Conflict Minerals Rules May Soon Have International Counterparts

Bad news for companies struggling to comply with the U.S. conflict minerals disclosure rules created by the Dodd-Frank Act—other countries are considering similar rules and they could be even more onerous.

In the European Union, similar legislation has been in the works for months and could be on the books as early as the end of the year, according to statements by members of the European Union Commission. Australia and Canada are also at various stages of efforts to release their own conflict minerals rules. Other countries are also considering legislation that would either require companies to disclose the use of controversial materials that could contribute to human rights violations or discontinue their use completely.

The new rules could require global companies to revisit their conflict minerals rule compliance efforts. “Whether it's the EU, Canada, or anyone else, these are not going to be clones of the U.S. rule,” says Michael Littenberg, a partner with the law firm Schulte Roth & Zabel who heads its conflict minerals practice. “For the EU in particular, it is probably going to look substantially different. Companies shouldn't think of these as foreign equivalents of the U.S. rule.”

That means as companies build out their compliance programs, they should strive to make them flexible, robust, and scalable because they may very well end up having to add other geographies, activities, or minerals, Littenberg says. “It is important to have a program that you don't need to scrap and redo as you continue to meet ongoing compliance needs,” he adds.

Final rules adopted by the Securities and Exchange Commission require companies to assess products they manufacture to determine whether any contain so-called conflict minerals—columbite-tantalite, cassiterite, gold, and wolframite—and determine whether the source of those minerals is the war-torn Democratic Republic of the Congo or an adjacent country. Disclosure requirements are tied to that supply chain due diligence.

How will the EU's approach differ? Hints and rumors suggest it could take a broader approach than the United States. While the list of minerals covered may not be expanded, the countries covered are expected to.

In a September speech European Commissioner for Trade Karel De Gucht advanced this notion. “We need a broad geographical scope,” he said. “While it is true that the [DRC] region remains the most terrifying example of the problem it is certainly not the only one, as we have seen with other examples in Latin America, and we cannot exclude other regions in the future either.”

Beyond the Congo

The EU's approach builds upon United Nations and Organization for Economic and Co-operation Development (OECD) guidelines and its view that the problem on mining operations funding violence as a global matter is not isolated to the Congo. For example, Coltan, used in microchips, is illegally mined in Venezuela and Columbia and funds the militia known as the Revolutionary Armed Forces of Colombia, or FARC.

“There are other areas of the world that are potential hotspot as it relates to raw materials or manufacture goods. It is something companies have to be thinking about as they are assessing risk internally,” Littenberg says. “Responsible sourcing is becoming an increasingly important issue for companies to address. Whether you are talking about conflict minerals, cotton from Uzbekistan, or garment factories in Bangladesh, it is all part of the same broader issue and dialogue.”

There is some speculation that the EU may even refrain from specifically naming particular countries or regions, thereby providing the flexibility to respond to crisis. If so, it remains to be seen how the directive will be applied on a case-by-case basis.

Efforts in Europe and the United States open the door to legislators in other nations expanding regulations in other ways as well, says Harrison Mitchell, head of due diligence and responsible supply chains for London-based Resource Consulting Services. “They will look at other issues in the mining sector, such as forced labor, child labor, and environmental issues.”

Mitchell compared the conflict minerals trajectory to diamond trade legislation and regulation. “First the focus was on conflict,” he says. “Then, as the conflict issue became less pertinent, it turned to human rights abuses.” Conflict minerals laws offer “a natural avenue for human rights campaigners and business advocates to look toward, because it will be a powerful tool for pushing standards down the supply chain.”

“As a company is building out its compliance program, it should be developing a program that is flexible, robust, and scalable because you may very well end have to add other geographies, activities, or minerals.”

—Michael Littenberg,

Partner,

Schulte Roth & Zabel

As signaled by De Gucht, the European approach will focus upstream of the supply chain, closer to smelters. This is the opposite of how the U.S. rules tackle the problem, using disclosure to “name and shame” corporate end users into demanding supply chain reforms. What remains to be seen is how upstream the EU will go. Will it look exclusively at those smelters, or nudge more downstream to cover exporters?

“I'm not sure as to the mechanism on how they are going to do that,” Mitchell says. “How is Europe going to enforce obligations on a smelter in Asia?” It doesn't means there are not going to be any compliance obligations for downstream companies, he adds, just that the bulk of the compliance is going to be further upstream.

