubbed ‘3TG minerals’ – tungsten, tantalum, tin and gold – which have been linked to armed conflicts and human rights abuses, mainly in the Democratic Republic of Congo (DRC) and neighbouring countries. The most common of the four, tantalum, can be found in almost every small electronic device, from laptops and DVD players to mobile phones and hearing aids.

Critics, such as the US Chamber of Commerce and the National Association of Manufacturers, have said the law is too burdensome and expensive, and have claimed it would not achieve congress’ overall objectives.

And while it was expected that corporations would greet the prospect of less regulation with open arms, Trump’s attempt to lift yet another compliance burden prompted a different reaction.

“We do this because it’s the right thing to do,” Apple said in a statement after the draft executive order was leaked to the press in February.

Being associated with conflict minerals is simply bad for business – and the risk only becomes more significant with rising public and NGO scrutiny and customer expectation that brands maintain high sustainability and human rights standards.

“Conflict mineral disclosure will become a growing reputational issue, if not a legal one,” said Verisk Maplecroft, a global risk analysis company, in its 2017 geopolitical risk outlook published in May.

It’s not just pressure from customers: financial considerations play an important role too, with the term ‘impact investing’ – investments into companies with a positive social or environmental impact – flourishing around the globe.

Ironically, the American debate of scrapping requirements on conflict minerals comes right as politicians on the other side of the Atlantic are taking measures towards regulating the exact same area. And while industry professionals in the EU agree that association with armed conflict is a high reputational risk for any business, they have – just like in the US – a mixed take on the need for regulation and the consequences it may have for companies in the sector.


Legal issues

EU companies will have to start preparing for the new legislation approved by the European parliament on March 26, which will take effect in 2021. Before then, businesses covered by the law are required to adopt a supply chain policy in accordance with the OECD guidance on the matter, and incorporate it into contracts with their suppliers. They also have to put in place traceability systems identifying the name and type of minerals, quantities imported, suppliers and
the country and date of origin.

The EU rules differ slightly from those in the US in that they apply to a more narrowly-tailored group of companies, focusing entirely on upstream importers of the minerals, metals and their ores (namely mining companies, traders in raw materials, smelters and refiners) – which, it is argued, reflect the last stage at which it is possible to verify information on the minerals’ origin.

For those companies, the new regulation will come with an additional compliance cost, but most will be well prepared, explains John Sayers, partner in the trade finance team of law firm Simmons & Simmons.

“The legislation is obviously new, but the underlying issues around conflict minerals have been around for some time, along with general pressure to make supply chains more transparent,” he says. “This legislation wouldn’t have come in if there wasn’t some sense that the importers, the refiners, had transparency and understanding of their supply chains. So yes, there will be an ongoing cost connected with the legislation, but lots of the preparatory work has already happened.”

He says that, typically, refiners will source the majority of their minerals under long-term supply contracts with trusted exporters. “So when the legislation kicks in, EU refiners should have a stable sellers list, knowing that the minerals originate from the same source as in the last two, five, 10 years. It is only over time, as existing supplies dry up or become uneconomic, or new suppliers come online, that refiners will have to factor in compliance costs when considering whether to onboard new suppliers,” Sayers explains.

He adds that since the monitoring and enforcement of the law are delegated to member states, importers will focus on whether this, in practice, could result in differing regulatory standards applying across the EU.

But for trade finance bankers, who play a role in facilitating the import of minerals, there is a concern that the new regulation will add to the already heavy compliance burden on banks, and in effect discourage some from financing the sector.

Legally speaking, the regulation doesn’t put direct obligations on financial institutions, but banks will be concerned with reputational risk and being penalised for unintentionally financing companies accused of breaching the legislation.

“What the banks probably will default to is including some form of compliance undertaking that references the regulation in appropriate finance documentation,” Sayers says.

He adds that multinational government-funded institutions will be particularly concerned about the reputational risks of inadvertently funding activities engaged in by their bank counterparties.

“If you are going for a large financing involving an export credit agency or a multilateral organisation, they may look at this regulation and want some kind of formal comfort from their counterparty, whether it be the banks or the borrower, that the regulation has been complied with,” Sayers says.


Unintended consequences

Trade finance bankers at ING and Deutsche Bank tell GTR they already have high standards and due diligence procedures when engaging in the mineral import financing.

“One of the big non-financial risks that we consider on every transaction is the reputational risk,” says Deutsche Bank’s global head of structured commodity trade finance, John MacNamara. “As an institution, we have quite a lot of rules and guidelines around our social responsibilities. Obviously, you have to be more careful with some jurisdictions than others, but it’s a consideration on every single deal, irrespective of geography. We have no interest or risk appetite for handling conflict anything, whether it’s minerals or anything else.”

But, he adds, the new regulation will bring added administrative workload for banks operating in the sector. “The difference is that now we have to write down that we have zero risk appetite for these things, and then we have to check that we’ve complied with it on a regular basis, and then somebody has to check that we’ve checked,” MacNamara says.

