On March 5, 2014, the European Commission released its long-awaited draft conflict minerals regulation (the “draft Regulation”). The draft Regulation would establish an approach that is fundamentally different than the U.S. Dodd-Frank Act and Securities and Exchange Commission (“SEC”) rule, i.e., a voluntary system of self-certification for importers of tin, tantalum, tungsten and gold into the European Union (“EU”). The draft Regulation is accompanied by a Joint Communication by the Commission and High Representative of the EU for Foreign Affairs and Security Policy (the “Communication”) that outlines a number of initiatives to encourage responsible sourcing by EU companies. 

Unlike the U.S. scheme, self-certification under the EU draft Regulation would not extend to downstream users of the metals, including importers of products containing those metals, and would instead focus entirely on importers of the minerals, metals and their ores. However, downstream users may be impacted by procurement measures envisioned in the Communication for products containing these metals. The geographic scope of the draft Regulation is also global, extending far beyond the Democratic Republic of the Congo (“DRC”) and adjoining countries covered by Dodd-Frank.

The draft Regulation is available here, and links to the Communication and other related materials are available here.

Importer Self-Certification

Under the draft Regulation, importers choosing to participate in self-certification would be required to exercise due diligence in line with the five steps set out in the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (“OECD Due Diligence Guidance”) and obtain a third party audit. In addition, such importers would be required to disclose information relating to supply chain due diligence with immediate downstream purchasers, publicly report “as widely as possible” on due diligence practices and audit results, and provide certain additional information including the names and addresses of smelters and refiners in their supply chains to the relevant Member State competent authorities.

Due diligence as part of voluntary importer self-certification would have a global scope extending to tin, tantalum, tungsten and gold originating in all conflict-affected and high-risk areas. The draft Regulation does not provide a list or otherwise specify covered countries or geographic areas, and instead defines conflict-affected and high-risk areas to include areas in a state of armed conflict, 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.

Supporting Initiatives and Policy Measures

The Commission has proposed a number of complementary initiatives in the Communication including financial support for implementation of the OECD Due Diligence Guidance, funding for small and medium enterprises to participate in self-certification, and public procurement measures. With respect to procurement, the Communication indicates that the Commission will include performance clauses in its public procurement contracts requiring due diligence for products containing tin, tantalum, tungsten or gold consistent with the OECD Due Diligence Guidance or an equivalent scheme. The Communication also sets out several policy measures to address the link between conflict and minerals trade including facilitation of regional dialogues and outreach to countries where smelters and refiners are located.

Relationship to Dodd-Frank Act Reporting Requirements

The EU draft Regulation differs from the U.S. Dodd-Frank Act and SEC rule in several important ways. For example, the geographic scope of the draft Regulation is much broader than that of the U.S. scheme in that it is not limited to minerals from the Democratic Republic of Congo or adjoining countries; due diligence pursuant to self-certification under the draft Regulation could extend to minerals originating in any conflict area worldwide. Also, as noted above, the draft Regulation would cover importers of tin, tantalum, tungsten (and their ores) and gold; the U.S. scheme applies to downstream entities that manufacture or contract to manufacture products containing these metals.

Information generated under the draft Regulation, however, could be useful to companies with Dodd-Frank reporting obligations. Both Dodd-Frank and the draft Regulation build their due diligence requirements around the OECD Due Diligence Guidance, and compliance programs for each should have key similarities. Further, under the draft Regulation, participating importers would be required to report to their immediate downstream customers. Companies with Dodd-Frank obligations may be able to use information reported through the self-certification program to build and improve their own disclosures.

Next Steps

The draft Regulation will proceed through the European co-decision process and will be reviewed by the Council and the European Parliament. If these institutions take favorable action on the draft Regulation later this year, it would likely take effect in 2015.