On March 16, 2017, the European Union (EU) Parliament passed a comprehensive conflict minerals regulation after nearly four years of stakeholder meetings and deliberations. The EU regulation is aimed at addressing the same human rights issues – forced labor, forced resettlement, and various forms of violence – linked to the demand for certain minerals from Africa that prompted the U.S. Congress to pass Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). 

While the EU and U.S. regulatory regimes are similar in some respects, there are notable differences between the two in terms of their applicability to companies, geographic scope, and due diligence requirements. Here, we highlight three key ways in which the EU regulation will differ from the U.S. approach, which have important implications for companies using minerals potentially sourced from conflict-affected areas.  

Understanding these differences can help companies navigate this area of rapidly evolving legal standards. Though recent media reports indicate that the new U.S. administration may soon change or suspend the U.S. conflict minerals rules, those rules currently remain in effect and companies subject to both the EU and U.S. regulations should consider how their existing conflict minerals due diligence and disclosure processes can be leveraged and enhanced to comply with both regulatory regimes. Even if the U.S. rules are ultimately suspended, an understanding of key differences between the EU and U.S. regulations can assist companies with adapting Dodd-Frank-focused processes to comply with the EU regulation going forward. 

The U.S. Rule 

In 2012, the U.S. Securities and Exchange Commission (SEC) issued a rule regulating certain conflict minerals ("U.S. rule") under the Dodd-Frank Act. The U.S. rule requires any domestic or foreign company required to make filings with the SEC under the Securities Exchange Act of 1934 (i.e., an "issuer" listed on U.S. stock exchanges) to conduct due diligence reviews and make disclosures to the SEC if tin, tungsten, tantalum, or gold (collectively "3TG") from the Democratic Republic of Congo (DRC) or nine neighboring countries is necessary to the functionality or production of the company's products. In the three annual reporting periods since the SEC issued the rule, more than 1,000 companies have filed disclosure forms each year.  

The EU Regulation 

The new regulation, applicable to all the EU member states, will require most importers of 3TG from "high-risk" and "conflict-affected" areas into the EU, as well as smelters and refiners, to carry out due diligence and certification processes. Small importers, such as jewelers and dentists and recycled materials, are exempt. The EU regulation will become effective on January 1, 2021. Under the regulation, each EU member state must implement and enforce its own requirements, subject to EU Commission oversight. 

Key Differences

Although the EU and U.S. regulations were both created to address the same human rights issues, there are significant differences between the two regimes, including the following: 

• Narrower Applicability to Companies: The EU regulation will cover a narrower set of companies than the U.S. rule. The U.S. rule is broader in scope because it applies to any domestic or foreign issuer that files with the SEC under the Exchange Act and uses any 3TG that is necessary to the functionality or production of a product that the company manufactures or contracts to manufacture. In contrast, the proposed EU regulation will only apply to direct importers of 3TG into the EU, as well as smelters and refiners that process 3TG from "conflict-affected" and "high-risk" areas. Unlike the U.S. rule, the EU regulation does not require downstream manufacturers and sellers to engage in mandatory due diligence. Instead, these companies will be encouraged to voluntarily report the use of 3TG in their products. 
• Potentially Broader Geographic Scope: Compared with the U.S. approach, the EU regulation may cover conflict minerals from a different and more expansive geographic area. The U.S. rule applies to a defined set of "Covered Countries," which includes the DRC, Angola, Burundi, Central African Republic, Rwanda, Republic of the Congo, South Sudan, Tanzania, Uganda, and Zambia. The Covered Countries correspond to those on a list published by the U.S. Department of State and will only change if that list changes. In contrast, the EU regulation may be more expansive geographically because it will apply to a yet undefined set of "conflict-affected" and "high-risk" regions. According to the regulation, the EU Commission will select experts to provide an “indicative, non-exhaustive, regularly updated list of conflict-affected and high-risk areas."
• Mandatory Due Diligence Without Preliminary Assessment: Unlike the U.S. regime, the EU regulation does not allow covered companies to forgo a full due diligence review based on a preliminary assessment. The U.S. rule requires companies to perform an initial Reasonable Country of Inquiry (RCOI) to determine if the company has knowledge or reason to believe that a conflict mineral necessary to the functionality or production of the products they manufacture comes from a Covered Country. Depending on the results of this preliminary step, the company may determine that a due diligence review is unnecessary, or conduct due diligence based on the Organisation for Economic Co-operation and Development's  Due Diligence Guidance on Responsible Supply Chains (OECD guidance). In this process, companies must collect information from suppliers by sending out surveys such as the Conflict Minerals Reporting Template, a publicly available reporting template developed by the Conflict-Free Sourcing Initiative, which is widely-accepted across industries.  
   
  The EU regulation, by contrast, does not require any threshold review prior to due diligence. If an importer is covered by the EU regulation, the importer must conduct due diligence on its suppliers using an independent third-party auditor. Similar to the U.S. rule, the EU regulation requires due diligence to be based on the OECD guidance. 

Implications 

Responsible companies with global operations in extractives, electronics, manufacturing, and other sectors recognize that they operate in a complex and changing international landscape of legal and reputational risks associated with sourcing minerals. In particular, the new EU regulation is a reminder that the U.S. administration's potential suspension of the U.S. conflict minerals rules should not be considered in isolation, and that companies may be subject to multiple regulatory regimes in this area.  To stay ahead of the curve in this context, companies that are currently subject to the U.S. rules should conduct a careful analysis to determine whether they may be covered by the EU regulations (i.e., whether they would qualify as a direct importer, smelter, or refiner), and if so, consider ways to leverage existing compliance program components to comply with both regimes.  

For more information, please contact:

Nate Lankford, nlankford@milchev.com, 202-626-5978

Richard A. Mojica, rmojica@milchev.com, 202-626-1571

Quinnie Lin*

This alert was co-authored with Sue Millar and Joanne Jones of the firm Stephenson Harwood. It first appeared in Law360 on March 20, 2017.

*Former Law Clerk

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