One issue in particular is that the rules have a larger geographical scope than those of the US, which have focused only on imports from the DRC and surrounding territories. The EU regulation, on the other hand, covers imports of minerals from any country.

“One concern we are having is that it goes beyond the high-risk countries,” says Maarten Koning, ING’s global head of structured metals and energy finance. “For high-risk countries, this is already fully incorporated, and we are very strict on these areas. If we now also need to apply this for the rest of the world, then it really becomes an additional administrative requirement.”

His comments are echoed by MacNamara: “What the regulators who come up with these things miss is the law of unintended consequences. When the EU says: ‘Identify all conflict minerals,’ you are going to have to test all minerals to see if any have conflicted origin. You have got to check everything from the 195 countries in the world. That’s a very big job. It’s a much bigger task than I think the regulators realise.”

Various academics and commentators have already brought up the issue of unintended consequences of the conflict minerals law in the US. They argue that the resistance of companies to the costs of due diligence and reporting has led to a de facto embargo of minerals from the DRC, which has only devastated the country’s economy further.

MacNamara believes the new EU rules could discourage some banks from financing minerals altogether. “If we have rules against conflict minerals, the easy thing for a bank of a 100,000 people, of whom less than 2,000 are involved in trade finance, is to say: ‘Too difficult, we’re not going to finance minerals at all.’ Because the infrastructure you need to make sure that you are complying with these new regulations is just not cost-effective, so let’s just not finance minerals, full stop,” he says.

Koning agrees that, on top of an already big compliance burden, the EU conflict minerals law could be the “final straw that breaks the camel’s back” for some banks.

“I can imagine that some of the banks implementing these policies might come to the conclusion that the risk is increasing, and the administrative cost to manage it becomes disproportional,” he says. “In that sense, some banks might decide to look at smaller traders again and re-evaluate their relationships with them.”


Long-term benefits

While some bankers fear unintended consequences, other sources believe the new regulation will push even more companies to voluntarily take up the same standards. This is especially true for technology brands, which are more visible to stakeholders and particularly threatened by social issues in the supply chain.

“The most progressive and forward-thinking companies know the importance of identifying and addressing risk in their supply chains. And they are going to do it whether it’s required or not,” says Patricia Jurewicz, director of Responsible Sourcing Network, a US-based organisation that helps companies build responsible supply chains.

“There’s a lot of advantages for companies to be proactive on having more transparency and accountability in their own supply chain,” she says, adding that it will not only help them comply with conflict minerals rules, but also a range of other expectations and regulations concerning the environment and human rights.

Tim Mohin is the chief executive at Global Reporting Initiative, headquartered in the Netherlands, and has previously led CSR teams at AMD, Apple and Intel in the US. Having seen these companies go through the process of mapping out their supply chains over the last decade, he is optimistic about the positive effects of the new European regulation.

“When I first heard of this issue, I was working at Apple in 2007. I’ll never forget that day,” he says. “I thought to myself: ‘How are we ever going to do this?’ We were having trouble at that time just dealing with the first and second-tier suppliers, and now we’re talking third, fifth, seventh,” he says.

“That was 10 years ago. Fast-forward to now, and there was a heck of a lot of work to get here: companies like Apple, have figured out their supply chain from end product to raw material, and that has created huge benefits. Because they can manage their conflict mineral status, but other issues too.”

“In the long run, what I’ve seen on the Dodd Frank side, and this will probably be true on the EU side as well, is that those costs get minimised as people get more familiar with the process,” Mohin says.

“The question about unintended consequences is a good one and a fair one. However, we know that this is not an excuse to ignore the problem. The problem exists and is being funded by the supply chain, and so the supply chain has an obligation.”


In short: The EU’s new conflict minerals regulation

  • From January 1, 2021, EU importers of tin, tantalum, tungsten and gold will have to carry out due diligence on their supply chains.
  • The EU anticipates the law will apply directly to between 600 and 1,000 importers and indirectly to 500 smelters and refiners, some of which are based outside of the EU.
  • The regulation does not apply to EU importers who import less than a certain amount, nor to recycled metals or stocks created before February 1, 2013.
  • Downstream companies are not covered by the mandatory requirements, but they will be encouraged to adopt voluntary procedures, tools and mechanisms to make their supply chains more transparent.
  • Importers will be required to disclose to downstream purchasers the results of their due diligence, and publish an annual report on their activities.
  • The European Commission is preparing guidelines to help firms identify conflict-affected and high-risk areas, which should be ready by the end of 2017.
    The commission will also produce an “indicative, not exhaustive” list of high-risk areas, which will be updated regularly, as well as a whitelist of responsible smelters and refiners that are deemed to fulfil the requirements.
  • EU member states are responsible for checking that EU importers respect the law.