COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas
Date: 2014-03-05
Institutions: European Commission
Subjects: certificate of origin, customs inspection, gold, import (EU), mineral resources, tantalum, third country, tin, tungsten, war













EUR-Lex - 52014SC0052 - EN











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52014SC0052

COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas /* SWD/2014/052 final */










Introduction
and Context
Introduction

Armed
groups in conflict regions finance their activities inter alia from the
proceeds of extraction and the trade of minerals which later enter the global
supply chain. Consequently, business operators further down the supply chain
run the risk of supporting armed activities through their purchases of mineral
ores or derivatives and have an interest in sourcing from such regions in a
responsible manner. 
The concept of responsible
sourcing is referred to in the updated OECD Guidelines for Multinational
Enterprises and in line with the objectives of the United Nations Guiding
Principles on Business and Human Rights. Both aim at encouraging
businesses to verify through an ongoing process known as due diligence, that their
commercial activities are not contributing to conflict.

Policy context

Responsible sourcing of minerals from
conflict zones has received considerable attention from the international
community over the past few years. The challenge posed by the desire to
minimise the financing of armed groups and continuing to source legitimately
from the region, has been taken up by governments and international
organisations together with business communities and civil society
organisations. 
As a result, there are presently
a number of prescriptive due diligence frameworks in place: 
-       
In
2010, the United States passed the Dodd Frank Wall Street Reform and Consumer
Protection Act (US DFA) whose section 1502 requires companies listed on US
stock exchanges and using "conflict minerals" to declare the origin
of such minerals used in their supply chain as well as to perform due diligence
as appropriate. 
-       
Based
on the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals
from Conflict-Affected and High-Risk Areas legislation is in place in the Democratic
Republic of Congo (DRC) and Rwanda. A few other countries (Uganda, Burundi) are preparing the transposition of the OECD Guidance into law. Moreover, Colombia and Côte d'Ivoire are considering participating in the implementation programme of the
OECD.
On 7 October 2010, the European
Parliament passed a Resolution calling for the EU to legislate along the lines
of the US "conflict minerals" law. In view of this political demand,
this report assesses the different policy options which would best take forward
this request for EU legislation in collaboration with the European Parliament.

Problem
Definition

The main problems relating to the
responsible sourcing of minerals originating from conflict-affected and high-risk
areas as identified by stakeholders in the public consultation include: 
(i)      the
continued financing of armed groups via the (proceeds of) extraction and trade
of minerals in conflict-affected and high-risk areas: the problem is
prevalent in countries rich in natural resources but vulnerable to armed
conflict across the whole or part of their territory. While the issue arises
world-wide, the impact assessment focuses primarily on the well documented case
of the eastern DRC and neighbouring countries, which has received high-profile
attention by advocacy groups these last 10-15 years;
(ii)     the
implementation challenges faced by EU downstream enterprises attempting to
sustain legitimate trade, or voluntarily, performing due diligence within the
current frameworks: due to a number of problems (e.g. opaque supply chain,
confidentiality concerns, lack of leverage over smelters/refiners, lack of
awareness or ethical concerns) EU companies have difficulties complying with
due diligence requirements on the basis of customers' requests;
(iii)    market distortion in
the form of reduced demand and prices in formal sector for minerals from the
DRC and other Great Lakes Region countries: since 2010 the DRC is
experiencing a reduction in formal export volumes, lower prices and increase in
informal trade of tin, tantalum, tungsten ores and gold and fewer opportunities
to export to US or EU clients. The decline can be attributed to business
choices not to source any more from the Great Lakes Region by operators
affected directly or indirectly by the Dodd Frank Act.

