European Union's Draft Conflict Minerals Rules Reject Dodd-Frank's Approach

When the US Congress enacted a law addressing the use of four minerals to finance armed conflict in Central Africa as part of the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the European Parliament passed a resolution welcoming the new development and seeking proposed legislation "along these [same] lines". More than three years later, the European Commission finally answered the Parliament's request, but has proposed to address the issue in ways that sharply diverge from Dodd-Frank. The Commission proposal, issued March 5, 2014, would introduce a system of voluntary self-certification by mineral importers as opposed to the mandatory reporting by product makers under Dodd-Frank, would cover a greater geographical area than Central Africa, and would rely on individual EU Member States to administer the regulation.

The Commission likely benefitted from observing the difficulties the US Securities and Exchange Commission (SEC) experienced when it implemented Dodd-Frank's conflict minerals provision. The US law proved contentious: The SEC's final rule (explained here) followed two years of public debate, and major US business organizations, including the US Chamber of Commerce, have sued to overturn the law and SEC regulation. As US companies have scrambled to meet Dodd-Frank's first reporting deadline of May 31, 2014, many have complained of costly or insurmountable challenges they face in identifying the minerals' complete chain of custody. Against that backdrop, the Commission's delay and decision to opt for an alternative approach is unsurprising.

The Commission's proposal addresses the same four minerals as Dodd-Frank -- tin, tantalum, tungsten (and their ores), and gold. Products such as automobiles,consumer electronics, medical devices, and jewelry incorporate one or more of the four minerals. The Commission's proposal also contemplates use of the same Organisation for Economic Co-operation and Development (OECD) framework for due diligence on mineral purchases as does Dodd-Frank. The Commission's proposal differs from Dodd-Frank and the SEC rule, however, in multiple respects:

• It applies to companies that import the four minerals into Europe rather than those that manufacture or contract to manufacture products for which the minerals are necessary to functionality or production. There are fewer importers (400 according to the Commission's estimate, whereas the SEC projected 6,000 US filers would be impacted by its reporting requirement) and they are closer to key points in the supply chain, such as the minerals' smelter or refiner.

• It is voluntary rather than mandatory. Importers may, however, face business pressures to participate given the Commission's apparent intention to require that manufacturers with public procurement contracts for products such as cell phones, computers, and printers source from self-certified "responsible" EU importers.

• It pertains to minerals from any "conflict-affected" or "high risk" area rather than solely minerals from the Democratic Republic of the Congo and surrounding countries. The Commission proposal rejects Dodd-Frank's geographic limitation, in part due to evidence that risk-averse US filers preferred avoiding Central Africa altogether instead of attempting to establish that minerals from that region were conflict-free.

The proposed new EU Regulation will not be finalized until approved by the European Parliament and the Council, a process that will likely take well into 2015. Nonetheless, the Commission draft Regulation is extremely important for several reasons. It clarifies what will likely be expected of importers of conflict minerals into EU Member States and signals that the EU is likely to focus far less on product manufacturers than the United States has done. The draft EU Regulation may in its final form expand the scope of world regions where due diligence will be expected. More generally, the EU Regulation is likely to increase global expectations for clarity and transparency relating to the sourcing of tantalum, tin, tungsten, and gold. US companies, whether they are subject to Dodd-Frank or the EU rules, or perhaps both, will want to consider finding ways to capture and store the sourcing information provided by importers that submit reports under the EU system. As many companies have learned as they prepare for the first public disclosures under Dodd-Frank, the more information the better to facilitate compliance with reporting requirements.

© Arnold & Porter Kaye Scholer LLP 2014 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.