Other concerns emerging in advance of the European Commission's directive is whether it will harm companies that do business there. “Indications are that there may be some distinction in how the rule is applied to countries that trade within the European markets and those that trade from outside,” says Dynda Thomas, a partner at law firm Squire Sanders. “There is great concern that the rules would unfairly or disproportionally impact non-European companies. U.S. companies are concerned that they will have to comply with rules that their European competitors will not have to. That's something everyone will be looking at very closely.”

There is also another wildcard to consider—that the European Commission will only issue voluntary guidelines for some or all of its initiatives, with required compliance at least three years off. That too is among the rumors starting to leak out of Brussels.

Australia, Canada, and Others

The Australian government released due diligence guidelines for supply chains, pressuring them to mitigate the risk of supporting conflict in the DRC. Similar guidance, stopping short of legislation, has emerged from U.K. officials as well.

Mitchell explains that Canadian legislation introduced earlier this year was very broad and would have covered more minerals, more companies, and more countries. “It was much more expansive and alarming,” he says. That proposal, a legislative initiative filed by a citizen, garnered a lot of press, but will likely be significantly weakened.

INSIGHT INTO THE EU APPROACH

A speech by European Commissioner for Trade Karel De Gucht, “Conflict Minerals: The Need to Act,” delivered in September, offers some insight into how the EU will address conflict minerals. A selection from his remarks follows:

We have to acknowledge that trade is just one factor among many that have created these conflicts. It would be great news if trade policy could provide a simple solution to war, but it cannot.

Our action must support existing efforts to tackle the issue. I am very conscious that many European companies are already setting high due diligence standards for themselves as part of their corporate social responsibility agenda. Also, many must comply with reporting requirements on conflict minerals in their supply chains either because they are listed on US stock exchanges and are therefore subject to Dodd Frank Section 1502 or because they supply large U.S. businesses who are.

We need to follow the doctor's maxim: do no harm. We have to avoid creating incentives for companies to stop sourcing minerals from conflict regions altogether. This would have disastrous development consequences. Our approach must provide incentives for companies to work with primary producers in conflict regions to provide guarantees that they are above board.

We need a broad geographical scope. While it is true that the Great Lakes region remains the most terrifying example of the problem it is certainly not the only one, as we have seen with other examples in Latin America, and we cannot exclude other regions in future either. In fact, the Heidelberg Institute estimates that some 20 percent of global conflicts are linked to natural resources. So we need broad coverage if we want to be effective.

We need a targeted approach. If we want to be effective we need to focus on where we can have most impact. And that means providing smelters – the narrowest point in the supply chain – with incentives to carry out due diligence on their upstream suppliers.

Source: European Commission.

Will Asia will be the next part of the world to focus on these issues? “It is definitely coming,” Mitchell says. “Rules of this sort don't just get contained to the jurisdiction that initially creates them,” says Michael Kirschner, an environmental compliance expert and principal consultant for ENVIRON International Corp. “Other legislators and regulators around the world are constantly looking at what others are doing and saying, ‘Look we've got the same problem here, so what if we adopt it and localize it.”

Those laws can be more onerous than the originals. The Restriction of Hazardous Substances Directive, better known as RoHS, was adopted in 2003 by the European Union and made law in each member state. It restricts the use of several materials (among them lead, mercury, and cadmium) that are deemed hazardous in the manufacture of electronics.

“The EU's RoHS directive has been adopted in all sorts of different places around the world,” Kirschner says. “But it is not exactly the same anywhere else. They are totally un-harmonized, have different scopes and degrees of restriction, and different reporting requirements. 

These variations can be problematic. “I've seen manufacturers just focus on EU RoHS and then there was China RoHS” he said. “All of a sudden they had to change all the systems that they put in place because it was slightly different.”

Tougher conflict minerals laws could emerge just as China took a more restrictive approach to RoHS. “In other countries legislators and regulators can do whatever the heck they want,” Kirschner warns.

Jurisdictions at the state and local level are also joining the conflict minerals fray—including Massachusetts, Maryland, California, Pittsburgh, and Detroit—and passing their own conflict minerals laws. Most enhance federal efforts by refusing government contracts to companies that fail to comply with the SEC rule.

Conflict minerals regulations, and the laws they inspire, will be a moving target for years to come. As the SEC was crafting its rules, Thomas says she advised clients to keep their eye on the big picture and “make sure your process is adaptable and can grow and change as the regulatory environment changes,” she told them. That advice still rings true.