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EU Introduces Supply Chain Due Diligence Obligations for Conflict Minerals

On 19 May 2017, the European Parliament and Council published Regulation 2017/821 in the Official Journal of the European Union, laying down supply chain due diligence obligations for EU importers of tin, tantalum and tungsten, their ores, and gold which originate from conflict-affected or high-risk areas (the Conflict Minerals Regulation).

The new Regulation aims to prevent gross violations of human rights and violations of international humanitarian law by requiring companies to import the minerals concerned from responsible sources. The law will have an impact on EU importers, including of materials from Hong Kong and mainland China, in certain situations and circumstances.

The Conflict Minerals Regulation establishes an EU system for supply chain due diligence in order to curtail opportunities for armed groups and security forces to trade in tin, tantalum and tungsten, their ores, and gold (commonly referred to as “3TG”). The new law is designed to provide transparency and certainty with regard to supply practices of EU importers, and of smelters and refiners sourcing from conflict-affected and high-risk areas. Such areas are defined under the Conflict Minerals Regulation as “areas in a state of armed conflict or fragile post-conflict as well as areas witnessing weak or non-existent governance and security, such as failed states, and widespread and systematic violations of international law, including human rights abuses”.

The Democratic Republic of Congo and its neighbouring countries are the most obvious examples. 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.

Hong Kong traders with EU export operations may like to know that 3TG are used in many consumer products in the EU, in particular by the jewellery, automotive, electronics, aerospace, packaging, construction, lighting, industrial machinery, and tooling industries. Furthermore, it must also be said that the EU is at present a major magnet for the import of minerals, whether they be raw minerals or incorporated within consumer devices. For instance, the EU is said to be 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 Conflict Minerals Regulation, it will become incumbent upon EU importers of minerals and metals from mainland China to diligently check their supply chain.

The specific minerals and metals affected under the Conflict Minerals Regulation are set out in Annex I along with the applicable volume thresholds. The Regulation also applies to minerals and metals that are obtained as by-products, providing an exception for recycled metals.

Hong Kong companies may find it relevant to know that the Conflict Minerals Regulation does not apply to actual manufactured products containing 3TG. While the Conflict Minerals Regulation affects 95% of all imports of 3TG into the EU, the 3TG which are incorporated into products, components or other materials are not affected. Nevertheless, Hong Kong traders should note that the EU authorities have stated that future mandatory measures may be implemented to extend the scope of the regulation so as to include manufactured products. Currently, manufacturers are being encouraged to establish their own voluntary due diligence programmes.

The Conflict Minerals Regulation is not applicable to Union importers of minerals or metals where their annual import volume of each of the minerals or metals concerned is below the volume thresholds set out in Annex I. According to the Conflict Minerals Regulation, an amendment of Annex I is already intended for 2020. It is expected to establish volume thresholds for tantalum or niobium ores and concentrates, gold ores and concentrates, tin oxides and hydroxides, tantalates and carbides of tantalum. The existing thresholds will be amended every three years, after January 2021.

The Union system sets out four groups of obligations to which importers of minerals or metals containing or consisting of 3TG must adhere. They are required to, firstly, establish a management system related to the sourcing of 3TG in the supply chain; secondly, carry out risk assessment and management activities; thirdly, validate due diligence through third-party independent audits of smelters or refiners in the metal supply chain; and, lastly, respect disclosure obligations.

Under the management system obligations, EU importers will be required to establish and operate a chain of custody or supply chain traceability system that includes the following information: description of the mineral, including its trade name and type; name and address of the supplier to the Union importer; and country of origin of the minerals.

To confer weight on the concept of responsible sourcing, importers are furthermore required to identify risks and accordingly adopt risk management measures. Where necessary, they can take steps to exert pressure on suppliers to prevent or mitigate the identified risk, e.g. by suspending trade temporarily while pursuing ongoing measurable risk mitigation efforts, or disengaging with a supplier after failed attempts at risk mitigation. Union importers of minerals or metals will be required to carry out audits via an independent third party (third-party audit).

The Conflict Minerals Regulation introduces large disclosure obligations on importers; they will also be required to publish an annual report on their supply chain due diligence policies and practices for responsible sourcing.

Infringements to the abovementioned obligations will be penalised by the Member States, which must designate competent authorities for the application of the Conflict Minerals Regulation by 9 December 2017. These authorities can carry out checks to ensure compliance by Union importers of their obligations.

The Conflict Minerals Regulation enters into force on 9 July 2017, and importer obligations apply from 1 January 2021. This should leave EU importers sufficient time to adapt to its requirements, e.g. develop management systems and risk assessment strategies, and consider options for third-party auditors.

Please click on the following link to view Regulation 2017/821.

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