The EU's new conflict minerals Regulation (EU 2017/821) is due to come into force on 1 January 2021, almost four years after the text of the legislation was published in May 2017.
Ostensibly, the new Regulation aims to boost corporate transparency and encourage companies to embrace a more sustainable approach to sourcing four key metals – tin, tantalum, tungsten and gold (also known as 3TG) – and avoid supporting conflicts in areas where these minerals are produced.
With less than a year to go until the Regulation's implementation deadline, scrutiny of the legislation is increasing and its shortcomings are being laid bare.
Responsible mineral supply chain principles are not new.
The EU, so often a leader in environmental and social governance (ESG) legislation, is only just starting to catch up in the area of conflict minerals.
A number of mining industry initiatives have already been developed in response to OECD Guidance for Conflict Affected and High Risk Areas.
Standards introduced by the mining industry include:
- The International Tin Supply Chain Initiative (ITSCI);
- The Responsible Gold Mining Principles developed by the World Gold Council; and
- The responsible sourcing protocols launched by the London Metal Exchange.
Many companies that will be required to comply with the EU Regulation will have already adopted one of these voluntary initiatives or, if they are publicly listed in the US, may be subject to Section 1502 of the US Dodd-Frank Act, relating to minerals from in and around the Democratic Republic of the Congo (DRC).
They will therefore have existing systems and procedures, as well as the right corporate ethos, in place to enable them to implement the requirements of the EU Regulation.
However, as outlined below, at present it is unclear to what extent there will be meaningful consequences for non-compliance.
A toothless law?
As with much EU regulation, enforcement of Regulation (EU) 2017/821 will take place in Member States, i.e. by competent national authorities.
However, there is currently no basis under the Regulation for Member States to impose penalties for infringement.
Article 17(3) of the Regulation provides that a planned review of the legislation, by January 2023, will assess whether Member States should be given the power to impose penalties "in the event of persistent failure to comply with the obligations set out in this Regulation".
In addition, the obligations within the Regulation do not apply to all actors in the supply chain (unlike the Dodd-Frank Act), but sit solely with the importer of the offending minerals, and only if they exceed certain thresholds (set out in Annex I of the Regulation).
This makes the Regulation something of an anomaly in EU legislation and begs the question why the EU has gone to the trouble of adopting a regulation that cannot be enforced.
A force for (eventual) good
Despite its limitations, there are a number of reasons for proponents of greater supply chain transparency to be cheerful about the EU Regulation.
In the first instance, if a Member State wants to impose meaningful penalties on a company that fails to comply, there is nothing in the Regulation stopping them from doing so.
That said, if a Member State does take that course of action, lawyers might argue against any penalties on the grounds that there is no basis in the Regulation for imposing them.
While the US rules are limited to minerals sourced from DRC and contiguous countries, the EU rules cover all countries exporting 3TG minerals into the EU – an admirably broader scope, but one which seems slightly meaningless given the lack of penalties for infringement.
However, whereas S.1502 of Dodd-Frank does not explicitly name any particular minerals, but rather applies to any "minerals that directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country", the EU Regulation expressly limits its scope to "tin, tantalum and tungsten, their ores, and gold".
Another positive from an ethical perspective is that the EU has the opportunity to review the legislation and toughen it up before the 1 January 2023 deadline.
The Regulation was passed by the previous EU Commission, so it is possible that the new Commission, which took office on 1 December 2019 under the Presidency of Ursula von der Leyen, may decide to take a firmer stance on this issue.
This will be no easy task, however, given the struggle to pass the legislation in the first place and the numerous concessions that were made to industry to get the Regulation over the line.
More broadly, the Regulation has brought the issue of conflict minerals to the attention of EU consumers.
While it currently compares unfavourably to Dodd-Frank, which places due diligence obligations and corresponding harsh penalties across entire supply chains handling conflict minerals, the EU Regulation still has room to become tougher.
Harder hitting provisions will most likely be effected in response to pressure from civil society, as opposed to regulators – a trend that is already manifesting itself in the rise of ethical consumerism and investor emphasis on ESG credentials.
Demands for a level playing field from publicly traded companies, listed in the US and with a presence in the EU, who are subject to Dodd-Frank, will also play an important role in tightening up the Regulation.
In this sense, the Regulation is not atypical of EU legislation, in that the first iteration appears fairly weak, having been watered by the influence of numerous vested interests.
Regulation (EU) 2017/821 is, at the very least, a foot in the door when it comes to improving supply chain transparency in the EU.
There is reason to expect that subsequent versions of the legislation will be more meaningful – including an extension of obligations, proportionate penalties and, potentially, an expansion in scope to include other minerals in addition to 3TG.
Will the UK follow the Regulation post-Brexit?
The UK officially exited the EU on 31 January 2020, and its continued application of the provisions in Regulation (EU) 2017/821 is one of many issues yet to be determined.
In any event, the withdrawal of the UK from the EU will mean that any EU-27 importer of conflict minerals from UK suppliers will be required to comply with the EU provisions, the same as with regard to supplies from other non-EU sources.
To the extent the UK applies similar due diligence requirements following Brexit, that will simplify the due diligence efforts of EU-27 importers.
On the basis that the UK government has supported the development of the Regulation and the OECD Guidelines, it is likely that the UK will ensure that domestic legislation is in place after Brexit which ensures UK companies must, at a minimum, operate to standards and obligations equivalent to those set out in the Regulation.
Complying with conflict minerals legislation
While many multi-national organisations will already be more than prepared for the EU's conflict minerals Regulation, there are undoubtedly businesses which will have to develop the necessary compliance procedures for the first time.
Fortunately, there is enough guidance and expertise available from existing voluntary initiatives, industry bodies and professional advisers to make this a relatively smooth process.
Companies will also understand the commercial sense in complying (and demonstrating their compliance) with the Regulation in light of the ever-increasing focus by customers and investors on good ESG practice.
Laurent Ruessmann and Andrew Hood are partners specialising in EU competition, regulatory and trade at European law firm, Fieldfisher. Jonathan Brooks is the firm's Head of Metals and Mining practice. For more information on complying with conflict minerals legislation or wider ESG regulations and guidelines, please contact the authors.
Sign up to our email digest
Click to subscribe or manage your email preferences.