The EU Response to the Trade in Conflict Minerals from Central Africa
-
1. Introduction
Over the last decade, a consensus has emerged to end the trade in minerals from the eastern part of the Democratic Republic of the Congo (DRC) and its neighbouring countries, which are often sold by local warlords to finance their illegitimate military activities in the region. These activities have resulted in the most flagrant violations of human rights, such as slavery, conscription of child soldiers, and rape. Calls from the United Nations (UN) to eliminate these practices have resulted in the establishment of various regulatory regimes to regulate the behaviour of corporations involved with conflict minerals. Different initiatives and measures have been adopted by international and regional organizations, governments, and by the industry itself as the connection between the trade in conflict minerals and the continuation of human rights violations is, from their perspective, apparent. The key instrument in the fight against conflict minerals has been transparency, both in the supply chain and finances. Providing transparency has been the starting point for many initiatives.
The establishment of several due diligence schemes by international and regional organizations and regulatory initiatives taken by different sectors to tackle the trade in conflict minerals have led to a debate within the European Union (EU) on how to deal with the trade in conflict minerals. Legislative developments in the United States also increased the pressure on the EU to address the issue of conflict minerals. Meanwhile, the EU can look at a range of measures, taken by different parties, to come up with a mechanism that stimulates corporate transparency, which should put an end to the unacceptable practices related to these minerals. The EU's promotion of corporate social responsibility (CSR) provides a fruitful framework to determine how the desired and required level of transparency can be achieved within the Union.
The purpose of this essay is therefore to analyze how the EU, in light of its promotion of CSR, should regulate the behaviour of multinational companies dealing with minerals from conflict-ridden areas. In the light of recent initiatives taken by the UN, the US and the mineral-extraction industry, it is examined whether the EU should adopt public regulation, such as in the United States, or whether it should continue its promotion of private self-regulatory regimes. -
2. International Organizations and Their Contribution to the Fight against the Trade in Conflict Minerals
2.1 The UN Guidelines for Due Diligence
By the end of 2001, a UN Panel of Experts published an extensive report1xUnited Nations 2002 (S/2002/1146). on illegal and criminalized trade in natural resources, including rare minerals in the DRC, a region that has been ravaged by civil wars and large-scale human rights abuses for many years.2xDrimmer & Phillips 2012, pp. 139-140. The Panel of Experts recommended creating a monitoring body that would adequately reduce the level of illegal exploitation of natural resources. It concluded that “[e]thical and transparent business practices” were necessary to eliminate the illegal trade in natural resources.3xUnited Nations 2002 (S/2002/1146).
A year later, the UN Security Council ‘strongly condemned’ illegal trade in natural resources from the DRC and adopted Resolution 1457, which stressed that the excavation of natural resources “should be [transparent], [legal] and on a fair commercial basis, to benefit the country and its people”.4xResolution of the Security Council of the United Nations, 24 January 2003 (S/RES/1457). The illegal trade in these so-called ‘conflict minerals’ has played a substantial role in the continuation of war and violations of human rights in the DRC.5xCook 2012, p. 2. Conflict minerals are described by Cook as “ores that, when sold or traded, have played key roles in helping to fuel conflict and extensive human rights abuses, since the late 1990s, in far eastern Democratic Republic of the Congo”. Section 1502 of the Dodd-Frank Act provides the following description to conflict minerals: “[…] columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives; or […] any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country”. For this reason the Security Council noted that the trade in conflict minerals formed a serious threat to the security of Central Africa.6xResolution of the Security Council of the United Nations, 24 January 2003 (S/RES/1457), the Security Council “[n]otes with concern that the plundering of the natural resources and other forms of wealth of the Democratic Republic of the Congo continues and is one of the main elements fuelling the conflict in the region, and in this regard, demands that all States concerned take immediate steps to end these illegal activities, which are perpetuating the conflict, impeding the economic development of the Democratic Republic of the Congo, and exacerbating the suffering of its people”. In order to put a halt to the trade in conflict minerals, Resolution 1457 contained a general appeal on (private) companies to be transparent in the exploitation of natural resources from the DRC.
The UN Group of Experts on the DRC was established pursuant to Security Council Resolution 1533 and has published twenty reports on the situation in the DRC since its creation in 2004. In these reports, the Group of Experts paid attention to the issue of illegal exploitation of natural resources from this area.7xResolution of the Security Council of the United Nations, 12 March 2004 (S/RES/1533). Their reports and recommendations have led to the adoption of various Security Council resolutions.8xResolution of the Security Council of the United Nations, 31 July 2006 (S/RES/1698); Resolution of the Security Council of the United Nations, 10 August 2007 (S/RES/1771); Resolution of the Security Council of the United Nations, 31 March 2008 (S/RES/1807); Resolution of the Security Council of the United Nations, 22 December 2008 (S/RES/1857); Resolution of the Security Council of the United Nations, 30 November 2009 (S/RES/1896); Resolution of the Security Council of the United Nations, 29 November 2010 (S/RES/1952); Resolution of the Security Council of the United Nations, 29 November 2011 (S/RES/2021).