Objectives

Specific objectives
1.     
Increase
the proportion of EU and global smelters/refiners that perform due diligence.
2.     
Raise
the level of public accountability for due diligence performance (and level of
compliance) by EU and global smelters.
3.     
Increase
the ability of EU downstream companies to successfully identify
smelters/refiners.
4.     
Improve
the bargaining position of EU downstream companies (on due diligence) vis-à-vis
companies further back in the supply chain.
5.     
Improve
awareness of due diligence, of the importance of due diligence compliance, and
of ethical dimensions throughout the supply chain – both inside and outside the
EU.
6.     
Increase
the uptake (performance) of due diligence practices by downstream companies.
7.     
Offset/reduce
the adverse commercial incentive created or exacerbated by US DFA.
Operational objectives
1.     
Provide
enhanced visibility and transparency for due diligence practices (and level of
compliance) of EU and global smelters.
2.     
Raise
awareness of due diligence, ethical dimensions, and the importance of improving
due diligence compliance with governments of main non-EU smelters/refiners.
3.     
Empower
downstream users by providing a mechanism to identify due diligence compliant
operators (including smelters), and thus to facilitate switching of suppliers.
4.     
Introduce
certainty and transparency in the supply chain nearer to downstream users.
5.     
Promote
increased awareness of due diligence and ethical dimensions among EU operators.
6.     
Create
additional financial incentives in order to promote/support due diligence
practices among downstream users.
7.     
Support
the uptake of OECD Guidance among smelters/refiners willing to source in
conflict-affected areas.
8.      Support demand from
conflict-affected areas: facilitate switching by EU operators to due diligence
compliant smelters/refiners sourcing in those areas.

Policy
Options

The following range of policy
options has been considered:
Option 1 – Standalone EU
Communication 
This option consists of the
following measures to be included in a joint Communication of the Commission
and of the High Representative: 
(i) National Contact Points
(NCPs) and the Enterprise Europe Network (EEN) would advocate the uptake of the
OECD Guidance; (ii) EU public procurement: the application of performance
clauses in Commission and EU Member States' public procurement contracts for
relevant products; (iii) financial assistance to the existing OECD programmes;
(iv) Commission support to 'Letters of Intent' by the European industry, and
(v) government-to-government actions.
Option 2 – "Soft-law" approach
This option combines the measures
described under Option 1 with a Council Recommendation that would be
instrumental in raising awareness of and promoting the voluntary uptake by EU
enterprises of the OECD Guidance notably for those enterprises that are not
already subject to a mandatory third country scheme.
Option 3 – Regulation establishing obligations under
an "EU responsible importer" certification based on OECD Guidance -
VOLUNTARY
This option combines the measures
described under Option 1, with a Regulation targeting all EU importers of tin, tantalum
and tungsten ores and metals, and gold, regardless of the origin of the
products. The Regulation relies on the OECD Guidance to define obligations for
EU importers that opt to be self-certified as responsible importers of tin, tantalum
and tungsten ores and metals, and gold, on the basis of a self-declaration of
compliance. 
Although the scheme is voluntary,
EU importers choosing self-certification are obliged to integrate all elements
of the OECD Guidance in their management system by: (i) maintaining a system of
controls and transparency over the mineral supply chain, which includes inter
alia the mine of mineral origin and the smelter/refiner; (ii) identifying
and assessing risks in the supply chain against the OECD model supply chain
policy; (iii) designing and implementing a strategy to respond to identified
risks; (iv) obtaining independent third-party audit assurance of supply chain
due diligence of the EU importer; and (v) reporting publicly on supply chain
due diligence.
The EU self-certified importer is
required to disclose annually to Member States' competent authorities the
identity and geographical location of the smelter/refiner in its supply chain.
On this basis, an EU list including responsible smelters/refiners would be drawn
up. 
The scheme will be evaluated
after three years and the results will be used for decision-making needs on the
future of the EU approach and for amendments to the regulatory framework,
making it mandatory, if appropriate and on the basis of a further impact
assessment.
Option 4 – Regulation establishing obligations under
an "EU responsible importer" certification based on the OECD Guidance
– MANDATORY
This option combines the measures
described under Option 1, with a compulsory version of the Regulation described
in Option 3 under which all EU importers of tin, tantalum and tungsten ores and
metals, and gold, would be subject to the obligations defined under the
Regulation.
Option 5 – Directive establishing obligations for EU-listed
companies based on the OECD Due Diligence Guidance
This
option combines the measures described under Option 1, with a Directive
targeting almost 1,000 EU-listed companies using tin, tantalum, tungsten and
gold, regardless of origin, in their supply chain.
The Directive would define the
obligations for EU-listed companies to integrate the "five-step" OECD
Guidance framework in their management system by (i) maintaining a system of
controls and transparency over the mineral supply chain, which includes the
mine of mineral origin and the smelter/refiner; (ii) identifying and assess
risks in the supply chain against the OECD model supply chain policy; (iii)
designing and implementing a strategy to respond to identified risks; (iv)
obtaining an independent third-party audit of supply chain due diligence of the
EU-listed company; and (v) reporting publicly on supply chain due diligence.
EU-listed companies should
disclose the outcome of the independent third-party audit.
Option
6 – Prohibition of imports when EU importers of ores fail to demonstrate
compliance with OECD Guidance) – import ban 
This option consists of the
measures described under Option 1, and in addition it would require EU
importers to mandatorily demonstrate compliance with the OECD Guidance.
Providing evidence on compliance to Member States' customs authorities,
importers will be eligible to access the EU market.
This option would follow the
approach taken by the Kimberley Process Certification Scheme targeting the
trade in rough diamonds and Council Regulation 2368/2002 of 20 December 2002
based on Article 133 EC (now Article 207 TFEU) which sets out the rules
applicable for imports and exports of rough diamonds. In this case an international
agreement supports the importation ban for so called "conflict
diamonds". 

