EU Regulation on responsible sourcing of minerals

EU trilogue negotiations on the draft regulation started on February 1, 2016. Over the coming months, the European Commission, the European Parliament and the Presidency of the European Council will attempt to agree on a compromise text.

The ravages of the mineral trade linked to conflict and human rights abuses have been widely documented. ^[1]See for example several information documents from members of our coalition: https://www.globalwitness. org/documents/18087/NGO_Coalition_Briefing_-_EU_Regulation_on_ … Continue reading This problem remains current. Several reports and events have recently highlighted the urgency of addressing this challenge, which damages the reputation of companies and investors who do not fulfill their due diligence duties.

• On August 20, 2015, Kardiam, a Belgian company, has been placed on the list of companies targeted by UN sanctions “for having supported armed groups in the Central African Republic […] through the illegal exploitation or trafficking of natural resources (diamonds, gold)” Kardiam denied the UN allegations during his discussions with Global Witness.
• There Berne Declaration recently released a report which noted that the world's largest gold smelter, based in Switzerland, "purchases gold produced by children." The Berne Declaration specifies that this company rejected his requests for meetings and did not respond to questions sent to him by email.
• • Amnesty International and Afrewatch recently published a report which reveals that “major brands in the electronics sector, such as Apple, Samsung and Sony, do not carry out basic checks to verify that their products do not contain cobalt extracted in mines by children”. The appendix to this report summarizes the responses companies gave to Amnesty's findings ^[2]THE company responses can be found in the annex to the English version of the report, starting on page 75..

The Council's mandate does not provide an effective European response to this problem. Let us first note that the Council is proposing a voluntary system which excludes the vast majority of companies which market tin, tantalum, tungsten and gold ("3TG") on the European market - whether at raw or as components of devices such as laptops or motors. Furthermore, this system significantly undermines the main international framework previously endorsed by the EU, namely the OECD Due Diligence Guidance. By doing so, the Council waters down the very meaning of being a “responsible” company. The OECD Due Diligence Guidance was negotiated and agreed by industry, governments and civil society. It already forms the basis of legislation in other countries and has been endorsed by 34 OECD member countries, 19 other countries and the UN Security Council.^[3]The OECD Guide has been endorsed by 34 OECD member countries, as well as by Romania, Lithuania, Latvia, Brazil, Argentina, Peru, Morocco, the 12 member states of the… Continue reading. It is also on this Guide that new Chinese industrial standards on due diligence applied to mineral supply chains are based.^[4]Global Witness, December 2, 2015, Global Witness welcomes China's adoption of progressive new mineral supply chain guidelines. Furthermore, the OECD Guidance specifically implements the UN Guiding Principles on Business and Human Rights within mineral supply chains, which outline the responsibility of businesses to respect human rights ^[5]Office of the UN High Commissioner for Human Rights, 2011, Guiding Principles on Business and Human Rights: Implementing the “Protect, … Continue reading. EU companies are already implementing the OECD due diligence framework, largely as a result of Section 1502 of the US Dodd-Frank Act (DFA 1502), which requires companies submitting reports financial institutions under US law that they engage in due diligence in accordance with the OECD standard.^[6]For example, Vodafone recently admitted to Amnesty International that it only exercises OECD-compliant due diligence on tin, tantalum, tungsten and gold because it is… Continue reading.

• According to the Commission's estimates, 40 dual-listed companies are directly subject to the requirements of DFA 1502.
• In addition, up to 17 % EU companies that work with "3TG" are indirectly affected by the requirements of the US law since they supply US customers ^[7]European Commission, March 5, 2014, Impact Assessment, p. 13, p. 19, p. 23 and p. 36..
• Under the impetus of DFA 1502, joint industry initiatives are already helping companies — in very concrete ways — to comply with OECD standards.

It is therefore very worrying that the Council is proposing to re-discuss and weaken this established standard, in a way that will not help EU companies which are already implementing it and which, in a way , will limit the effectiveness of the EU's response to the trade in conflict minerals. The contrast between the Council's position and the EU's discourse on responsible supply chains is striking. Last fall, the EU backed G7 commitments to encourage sustainable global supply chains European Commission, October 12, 2015, EU announces support to improve workplace safety and working practices in producing countries. Under its new trade strategy, the Commission argues that “responsible management of global supply chains is essential to align trade policy with European values”. In the context of conflict minerals, it undertakes to “build on the work of the OECD” ^[8]European Commission, October 2015, Trade for all: http://trade.ec.europa. eu/doclib/docs/2015/october/tra-doc_153879.pdf">Towards a more responsible trade and investment policy, p. 7, p.24 and p. 25. The EU Regulation offers Member States an excellent opportunity to deliver on these commitments. Governments have taken steps to make supply chains more accountable in other sectors—food, lumber, finance, and financial services. Thus, very recently, the United Kingdom has shown leadership on the issue ofmodern slavery. However, governments have been slow to promote such a level of transparency and accountability along mineral supply chains, where both aspects are sorely lacking. Of all the corruption cases studied by the OECD in 2014, the extractive industries were the first sector represented (19 %).^[9]OECD, December 2, 2014, OECD report on international corruption. How is the Council weakening the OECD international standard? The Council's mandate falls short of the OECD Due Diligence Guidance in three respects: 1. It proposes specific due diligence measures that are significantly less stringent than the due diligence standard. OECD (Articles 4 and 5 of the preliminary draft EU Regulation). By imposing lower requirements on certain companies — notably manufacturers and traders — the mandate makes them appear to be “responsible” companies even if they do not comply with OECD standards. For example :

