Transparency reporting – Canadian Act now in force (following UK and Norwegian legislation last year), further EU implementation and US still to come

Last week, the Canadian federal government brought new legislation into force, which establishes reporting requirements of payments made to governments by mining (and other extractive) companies.  The Extractive Sector Transparency Measures Act applies to Canadian listed companies, as well as those companies above certain monetary / employee thresholds with assets or business located in Canada, which are involved in oil, gas or minerals. Reporting will commence in respect of financial years ending after 1 July 2016.

What are the requirements?

Like the UK and Norwegian legislation that came into force in 2014 (see here for our e-bulletin on the UK position), the key focus of the legislation is reporting of any payments to government entities that exceed $100,000, whether monetary or in kind (including taxes, royalties, fees, production entitlements, bonuses, dividends).  Those payments may be at any level of government, including from June 2017 to Aboriginal entities.

And similar to the approach by the UK government and as reflected in the EU Directives approach, the Canadian legislation contains an equivalency clause which allows for substitution of another jurisdiction's reporting regime, to address the concern of multiple overlapping reporting obligations.  Since the Norwegian reporting requirements were the first to come into force, reporting has already commenced under those requirements (see here for Statoil's report).

Other jurisdictions to follow?

There is expected to be further implementation of the EU Directives by European countries this year, given the deadlines later this year for transposing the EU Directives into national laws.

The relevant US SEC rules promulgated under the Dodd-Frank Act have been subject to controversy, and were overturned by the US District Court for the District of Columbia in 2013.  It appears now that revised rules may not be produced until spring of 2016.

For further information, please contact Jennifer Bell, Partner, London or your usual Herbert Smith Freehills contact.

EU Parliament amends proposal on regulating importation and use of conflict minerals

On 20 May 2015, the EU Parliament adopted (by 402 votes to 118, with 171 abstentions) important amendments to a 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 (COM/2014/0111; the Regulation). The new proposed Regulation, if accepted in its current form, aims to curtail opportunities for armed groups and security forces to finance conflicts and human rights abuses through the use of minerals in conflict-affected and high-risk regions¹ by "breaking the nexus between conflict and illegal exploitation of minerals" in such regions.  The metals subject to the proposed Regulation are commonly used in many consumer products in the EU, in particular, in the electronics, aerospace, jewellery, industrial machinery and tooling industries. The proposed Regulation refers to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (OECD Guidance) a number of times and is inspired to some extent by section 1502 of the United States Dodd-Frank Wall Street Reform and Consumer Protection Act  ,² which regulates the extraction of "conflict minerals" in the Democratic Republic of Congo and nine adjoining countries.

The proposed Regulation attempts to set up a system for supply chain due diligence certification that is tailored to the nature and the activities of the undertaking in question, and imposes supply chain due diligence obligations on all Union importers who source the listed minerals (recycled metals being treated as a special case) in accordance with the OECD Guidance. It also aims to distinguish between the roles of upstream and downstream undertakings;³ in the supply chain.⁴ Key amendments to the proposed Regulation include:

• obligations upon smelters and refiners established in the Union to apply the Union system of due diligence (or other systems recognised by the Union as equivalent) or risk penalties as imposed by Member States,⁵ and
• obligations on downstream companies to identify and address risks of minerals being sourced from conflict regions in their supply chains in accordance with the OECD Guidance, and to provide information on their due diligence practices,⁶

The Commission is to make publicly available an updated list, in a timely manner, of the names and addresses of responsible importers of minerals and metals, of responsible smelters and refiners and shall identify those smelters and refiners that at least partially source minerals from the said areas.⁷ Member States are to designate competent authorities within their respective territories to apply the provisions of the proposed Regulation.⁸ These competent authorities shall also be empowered to carry out ex-post checks on those Union importers certified as responsible importers to ensure that they comply with their obligations under the Regulation.⁹ Member States are also empowered to lay down rules as to the consequences of infringing the provisions of the Regulation, and inadequate remedial action taken by the responsible importer after being notified that it infringes the Regulation may result in the loss of its responsible importer certification.¹⁰

Various accompanying measures will need to be set out by the Commission in a legislative proposal within the transition period (currently proposed to be two years) to enhance the effectiveness of the Regulation.¹¹The EU Parliament has asked the Commission to support small and medium-sized enterprises which responsibly source for minerals by granting financial support towards their certification procedures from the COSME programme (the EU programme for the Competitiveness of Enterprises and Small and Medium-sized Enterprises).¹² This is because, the new regulations, if implemented, will potentially affect about 880,000 EU companies, most of which are expected to be small or medium-sized companies.

Industry impact

The EU Parliament's adoption of the amendments resulted in a departure from the EU Commission's earlier "self-certification" approach for EU importers that was meant to be voluntary. There are inconsistencies between the recitals and the main body of the proposed Regulation, suggesting a major overhaul of the proposed Regulation through the legislative process.¹³ One will need to wait to see what shape the final Regulation takes before determining which obligations will be mandatory or voluntary. This will help in conclusively assessing the repercussions the proposed Regulation is likely to have on the sourcing of "conflict minerals".