Impact Analysis

Option 1 – no change
This option is
expected to moderately impact the uptake of due diligence practices by
downstream operators but is only marginally expected to increase the proportion
of EU and global smelters/refiners performing due diligence. The contribution
to the reduction of the distortion in the market for minerals from the Great
Lakes Region is addressed to a limited extent. Overall the impact on reducing
the funding of armed groups from proceeds of minerals' extraction and trade in
conflict zones is expected to be limited. 
Option
2
The effectiveness of
this option is comparable to Option 1. However, it could be expected that the
added value of a Council Recommendation would reside in the improved visibility
that a 'soft law' option would entail for the EU to promote due diligence. 
Option
3
Overall the
effectiveness of this option in achieving the objectives set out above is high,
as all of them are met. By focussing on importers, who are only a few steps
removed from the mines where minerals are extracted, the scheme is applied at
an effective point in the supply chain. This option improves the ability of EU
downstream operators to comply with existing due diligence frameworks,
including US DFA. It also contributes to the reduction of funding of armed
groups from proceeds of minerals' extraction and trade in conflict affected
areas and reduces the market distortion for minerals from the Great Lakes Region.
Due to the voluntary nature of
this self-certification, the overall cost of due diligence compliance for EU
importers would depend on the participation rate and the due diligence cost in
relation to the company turnover. The costs are nevertheless expected to be
manageable – if not minor – over the long run for most companies. Under the
scheme, an importer opting for self-certification is obliged to pass on to
clients due diligence information while duly respecting business
confidentiality concerns. Downstream operators should gain by this requirement
which allows them to minimise the costs for their own due diligence needs. The
availability of incentives as offered in Option 1 as well as the annual
publishing by the Commission of a list of smelters that perform due diligence
should enhance interest in the scheme. 
This option is effective in that
it gives a positive signal to business whose decisions to source or not in
conflict-affected areas have a direct impact on demand for minerals. The
reactivation of legitimate business connections opens up new positive
opportunities on the ground including increased governments revenues, formalised
mining sectors, more sustainable development and environment, increased
prospects for private investment and jobs in mining communities that in turn
stimulate local economies. 
Option
4
This option improves
the ability of EU downstream operators to comply with existing due diligence
frameworks, including US DFA. It also contributes to the reduction of funding
of armed groups from proceeds of minerals' extraction. One fundamental
difference with respect to Option 3 is that it is not expected to reduce the market
distortion for minerals from the Great Lakes Region caused by profoundly risk
averse sourcing decisions.  
While the participation rate of
EU firms can be increased with a mandatory self-certification scheme, this
option does not necessarily mean that the overall benefits would be maximised.
Indeed, under both Options 3 and 4, what the scheme does is provide a framework
for importers sourcing in conflict-affected regions to source responsibly and
have their efforts validated by Member State competent authorities. The scheme
cannot however compel EU importers to source from conflict-affected areas.
Therefore, in a mandatory scenario, the risk of importers seeking alternative
sourcing is higher than in Option 3. This assessment is supported by the
experience of developments on the ground since 2010 as explained in the Problem
Definition.  
Option
5
This option improves the
awareness of due diligence among EU downstream companies at the expense of high
implementation costs for companies while not contributing to the implementation
challenges to take up the due diligence effectively. This is because downstream
companies are further removed from the entry point of minerals into the EU
market, sometimes with dozens of suppliers in between. The further the position
of the company in the supply chain, the higher the cost of implementing due
diligence. As such, the reduction of funding of armed groups from proceeds of
minerals' extraction is not expected to be effectively addressed. 
Option
6
This option is achieving some of
the objectives but is contingent upon the adoption of an international agreement
in the foreseeable future, and subsequently on the number of participating
countries to such agreement. If broad participation could be attained, the
effectiveness reducing the financing of armed groups by mineral proceeds in
conflict zones is expected to be high. It is not the most timely option given
that the problem as described above needs to be handled now.  

