Blood diamonds, first brought to public attention in the 1990s, are diamonds mined in African war zones and sold to fund conflicts and insurgencies. In recent years, they have been replaced by a new hot-button topic: conflict minerals — those minerals essential to the manufacture of products such as consumer electronics, automobiles, apparel, medical devices, tools, and jewelry. As with blood diamonds, conflict minerals are associated with armed conflicts and human rights abuses in Africa. While the impact of blood diamonds was significant, the issues were limited primarily to the diamond trade and have, for the most part, been brought under control. On the other hand, virtually no industry is untouched by conflict minerals.
The issue has resulted in a massive regulation in the United States that passed in 2010 and came into force this year. It has also sparked similar possible regulations in the European Union (EU) and Canada. The new and emerging regulations make it essential for insurance and risk professionals to ensure that their customers have visibility into their supply chains to determine whether conflict minerals are being used in their products. Doing so will not only help reduce risk but also help ensure conformance with applicable regulations.
Global regulation on the issue is limited so far to the United States, which passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act); Section 1502 of the Act relates to conflict minerals. The law pertains to companies listed with the Securities and Exchange Commission (SEC) under Sections 13(a) or 15(d), including almost every publicly traded company in the United States. Of the listed companies, the law applies to those that manufacture or contract to manufacture products that contain any of four specified minerals 'necessary to the functionality or production' of their products. The covered mineral derivatives are tin, tantalum, tungsten, and gold.
The law states that the companies must investigate their supply chains to discover whether the so-called 'conflict minerals' in their products originated in the Democratic Republic of the Congo (DRC) or any of the nine adjoining countries. Implementation of the U.S. law began this year. The Washington, D.C., District Court recently denied a challenge to the regulation, leaving the conflict minerals rule in full force.
Effect on Private, International, and Other Public Companies
Although the law applies only to publicly traded companies that manufacture or contract to manufacture products, it has a much wider impact. Private and international suppliers, distributors, importers, and so forth are fielding a substantial number of information requests from companies subject to the law. Affected companies are required to seek and obtain 'reasonably reliable representations' from their suppliers regarding the facility used to process the minerals and the country of origin of the minerals. They must do this for all traces of minerals found in their final products, including those in components and from catalysts.
Achieving conformance will be challenging for many companies. Risk and insurance professionals are strongly advised to counsel affected customers to begin executing compliance initiatives if they have not already done so. Affected clients should also seek access to regulatory expertise. Those companies may also consider outsourcing compliance activities to a trusted solutions provider with specialized knowledge in the regulations of conflict minerals.
The Potential for Increased Regulation
The European Union may soon join the United States in requiring certain companies to perform due diligence to investigate whether minerals used in their products originated in conflict-affected or high-risk areas. The EU is considering modeling its own regulation on the U.S. law and has also looked to the Organization for Economic Cooperation and Development (OECD), which published guidance on the same topic in 2011. From March 27 to June 26, 2013, the EU Directorate-General for Trade conducted a public consultation on a possible EU initiative on responsible sourcing of minerals originating from conflict-affected and high-risk areas. Many of the minerals end up in products sold to European consumers, though the EU says that few companies, states, or consumers are aware of the extremely violent circumstances under which the materials originate.
The EU consultation's questionnaire asked whether an EU initiative should target specific segments in the minerals' supply chain and whether such an initiative should include exemptions for small and medium-size enterprises (SMEs). It also asked whether an EU conflict minerals initiative should follow the EU Timber Regulation (Regulation [EU] No 995/2010) by requiring that the entity first placing a selected mineral (processed or not) on the EU market must provide evidence of due diligence. Such documentation would provide reasonable assurance that its supply chain is conflict-free. The European Commission indicated that it will use the results of the questionnaire to help decide whether and how to complement and/or continue ongoing due diligence initiatives and support for good governance in mineral mining, especially in developing countries affected by conflict.
Canada is also considering a so-called 'private member's bill' that would ensure Canadian companies are not using conflict minerals in their supply chains. Bill C-486, introduced on March 26, 2013, addresses corporate practices related to the extraction, processing, purchase, trade, and use of conflict minerals from the Great Lakes region of Africa. The bill has not moved forward since the first reading. Its author introduced a similar bill in 2010, which would have created a due diligence mechanism for Canadian companies to ensure they are not purchasing minerals that finance conflicts. However, private member's bills in Canada are allocated restricted time for consideration, and few become law. The EU effort is far more likely to result in actual legislation.
Reducing Risk through Active Compliance
Risk and insurance professionals with clients that may directly or indirectly use conflict minerals should counsel those companies to seek assistance from service providers that are well versed in global EH&S regulations and thoroughly understand the global regulatory environment. Such providers can assist in implementing compliance activities in the organization and help facilitate compliance with increasingly complex and changing global chemical regulatory obligations. Because of reporting obligations, the highest risk may be to your client's reputation and the potential for customer backlash if its business is perceived to fund conflict in the DRC. The perception of your client's efforts could be a bigger concern than the SEC's actual standard for legal compliance.