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Internal Market, Industry, Entrepreneurship and SMEs

Background

The issue of responsible sourcing of minerals first gained international attention in the mid to late 1990s, when non-governmental organisations (NGOs) published research and launched awareness campaigns about the role diamonds play in funding conflicts in countries such as Angola, Sierra Leone, Liberia and the Democratic Republic of the Congo (DRC). This led to the creation of the Kimberley Process, an international certification scheme for diamonds, which aims to halt the financing of violent rebel groups. Since then, links between conflict and the exploitation of other minerals, such as tin, tantalum, tungsten and gold (3TG), in countries such as DRC were exposed by NGOs and civil society groups, media reporting, and by the United Nations Groups of Experts.

In 2010 the 11 member states of the international conference on the Great Lakes Region endorsed and, in 2011, the OECD Council adopted the OECD due diligence guidance (hereafter OECD DDG) for responsible supply chains of minerals from conflict-affected and high-risk areas (CAHRAs). This has become the de facto international standard for due diligence in mineral supply chains. It helps companies to identify and manage risks associated with the production and trade of mineral resources in global supply chains. Legislation such as section 1502 of the 2010 US Dodd-Frank act (see FAQ) and more recently regulation (EU) 2017/821 recommend and require the implementation of due diligence measures consistent with the OECD DDG by companies with 3TG in their supply chain.

In the case of the EU regulation, the rules are mandatory for importers of 3TG metals and minerals if the imported annual volumes exceed certain specified thresholds. Both laws recognise the OECD DDG as a best practice method for managing risks in mineral supply chains.

The EU regulation text is available in all EU official languages. SMEs (as well as non-SMEs) can visit the EU's trade policy page on the conflict minerals regulation to see whether they are required to comply with the regulation.

International attention towards risks in the supply chains of other minerals (i.e. beyond diamonds and 3TG) has been growing in the past few years. Global efforts to promote mineral supply chain due diligence through legislation and state-sponsored initiatives have come from multiple major markets including the EU, Switzerland, China and the US. This means that the expectation of due diligence is growing in breadth of scope and depth of application.

The Commission wants to promote due diligence along value chains. The report on the 'implementation of the strategic action plan on batteries: building a strategic battery value chain in Europe' of 9 April 2019 refers to due diligence and promotes ethical sourcing of battery raw materials (COM(2019) 176 final).

Project developed by the European Commission under the following tender reference number 676/PP/GRO/SME/18/F/103

Advisory

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Due diligence’s obligations and benefits

Legal obligations

This section will help you understand whether you need to comply with the EU regulation.

 

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See more on compliance with the regulation in the Official Journal of the EU.

Benefits

A. Protect and build profit, competitive advantage, viability and thus value

Most major global companies are exposed to strict regulatory requirements. They also tend to receive significant negative media coverage if they are found to have unmanaged risks or impacts in their supply chains. As a company, you may be part of global supply chains, and so risks in your supply chain could have negative impacts on your clients or the communities or environment in which you work.

Many companies would prefer to work with suppliers who manage risk in their supply chains, as this limits their own risk exposure. Some even require risk management in supplier agreements. If you cannot meet these expectations, your clients may take their business elsewhere or you may lose out on new business opportunities with prospective clients. In other words, not doing risk management narrows your market possibilities and client base. Doing due diligence can expand and strengthen these.

If you undertake due diligence on your supply chain, particularly if you correctly implement a common due diligence framework like the OECD DDG, you can easily demonstrate to existing and potential future clients that you adequately manage risk in your supply chain. As trust in your due diligence builds, you could find new business opportunities more easily, retain clients into the longer term and in some cases justify higher prices or help defend existing prices from being negotiated down.

Due diligence can also generate knowledge on how to make your supply chain more efficient. This could reduce your costs (and enable you to invest more capital into research and development, staff training, or building the company’s cash reserves). Increasing supply chain transparency through a better understanding of product flows and how suppliers interconnect with and rely on each other could help you to make better-informed and more strategic decisions on how to run your business, including building greater flexibility and resilience into your supply chains.

In terms of your own reputation, if you conduct due diligence on your supply chains, you may be able to identify and address risks that, if left unchecked, could prove significant to your business’s viability and value in the future. Prevention is cheaper than mitigation in many cases. Recovering from reputational damage can be an enormous uphill struggle for many years, or, in the worst-case scenario, can lead to the destruction of your business’s value.

B. Minimise liabilities, and so protect margin

Due diligence can help you manage supply chain risks and impacts better because it empowers you to identify and respond to them sooner. This enables you to develop appropriate solutions more rapidly.

Due diligence may mean you will engage with your suppliers and clients more often, and in a more comprehensive manner than you do now. By strengthening these relationships and asking your suppliers the right questions, you will be more likely to gain insights into risks that could pose a threat to your company and potential impacts that could cause harm to others. These risks and impacts could cause for example legal risk, business risk, financial risk and/or reputational risk. For example, you could find that one of your suppliers is being forced to pay bribes to corrupt politicians by conducting due diligence. Your supplier is probably passing these costs on to you, thereby increasing your procurement costs and impacting your margin. This ultimately makes your business less profitable, but it also means that you are contributing to corruption, which poses reputational and possibly legal risks to your business.