• The Council significantly reduces the assessment of supply chain risks expected from metal manufacturers and traders (“metal importers”). It restricts the information that these companies must review to "available audits", without taking into account other data in their possession (for example the policy governing their relations with their suppliers and information on the countries from which the foundries source) or in the public domain (e.g. UN and NGO reports). In addition to not being up to OECD standards, this system also has very concrete consequences. Thus, a metal importer may be compliant with the Regulation, and therefore be considered "responsible", if it reviews the audit reports of the smelters in its supply chain and concludes, solely on the basis of these audit reports, that these foundries are responsible. It is free to ignore all other information, even if it knows full well that one of the smelters behaved irresponsibly, for example by not properly examining its supply chain to identify a possible risk of financing of conflict or human rights abuses.
• In the event that a smelter's audit report is not available, the Council only expects the metal importer to carry out ad hoc risk assessments. However, the OECD clearly specifies that in such situations, companies should put in place individual and permanent risk management processes in order to respond to risks at any time and at any level of their supply chain. 'supply.
• The Council removes any reference to the OECD Guidance as a standard of due diligence with which metal importers must comply to identify, assess or mitigate risks associated with their supply chains. Thus, these companies have no obligation to assess or manage risk in accordance with any standard, and the authorities of the Member States have no standard on the basis of which to evaluate the practices of these companies.

We understand that due diligence standards have been narrowed in part to address concerns surrounding small and medium-sized enterprises (SMEs). However, SMEs play an important role in mineral supply chains and they are capable of complying with OECD standards, provided they have appropriate tools and guidance. Due diligence has been designed to give SMEs the flexibility they need; in fact, these standards are adaptable depending on the size of the company, the place it occupies within the supply chain and the influence it exercises over its suppliers. A recent study in the timber sector found that company size “is not necessarily important when it comes to managing risk within supply chains. […] Even very small businesses are able to implement a system that works for them.” Global Timber Forum, July 22, 2015, Survey on due diligence finds SMEs to be performing well. See also the website of the Timber Trade Federation 2. The mandate does not cover a significant number of downstream companies, ignoring those who are the first to place products containing 3TG on the EU market. The OECD Guidance makes clear that due diligence is designed to include a much larger number of downstream companies than just the metal importers covered by the Council's mandate. Such an approach is conducive to improving the transparency and resilience of supply chains, where companies can collaborate on information sharing, jointly lobby suppliers (including suppliers who are outside the EU), design programs and develop best practices at sectoral level. Downstream companies have a unique role to play in this regard: they are likely to be among the most powerful and profitable companies in the world, to exert considerable pressure on upstream suppliers and to become key players in sectoral programs. By focusing on 300-400 importers, Member States are missing an important opportunity to leverage much greater commercial influence. 3. The mandate does not take into account the progressiveness and flexibility of due diligence provided for in the OECD Due Diligence Guidance (see Consideration 9(a) and Article 1, paragraphs 2(b) and (d)) of the position of the European Parliament).

• Due diligence is proportionate — it is not a “one size fits all” strategy. It gives businesses the flexibility they need to tailor due diligence measures to their particular circumstances, including their size, industry and position in the supply chain.
• Due diligence is not a one-time compliance exercise. This involves companies proactively, continuously and individually identifying and managing risks associated with their supply chains, and demonstrating that progress is being made over time. These fundamental principles have been taken up in several European and national legislations in force. Legal entities are required to take “appropriate” measures to identify, assess and manage the risks of money laundering and terrorist financing, which measures must be “proportionate to [their] nature and [their] size”. ^[10]EU Anti-Money Laundering Directive, Article 8, paragraphs 1 and 3.. The British anti-corruption law, the Bribery Act, requires organizations to put in place procedures to prevent the payment of bribes, measures which must be proportionate to the risks they actually face, and to the nature, scale and complexity of their own activities. Companies must monitor these procedures and make improvements.^[11]UK Department of Justice, March 2011, Guidance about procedures which relevant commercial organizations can put into place to prevent persons associated with them from bribing (section 9 … Continue reading.

Our coalition of more than 80 civil society organizations hopes that Member States will take this opportunity to show leadership and engage in constructive dialogue to send unequivocal messages to businesses, investors, consumers and people affected by the trade in conflict minerals that the EU makes a strong commitment to more responsible and transparent supply chains. This will require a real commitment to exploit the progress already made – progress which the victims of this deadly trade still find too slow – and not to seek shortcuts which constitute a step backwards. We recommend that Member States review their positions and:

1. Show leadership on this issue by supporting mandatory due diligence requirements for businesses covered by the legislation
2. Support Regulation that complies with the OECD Due Diligence Guidance by:

• Ensuring that all due diligence obligations are consistent with the OECD standard
• Including companies located downstream of metal importers, in particular companies which market products containing minerals covered by the legislation on the European market
• Using language that explicitly reflects the progressiveness and flexibility of due diligence.

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