Due diligence in mineral supply chains and the quest for a list of conflict-affected and high-risk areas

This post by Rashad Abelson from the OECD Centre for Responsible Business Conduct clarifies due diligence expectations in responsible mineral supply chains and explains why understanding “red flags” is crucial for effective supply chain due diligence.

“Where can I find a list of conflict-affected and high-risk areas? Will the OECD publish this list? Do I even have to use the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (CAHRAs) if I’m not operating in such an area?”

As a policy analyst working for the OECD on supply chain due diligence in the minerals sector, last week I was asked these questions while on a call with a group of European based smelters and manufacturers. I was also asked these questions a few months ago while in a regional meeting of Indian gold refiners. At least one of my colleagues gets this question once a month. So why then doesn’t the OECD produce a list of conflict-affected and high-risk areas?

Many companies have expressed confusion and resistance to the expectation in the Guidance that companies determine CAHRAs themselves. Companies often argue that they do not have the capacity to make the determination of what a CAHRA is on their own and, even if they did, they argue that such a determination could potentially harm their business relations.

So why, until now, has no organisation taken the initiative to develop such a list? The simple answer is twofold: diplomatic sensitivities of labelling countries high risk and practical challenges of keeping such a list up-to-date as country circumstances are frequently changing.

However, the more complex reason is that such a list would also be completely contrary to the objective and philosophy of supply chain due diligence as set forth in the OECD Guidance and other relevant international standards, such as the UN Guiding Principles on Business and Human Rights. Any such list could furthermore result in stigmatising a whole country’s mineral production, leading to buyers and banks walking away from regions that desperately need responsible investment and trade – exactly the opposite of what the OECD Guidance wants to achieve.

Discussions surrounding the development of the EU Regulation on Responsible Sourcing of Minerals (which requires importers of 3TG to conduct due diligence in line with the OECD Due Diligence Guidance) saw demands from industry to develop a list of CAHRAs to clarify the scope of the regulation. The European Commission has called on external expertise to provide a non-exhaustive, indicative and regularly updated list of CAHRAs, which should be made available before the end of 2021.

While ultimately accommodating request from industry, the European Commission included important qualifiers: that it would be a “non-exhaustive, indicative, and regularly updated” list, and that the legislation would include an analysis of “red flags”. The European Commission issued  guidance for the identification of CAHRAs and other supply chain risks in August 2018. Why are these qualifiers so important? What does this mean for company implementation?

What does the OECD Guidance say?

The somewhat convoluted title of the Guidance (for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas) has many stakeholders thinking that they only need to carry out due diligence in line with the OECD Guidance if they are operating in a CAHRA. In fact, a mineral originating from or being transported through a CAHRA is only one of a number of red flags that trigger ‘enhanced’ due diligence. The OECD Guidance does not recommend disengaging only because a mineral comes from a CAHRA.

So what are red flags?

The objective of supply chain due diligence is that companies identify, and then prevent or mitigate, risks relating to financing conflict, serious human rights abuses, bribery, money-laundering and tax evasion associated with their mineral or metal supply chains. It goes without saying that companies cannot be expected to address all risks at once. Red flags relating to geography and the circumstances of supplier operations (i.e. trade routes and business relations) are meant to provide context to help companies prioritise risks and develop an effective due diligence process. This means that companies:

  • are expected to gather information on their supply chains, to understand the circumstances of mineral production, transport, and trade
  • are then expected to identify any supply chain risks covered in the OECD Guidance (see Annex II) such as forced labour, torture, indirect or direct support to non-state armed groups, worst forms of child labour, etc. by using red flags relating to the origin of the mineral, transport routes, business relationships and circumstances of trade.

The red flags described in the Guidance relate to (1) the likely geographic origin of the minerals, trade routes, and suppliers, (2) operations and ownership information of suppliers, and (3) any other anomalies and unusual information leading to reasonable suspicions of an Annex II risk associated with mineral extraction, transport, and trade.  The red flags are described in more detail and in a helpful format on the OECD’s interactive website for the OECD Guidance.

To illustrate the importance of not limiting enhanced due diligence to just a list of CAHRAs, take the example of a company sourcing refined metals from a refiner based in a trading hub not known for armed conflict, political instability, institutional weakness, or widespread violence. However, initial research shows that this hub is known to be trading minerals produced in conflict areas, which raises red flags of possible money laundering or bribery to enable trade in minerals linked to conflict. This situation clearly merits enhanced due diligence to ensure that the company’s refiner is not itself involved in any illegal business operation or financing conflict.

Do governments expect anti-money laundering or anti-corruption due diligence only from designated geographic zones? Of course not. Risk-based due diligence is expected to prevent bribery and money laundering worldwide. Geography provides context for potential risks, but is not a determining factor on whether companies should prevent or mitigate these risks. They should do so whenever potential risks are linked to their supply chains.

Thus, specific mention of “red flags” in the EU Regulation is critical, more so than the development of an indicative list of CAHRAs. To further clarify, companies are not expected to publicly disclose a list of the areas or countries they deem to be conflict-affected and/or high-risk, but they are expected to publish the methodology to identify them in their annual report.

Practical solutions for companies

Companies could use support to analyse risk information and progressively increase their understanding and capacity to make their own determination as to what areas can be considered high risk or conflict-affected. Companies would surely welcome the development of the European Commission list of CAHRAs.

The methodology to define CAHRAs will build on the 2018 guidance from the European Commission on how to interpret and apply the notion of “conflict-affected and high-risk”. The European Commission notes that both the list by external experts and the 2018 guidance aim to facilitate EU importers’ compliance with the requirements in the EU Regulation once they start to apply on 1 January 2021, but the ultimate responsibility to identify CAHRAs remains with the EU importers.

The OECD is also developing a free of charge online Knowledge Portal for Supply Chain Risk Information (Risk Portal) for companies. The Risk Portal will support companies implementing steps 1 and 2 of the Guidance by providing relevant, authoritative, and up-to-date information to help them identify and prioritise risks listed in Annex II, thereby supporting the risk-based approach of due diligence.

It is important for companies to make sure they have credible systems to support their decision-making processes, and to keep records of how decisions were taken. If companies choose to use an indicative CAHRA list to prioritise their due diligence, either from the EU or elsewhere, they should be prepared to explain why and how they are going beyond that list to look at all red flags. This means not only looking at location, but also supplier and circumstance red flags, and tailoring their approach to their specific supply chain and circumstances.

Due diligence implementation is a progressive, pro-active and reactive process that certainly comes with a learning curve. This is also true for the determination of what companies will consider conflict-affected and high-risk areas. Due diligence is not about perfection. It is a matter of process, not results.


OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas

Interactive website for the OECD Due Diligence Guidance for Responsible Mineral Supply Chains

Photo credit © Maya-Aska Yokoi-Arai

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