C. Drive performance for you and your suppliers

Due diligence typically becomes part of your daily business and operational risk management system. It gives you greater visibility over your supply chain, and through this you improve understanding and your ability to influence what happens upstream. This includes better understanding your suppliers’ business practices, strengths and weaknesses, as well as them understanding yours (because you set expectations by what you require and why). From this improved mutual understanding you will be able to negotiate more effectively on a range of issues and set fairer and more pragmatic terms of business. You will also be more able to be responsive to each other’s business realities, troubleshoot sooner or innovate to mutual benefit. Ultimately this builds trust and will ensure a more efficient and effective management of complex and global supply chains for you and your suppliers, as well as your customers.

Some businesses have demonstrated tangible commercial benefits through supply chain due diligence in terms of improved performance. This has included the identification and realisation of considerable cost-saving opportunities.

Case studies

Fictional case study

Megatronics – Failing to implement due diligence and its consequences: A fictional case study

A small electronic component manufacturer, Megatronics, supplies its components to some of the biggest companies in the market. A reliable supply of its components is fundamental to the maintenance of its client relationships.

Because Megatronics does not carry out due diligence on its suppliers, it is unaware that its tin and tungsten are coming from a high-risk area in the country of Galatia. Galatia has different rebel factions attacking areas where tin and tungsten are mined by artisanal and small-scale miners (ASMs). The rebel groups are known to take control of mining areas, forcing locals to work unpaid while they sell the minerals to fund their activities.

An NGO publishes an exposé of how some of the world’s biggest electronics companies are sourcing from Megatronics, which regularly sources from Galatia. Megatronics’ clients promptly request that the company halt the purchase of tin and tungsten from Galatia. These developments are a shock to Megatronics. In order to keep its clients, it must quickly find new suppliers who do not source from Galatia. But because it has no due diligence systems in place, Megatronics finds it difficult to determine which suppliers it should do business with. In the meantime, it is facing a shortage of the tin and tungsten it needs to produce its components, which is threatening its client relationships and indeed its business viability.

It also finds itself having to deal with media enquiries about its sourcing practices in light of the NGO’s allegations. As a result of Megatronics’ unreliable supply and reputational damage, the sale of its components declines and the company is forced to discount its prices in an effort to retain some clients. However, others choose to end their relationship with the company.

If Megatronics had been carrying out due diligence on its supply chain, the business and reputational risks it faced could have been better managed and potentially even avoided. Prior to the publication of the NGO report, due diligence could have enabled the company to

  1. Identify suppliers sourcing from rebel-controlled mines in Galatia and engage with them to try to mitigate the risks on the ground. If that failed, due diligence would have provided Megatronics with a timeline to find alternative sources of these minerals.

  1. Look for alternative suppliers that did not source tin and tungsten from sites controlled by armed groups.

  1. Work with their suppliers to help develop their own due diligence systems to source responsibly from CAHRAs.

  1. Diversify its supply of tin and tungsten to prevent future supply shortages.

The NGO report would have also acted as a red flag for Megatronics to trigger an investigation into its supply chains. If a company has due diligence systems already in place, such an investigation can be done more quickly and cheaply, allowing the company to assess the situation upstream and respond effectively (before its other business relationships potentially deteriorate).

Real case studies

Metachem SARL – Mitigation in action: A real-life case study

Metachem SARL is a Congolese business that treats, exports, mines and supplies tin, tantalum and tungsten (3Ts) from artisanal and small-scale miners in Eastern DRC.

Realising the need to conduct due diligence, Metachem SARL decided to produce a report evaluating the risks in its supply chain at the points of production, transportation and exportation. To identify these risks, Metachem SARL travelled to 13 mine sites from which it sourced. Furthermore, it analysed iTSCi reports and those of other NGOs, both national and international, who work in the mining sector for information relevant to their sourcing practices. In collaboration with the Comités Locaux de Suivi, Metachem SARL also participated in a workshop to discuss common risks. As a result of these actions, Metachem SARL was able to produce a table with all relevant incidents detailed. It found that there were serious problems with fraud, illegal taxation/extortion, misidentification of minerals (including misuse of iTSCi tags) and the presence of armed groups.

This then enabled the company to develop steps to be taken to mitigate the risk of identified incidents recurring. Metachem SARL reported all the incidents it found to iTSCi, state services and other relevant stakeholders. Risks were then ranked according to severity. Where risks were found to be particularly serious, Metachem SARL withdrew its business operations and submitted a report to the Provincial Committee for follow-up. Where risks were less grave, a mitigation plan was enacted via their agents in charge of traceability in the field.

In accordance with this mitigation plan, these agents are appointed at each point of sale, to ensure reliable and verifiable connections can be made along the supply chain all the way up to the point of export. They ensure the documentation that must accompany the minerals is accurate, which includes the details of the traders, the mineral tag and the mine site. Once the authorities have verified the documentation and payment of taxes, they issue a certificate of transport, which accompanies the mineral. At point of export, Metachem SARL communicates to the receiving party the quantity of minerals and exact itinerary of transport to be used. Upon arrival, the state services confirm the transport, documentation and minerals are correct. The details of the mine site, trader and tag number, as well as the relevant dates, are then logged. This officially registers the arrival of the traceable mineral.

As part of its due diligence programme, Metachem SARL was audited by the ICGLR in March 2016 on their supply chains, and in December 2016 THAISARCO conducted due diligence on the sites from which they source their minerals in Maniema.

As a result of these measures, Metachem SARL is able to publish an annual report on the due diligence conducted on its supply chains. As part of this, the company states where it sources its minerals from.

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