Furthermore, in order to assess the full impact of the proposed Regulation, one would need to look closely into the obligations upon a "responsible importer" under the proposed Regulation. For instance, these require the adoption of "risk management measures" that are consistent with Annex II of the OECD Guidance to address any adverse impacts that may be caused in its mineral supply chain. Depending on the responsible importer's ability to influence, it is required, where necessary, "to take steps to put pressure on suppliers" in order to mitigate the risk of adverse impact and may be required to "disengage with a supplier after failed attempts at mitigation".¹⁴ Annex II of the OECD Guidance exhorts concerned parties to "immediately suspend or discontinue engagement with upstream suppliers" where "a reasonable risk" that their sourcing is from, or linked to, "parties committing serious abuses" of human rights exists. The OECD Guidance advocates a similar suspension or discontinuation of engagement with upstream suppliers where "a reasonable risk" is identified that their upstream suppliers are sourcing from, or linked to, any party providing direct or indirect support to non-state armed groups. Therefore, the practical effect of the OECD Guidance, when implemented through the provisions of the proposed Regulation may, in fact, require the disengagement of Union importers from certain upstream suppliers when identifiable risks of certain adverse impacts persist.

Although the proposed Regulation does not provide for penalties for the breach of obligations by downstream companies, there are concerns that such obligations, if and when imposed, might cause businesses to pull out of conflict regions due to either burdensome due diligence obligations¹⁵ or lack of sufficient risk assessment / risk mitigation mechanisms that may apply to some conflict-affected and high-risk areas. In practice, one would also have to consider how these obligations will be enforced, as Member States shall have the authority to make rules in order to address infringement of the proposed Regulation. At the moment, it is unknown how harmonised these rules will be across the Union.

The EU Parliament has decided not to close the first reading position for the Regulation and is expected to enter into informal talks with the EU Member States to seek agreement on the final version of the law and to ensure smooth passage of the Regulation through the EU parliamentary process.

For further details:

Please refer to the EU Parliament's press release on the vote here.
Please refer to the original proposed Regulation here.
Please refer to the amendments adopted by the Parliament in the text of the proposed Regulation here.
Please refer to the procedure file of the proposed Regulation in the EU Parliament here.
Please refer to the OECD Guidance here.

For further information, please contact Stéphane Brabant, Partner, Paris and Yann Alix, Senior Associate, London should you have any specific queries as to how the proposed Regulation might affect your activities.

Endnotes

1. Conflict-affected and high-risk areas" are defined in the proposed Regulation as "areas in a state of armed conflict, with presence of widespread violence, collapse of civil infrastructure, fragile post-conflict areas as well as areas of weak or non-existent governance and security, such as failed states characterised by widespread and systematic violations of human rights, as established under international law". Whilst the Democratic Republic of Congo and the Great Lakes area are perhaps the most obvious examples, the proposed Regulation aims to tackle the abuse of metals and minerals in such areas anywhere in the world.
2. Portions of the US Securities and Exchange Commission (SEC) rules issued under section 1502 of the Dodd-Frank Act are currently under review before an en banc bench of the US Court of Appeal for the District of Columbia (D.C.) Circuit after a smaller bench of the D.C. Circuit ruled in April 2014 that certain provisions of the SEC rules were constitutionally invalid as they required 'compelled speech' in derogation to the First Amendment of the US Constitution. Other portions that were upheld in April 2014 continue to be in force and require companies to make filings to the SEC on 'conflict minerals'.
3. "Upstream" under the proposed Regulation means "the mineral supply chain from the extraction sites to the smelters and refiners, included" and "downstream" means the "metal supply chain from the smelters or refiners to the end use."
4. Article 1(2)(b).
5. Article 7(b).
6. Article 1(2)(d).
7. Articles 7(a) and 8.
8. Article 9.
9. Article 10(1).
10. Article 14(3).
11. Article 15(a).
12. Recital 12.
13. For instance, the amended recitals to the proposed Regulation refer to (i) an independent, third-party audit process for upstream undertakings such as smelters and refiners in accordance with the OECD Guidance (Recital 13), and (ii) a certification system for companies in the Union operating downstream of the supply chain which issues the "European certification of responsibility" when the company complies with the  OECD Guidance (Recital 12(a)). However, there are no provisions in the main body that crystallise these recitals in the form of obligations for the relevant entities. 
14. Article 5(1)(b).
15. Conversely, it is argued by supporters of the proposed Regulation that by seeking a Union supply chain due diligence system for minerals regardless of where they are sourced from, the proposed Regulation does not target minerals from any particular area(s) of the world (in contrast to section 1502 of the Dodd-Frank Act) and thereby reduces the risk of market distortion.