Legal requirements for the supply chain – Conflict Minerals Regulation (EU) to enter into force on 01/01/2021

A new EU Regulation will impose mandatory requirements on importers of conflict minerals to observe due diligence obligations from 2021. Its aim is to ensure that conflict minerals were obtained without the use of forced or child labor and that the relevant proceeds are not used for the financing of armed groups. At the same time, this provides an outlook on the legislative options for shaping the supply chain.

What are “Conflict Minerals”?

Smartphones, tablets, electronic components for vehicles, lighting products, or computer boards: all of these products that we are using in our high-tech everyday life contain mineral components. Many of these products require the use of the economically important minerals tin, tantalum, tungsten, and gold. They are referred to as “conflict minerals” as they often originate from politically unstable crisis-ridden regions that are affected by armed conflicts.

Objective of the EU Regulation

The EU is committed to breaking the link between the trade in conflict minerals, the financing of conflicts, and the associated exploitation of people. European economic operators are supposed to organize and monitor their sourcing of raw materials in such a way that they do not contribute to human rights violations in conflict-affected regions.

Modeled after the U.S. Dodd-Frank Act and the OECD Due Diligence Guidance for Responsible Supply Chains

In the U.S., annual legal reporting requirements for certain conflict minerals have been in place since 2010. In addition, the Organisation for Economic Co-operation and Development (OECD) issued a Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas in 2012. The Guidance contains legally non-binding recommendations to help companies comply with human rights and avoid contributing to conflicts in high-risk areas. The EU Regulation has been modeled after this international standard and commits businesses in the European Union to a “concept of responsible sourcing.”

Scope of application

From 2021, the Conflict Minerals Regulation will apply to all importers declaring tin, tantalum, tungsten, and gold – above certain thresholds – for release for free circulation in the European Union or instruct anyone to do so (so-called “Union importers”). No less than 95% of the total volumes of each mineral and metal imported into the European Union is subject to the obligations of Union importers set out in the Regulation.

Due diligence obligations for the import of conflict minerals: Risk management system

The core of the Regulation is the obligation of Union importers to maintain a risk management system: The companies are to identify and address actual and potential risks linked to conflict minerals to prevent or mitigate adverse impacts associated with their sourcing activities. Such risk management systems comprise entire sets of measures:

• Union importers are to adopt and clearly communicate to suppliers and the public up-to-date information on their supply chain policy.
• Senior management is to be assigned responsibility to oversee the supply chain due diligence process and to maintain records of those systems for a minimum of five years.
• The OECD Due Diligence Guidance is to be incorporated into supplier relations and adopted in contracts and agreements with suppliers.
• A grievance mechanism as an early warning system for risk awareness and
• A traceability system are to be established.

Audits by independent third parties and disclosure requirements

Union importers are also required to have their risk management system audited by independent third parties, such as auditing firms. The audit reports are to be made available to the competent German regulatory authority. They will thus be accessible to downstream buyers in the supply chain in the form of a report to be published annually on the Internet.

Recognition of supply chain due diligence schemes and list of responsible smelters and refiners

Union importers will be able to demonstrate compliance with the requirements of the Regulation by using a system developed and overseen by governments, industry associations or relevant organizations. The systems must be submitted for recognition by the EU Commission. The Commission will also establish and keep a global,up-to-date list of responsible smelters and refiners.

Checks and sanctions

The competent authority for the enforcement of the Conflict Minerals Regulation in Germany is the Federal Institute for Geosciences and Natural Resources. It has extensive rights of intervention and may not only obtain information, summon individuals to appear, and enforce remedial action by way of fines of up to EUR 50,000.00. In substantiated cases, the Institute may even access company premises and inspect commercial documents.

Conclusion and outlook

The Conflict Minerals Regulation requires Union importers to comply with extensive due diligence obligations in their supply chains. By introducing mandatory standards for risk management systems, the EU is demonstrating that it is increasingly focusing on the social responsibility of European businesses to observe human rights. The Regulation sets out the means available to legislators to enforce supply chain due diligence obligations. It is therefore also of interest to companies that do not import conflict minerals, but are discussing the issue of supply chain responsibility.