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EU Institutions Reach Political Agreement on Regulating So-Called “Conflict Minerals”

On 16 June 2016, a political understanding was reached by the European Parliament, Member State ministers and the European Commission. All but the smallest EU firms which import tin, tantalum, tungsten and gold into the common market will have to perform mandatory due diligence to ensure their activities are not fuelling fighting and human rights abuses. This due diligence will include smelters and refiners.

In addition, the European Commission will press big manufacturers to disclose the details of products that might contain conflict minerals. Political groups in Brussels have pushed for these reforms; the Group of the Progressive Alliance of Socialists and Democrats in the European Union recently reported that the EU is importing about 25% of mined conflict minerals.

Of importance to Hong Kong traders, the minerals in question can be found in several common consumer products, including jewellery, cars and mobile phones. The agreement is designed to put into place due diligence checks on minerals coming out of “conflict-affected and high risk areas,” defined in regulations as areas witnessing weak or non-existing governance and security, such as failed states, and widespread and systematic violations of international law.

“The EU is committed to preventing international trade in minerals from financing warlords, criminals and human rights abusers,” said Lilianne Ploumen, the Minister for Foreign Trade and Development Cooperation of the Netherlands, on behalf of the EU Council. EU Trade Commissioner Cecilia Malmström added: “This political understanding on conflict minerals will help trade work for peace and prosperity, in communities and areas around the globe affected by armed conflict.

Small EU importers, such as the dentist industry, will be excluded from the new regulations in order to avoid “unreasonable bureaucratic burdens on small enterprises.” Recycled materials, existing mineral stocks within the 28 member states and mineral by-products are also excluded from the future regulation.

Hong Kong traders with EU export operations may like to know that the four minerals, gold, tantalum, tungsten, and tin, are used in many consumer products in the EU, in particular by the automotive, electronics, aerospace, packaging, construction, lighting, industrial machinery, and tooling industries.

Furthermore, it must also be said that the EU at present is a major magnet for the import of minerals, whether they be raw materials or incorporated within consumer devices. For instance, the EU is the second largest importer of mobile phones and laptops in the entire world. Both these product categories contain the minerals at issue. Additionally, the EU imports almost one quarter of the gold, tantalum, tungsten, and tin on the global market.

In 2014, more than 70% of the laptops and cellular phones imported into the EU are reported to have come from mainland China. Moreover, in 2013, mainland China is said to have imported over 4,000 tonnes of gold, tantalum, tungsten, and tin from the Democratic Republic of Congo, Rwanda, Burundi, and Colombia. Consequently, because these minerals and regions are classified under the scope of the future EU regulation, it may well soon become incumbent upon EU importers of consumer goods from mainland China to diligently check their supply chain.

The future regulation will have the largest impact on Africa, where minerals are implicated in a manifold number of armed conflicts across the continent. As a matter of fact, mineral production, which accounts for a staggering 24% of gross national product in Africa, is linked with at least 27 armed conflicts within the continent.

The draft regulation is heavily based on a global standard set by the Organisation for Economic Cooperation and Development (OECD). The OECD standard provides a five step framework: (i) Establish a strong company management system; (ii) identify and assess risk in the supply chain; (iii) design and implement a strategy to respond to identified risks; (iv) carry out independent third-party audits of supply chain due diligence; and (v) report annually on supply chain due diligence.

The expectations set out by the OECD would be for firm due diligence to include the identification of factual circumstances involved in the extraction, transport, handling, trading, processing, smelting, refining and alloying of minerals originating from conflict-affected and high risk areas. With the factual circumstances in mind, they would then be evaluated against the company’s supply chain policy: this is likely to be required by the new EU regulation. The current recommendations by the OECD places the onus on firms to temporarily suspend trade while pursuing risk mitigation, or disengage with a supplier after failed attempts at mitigation or if mitigation is not feasible.

The text of the EU regulation, now agreed between the institutions, is the EU’s first compulsory law designed to address conflict mineral imports. Hong Kong traders already familiar with the US 2012 Dodd-Frank Act will know that it is similarly based on the OECD guideline. However, unlike Dodd-Frank, which covers only the Democratic Republic of Congo and the Great Lakes region of Africa, the EU’s future law is global in scope. The EU regulation is expected to adopt a mandatory reporting mechanism similar to the Dodd-Frank model, but what form it will take has yet to be negotiated.

Following the adoption of the new EU regulation, industry initiatives estimate that approximately 90% of all refined gold, 95% of smelted tantalum and 75-85% of smelted tin produced every year will be covered by industry audit programmes designed to implement the OECD global standard.

It is still unclear what the exact regulations will consist of as the technical details need to be worked out. The final version of the regulation is expected to be completed during the Slovak presidency of the EU Council. The Slovak Presidency will run from July to December 2016.

Content provided by Picture: HKTDC Research
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