US “Conflict minerals” legislation: Opportunities and obligations for Chinese companies

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In the Democratic Republic of Congo’s (DRC) eastern provinces of North and South Kivu foreign and Congolese armed groups and members of the Congolese army (FARDC) have made millions of dollars through illegal control of the minerals trade for almost fifteen years.

Across an area roughly the size of Hunan Province, control of mines and mineral trading routes has helped generate revenues to fund warring parties’ operations and weapons and has provided off-budget cash to rogue factions within the Congolese army. Competition over access to lucrative mining areas has been an incentive to continue fighting. Congo’s four ‘conflict minerals’ - tantalum, tin, gold and tungsten - are bought by international companies, including Chinese smelters and refiners, and enter supply chains where they are used in a wide range of products.

Section 1502: an attempt to prevent the minerals trade from funding fighting

 Section 1502 of the US Dodd-Frank Wall Street Reform and Consumer Protection Act (‘Section 1502’),[i]  passed in July 2010, is the first piece of legislation in the world that aims to break the links between eastern Congo’s minerals trade and the abusive armed groups that prey upon it.

Section 1502 requires US-listed companies that use tantalum, tin, gold, or tungsten in their products or manufacturing processes to trace the origin of their minerals and determine if they come from DRC or its nine neighbouring countries.[ii]  If this is the case, the company must undertake supply chain checks, known as due diligence, which meet international standards to determine whether or not their mineral purchases have financed armed groups in DRC. Companies must publically disclose, on an annual basis, the steps they have taken to comply with Section 1502 in a Conflict Minerals Report filed with the US Securities and Exchange Commission (SEC).

What does this mean in practice for Chinese companies?

Any company that supplies a US-listed firm covered by Section 1502, either directly or through a supply chain, will be asked to provide information about the country of origin of the minerals they supply. China is home to a significant proportion of the world’s mineral processers. Chinese smelters, refiners and other companies that use tantalum, tin, gold, or tungsten are subject to this obligation if they supply US-listed firms.

This means that Chinese companies may need to carry out due diligence to find out where the minerals they process come from, and whether their purchases may have funded armed groups. The regulations accompanying Section 1502 reference the Due Diligence Guidance developed by the Organisation for Economic Cooperation and Development (OECD)[iii] as the best standard companies complying with the law can use. This guidance is available to Chinese companies as well.

Changes in other jurisdictions that will impact Chinese companies

Responsible sourcing initiatives that may impact Chinese companies are also emerging in other jurisdictions.

In February 2012 the Congolese government introduced domestic legislation requiring companies, including Chinese companies, operating in its domestic tin, tantalum, tungsten or gold mining sectors to undertake supply chain due diligence in line with the OECD Guidance ‘to ensure that they do not contribute to human rights violations or conflicts in DRC’. In May 2012 two Chinese-owned traders operating in North Kivu, TTT Mining (exporting as CMM) and Huaying Trading Company, were suspended for failing to carry out due diligence and on suspicion that they were sourcing from areas under control of armed groups. The government instructed the provincial authorities to launch an investigation into mineral purchases made by the two companies. The suspension was lifted in May 2013.

The European Union (EU) is currently considering introducing a regulation which may require EU companies sourcing minerals from any high-risk and conflict-affected area, including eastern DRC, to undertake supply chain due diligence checks to ensure minerals entering the EU have been sourced responsibly and have not funded conflict. The Commission is due to publish draft legislation in December 2013. It is likely that Chinese companies supplying the European market will be affected by these measures.

For more details, please contact:

Sophia Pickles, Global Witness

Tel:     +44 20 7492 5893

Email:             [email protected]