Comparing the options

The following conclusions can be
drawn in relation to the effectiveness of the identified options in achieving
the objectives.  
Policy option 1, which is a
collection of measures outlined in an EU Communication, is among the least
effective options in achieving the objectives set. Policy option 2 which is an
extension of Option 1 reinforced by a Council Recommendation is on the same
level in terms of effectiveness relative to Option 1. 
Policy option 3 is assessed as one
of the most effective means of achieving the set objectives. Policy option 4
would be equally effective relative to Option 3 but would also generate some
possible negative impacts and not address one of the key problems – the market
distortion in the Great Lakes Region.
Policy option 5 establishing
obligations for EU-listed companies, is assessed equivalent to Options 1 and 2
in terms of effectiveness. Policy option 6 applying an import ban under an international
agreement is mid-way in terms of effectiveness between the least effective
Options 1, 2 and 5, and most effective 3 and 4. It should be noted that setting
up an international agreement requires a lengthy process with an uncertain
outcome. 
Comparing policy options 3 and 4
in terms of their administrative burden for the targeted importers, most of
them SMEs, Option 3 is assessed to be the less burdensome as it affects those
companies that decide choose for self-certification based on their own
cost-benefit analysis. Contrary to this, Option 4 imposes requirements on
importers. In terms of EU downstream users' ability to respond to clients' due
diligence request including US clients, Option 4 is expected to serve better
those requests since the mandatory character of the scheme by nature involves a
higher number of EU upstream operators relative to the voluntary Option 3. Nevertheless,
there is a risk that without addressing the market distortion, most of the
extra due diligence thus generated could amount to "greenwashing",
with operators meeting corporate social responsibility goals without sourcing
in conflict-affected areas.
As far as the potential for
delocalisation of EU importers is concerned, we need to refer again to the voluntary
nature of Option 3 where this risk has been assessed inferior relative to
Option 4. 
When comparing Options 3 and 4 in
terms of potential impact on EU employment, the assessment points to some
possible higher undesired impact of Options 4. 
Concerning the expected social
impacts on the livelihood of people and the environment in conflict zones, it
might be expected that Option 3 delivers the better results relative to Option
4.
The preferred option is Option 3.

Monitoring and
Evaluation

Monitoring of implementation will
be carried out in cooperation with Member States. In compliance with the
principle of subsidiarity, the relevant information should be gathered
primarily by Member States. Periodic reporting will be required in order allow
for appropriate evaluation of the implementation. The Commission will inform
the European Parliament and the Council regularly on the implementation of the
new initiative. The Commission should undertake an intermediate evaluation of
its new initiative within three years of its adoption assessing the extent to
which its results are consistent with the objectives set. The evaluation
results will be used for decision-making needs on the future of the policy, and
for amendments to the regulatory framework making it mandatory, if appropriate
and on the basis of a further impact assessment.