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Conflict Minerals: A Head's up for 2017

Jan 09, 2017

 

In November 2016, Minister’s of the European Parliament and the EU Commission came to an agreement around regulation respecting conflict minerals disclosure. Accordingly, all but the smallest EU importers of tin, tungsten, tantalum, gold and their ores will have to do "due diligence" checks on their suppliers, and big manufacturers will also have to disclose how they plan to monitor their sources to comply with the rules, under the EU draft legislation. The regulation aims to stop the financing of armed groups and human rights abuses through trade in minerals from conflict areas.  It will apply to all conflict-affected and high risk areas in the world, including the Democratic Republic of the Congo and the Great Lakes region of Africa.

As to how this will play out for CFO in the UK and EU next year, the European Commission estimates that mandatory reporting will affect roughly 1000 out of a total 7,959 EU listed companies and potentially 800,000 downstream companies – mainly SMEs....at a price tag of €8.4 billion initially, and €1.7 billion on a recurrent annual basis thereafter as a result of due diligence requirements.   The International Trade Committee and the full House will vote on the final agreement early next year.

While these numbers may be staggering enough, the extent of the coverage of conflict minerals disclosure in the EU can be best estimated by looking at the US example. For reporting year 2015, 1,220 US issuers had filed a conflict mineral disclosure statements by October 25, 2016, and 1012 of those submitted either a specialized disclosure (SD) or conflict minerals report. (CMR) According to a recent study by Development International the affected industries in America had a combined revenue of US$ 9.7 trillion in revenue – just over half of the U.S.’ Gross Domestic Product (GDP), which was US$ 17.9 trillion in 2015.

Given this degree of influence, the same study concludes that even if only a minority of the world’s companies practice conflict minerals due diligence, there will be a perceivable impact on the trade of 3TG. The most effected sector world-wide will be manufacturing, and within that according to US data, producers of semi-conductors and related devices will be the largest sub-group. In terms of US filers, those wielding the biggest impact to date have been Apple, General Motors, Honda Motor, HP, China Mobile, Cardinal Health and Microsoft.

 

Distribution of US filers by industry

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Development International. Nov 2016

As to what the major take-aways are from three years of conflict minerals reporting in the US.

First there will be significant challenges in obtaining the necessary information for complete disclosure. For example, the biggest challenge will be determining 3TG country of origin,  (in the US 65% couldn’t report this data), the second will be providing a list of downstream Smelters and Refinery (SORs) facilities where the minerals originated,  (43% of US companies couldn’t identify SORs),  and third will be describing your due diligence approach according to OECD guidelines.  (39% in the US didn’t comply)

EU regulation refers to the application of OECD guidelines and several require that companies actively engage with the SOR of origin. This is companies had the most trouble, or didn’t comply for other reasons.  Only 17% of US filers reported that they assessed the due diligence processes of the SORs, only 19% did a spot check of the SOR, on 21% monitored their improvement and one in four engaged directly with the SOR to obtain information. Downstream suppliers were often cited as being uncooperative and questions often arose around the reliability of information they provided.

The International Trade Committee and the full House will vote on the final agreement early next year.  As the latest US evidence concludes, sensitizing, educating, and drawing the required information for the entire 3TG supply chain will prove a formidable and time-intensive, challenge for EU filers preparing for their first conflict minerals report....effective date – TBD.

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