In 2010, the Group of Experts argued in one of its reports that armed groups were benefiting from the illegal trade in natural resources in the DRC.9xUnited Nations 2010 (S/2010/596). In response, the Security Council adopted a resolution on the recommendations of the Group of Experts to establish ‘guidelines for due diligence for importers, processing industries and consumers of Congolese mineral products’.10xResolution of the Security Council of the United Nations, 29 November 2010 (S/RES/1952). In its 2010 report, the Group of Experts defined due diligence as “a dynamic process whereby individuals and entities discharge their responsibilities with reference to a given standard”. One such standard is that of respecting human rights, entailing that the due diligence of individuals and entities is to mitigate the risk of their infringement on the human rights of others.11xUnited Nations 2010 (S/2010/596), p. 84. It should be noted that the Group of Experts recommends additional due diligence guidelines for “[i]mporters, processing industries and consumers of mineral products from ‘red flag’ locations […] in order to mitigate the broader risks of directly or indirectly supporting criminal networks and perpetrators of serious human rights abuses, particularly within the armed forces of the Democratic Republic of the Congo, and of directly or indirectly worsening the conflict in the east”. The Group of Experts recommended a ‘risk-based due diligence approach’, which aimed to create awareness of minerals coming from conflict areas in Central Africa. This was meant as an informative and general guidance for importers, consumers and processors of these minerals to avoid and “mitigate the risk of providing direct or indirect support for illegal armed groups”.12xIbid., p. 84, “the Group recommends a risk-based due diligence approach for importers, processing industries and consumers of mineral products, meaning that these individuals and entities need to assess and mitigate the risks of adverse impacts associated with their operations. ‘Mitigate’ here means ‘to moderate in force or intensity’. This standard requires individuals and entities to mitigate their risk of supporting the following armed groups in the eastern part of the Democratic Republic of the Congo: FDLR, ADF, LRA and numerous Mai Maimilitia. Significantly, excluded from the definition is FARDC, the armed force of the constitutional State, not an armed group. Similarly, other armed State services, including PNC, the mining police and ANR, are also not illegal armed groups and are therefore excluded.”
With regard to minerals from the so-called ‘red-flag’ areas,13xIbid. The Group of Experts means by ‘red flag’ locations “the eastern part of the Democratic Republic of the Congo and other countries in the region through which minerals from that area are known to transit, including Rwanda, Burundi, Uganda, Kenya, the United Republic of Tanzania and the Sudan”. the Group of Experts noted that additional due diligence guidelines were required because of the ‘broader risks’ of the support for criminal activities.14xIbid., p. 85. “Because of the Group's finding of multiple links between conflict in the eastern part of the Democratic Republic of the Congo and the involvement of criminal networks within FARDC in mineral exploitation and trade, and to promote consistency between global efforts to define the due diligence required to mitigate the risk of trade in ‘conflict’ minerals, including those of OECD, the Group recommends additional due diligence guidance. The additional guidance concerns how to mitigate the risks of direct or indirect support for criminal networks and/or perpetrators of serious human rights abuses within the armed forces and the broader impact of direct or indirect support for conflict in the eastern part of the Democratic Republic of the Congo.” Consequently, it designed two optional guidelines that could be adopted by the Security Council. The first included a set of general “due diligence guidelines for importers, processors and consumers of minerals from red-flag locations to mitigate the risk of providing direct or indirect support for armed groups in the eastern part of the [DRC] and violations of the asset freeze and travel ban on sanctioned individuals and entities”. The second was more explicit: “due diligence guidelines for the responsible supply chain of minerals from red-flag locations to mitigate the risk of providing direct or indirect support for conflict in the eastern part of the DRC; criminal networks and/or perpetrators of serious human rights abuses, particularly within the State's armed forces; armed groups in the eastern part of the DRC; and violations of the asset freeze and travel ban on sanctioned individuals and entities.” The Group of Experts strongly favoured adoption of the second regime.15xUnited Nations 2010 (S/2010/596), p. 86. “The Group recommends the adoption of the second, expanded due diligence option because it addresses more comprehensively than the first the factors generating insecurity in the eastern part of the Democratic Republic of the Congo. The second option is also more consistent with other due diligence guidance relating to commercial activity in conflict-affected and high-risk areas. If, however, the first, narrower due diligence guidance is endorsed by the Committee, the Group's mandate should include the evaluation of its impact and effect, and whether or not broader due diligence, as proposed in the second option, is required.”
In cooperation with the Organisation for Economic Co-operation and Development (OECD) and other stakeholders, the Group of Experts developed five steps that, in their opinion, should be part of due diligence of companies that are actively mining in red-flag areas. At any rate, all entities to which the UN's due diligence guidance applied were required to elaborate the OECD due diligence guidance. This entailed that entities involved in mineral trade should (i) strengthen their company management systems, (ii) identify and assess risks in their supply chain, (iii) design and implement a strategy to respond to identified risks, (iv) ensure independent third-party audits, and (v) publicly disclose supply chain due diligence and findings.16xUnited Nations 2010 (S/2010/596), p. 86. It should be noted that these five steps require a different approach than the first option.17xIbid., see pp. 93-96. An important recommendation of the Group of Experts to the Security Council was to impose sanctions on parties who do not serve the due diligence purpose, namely avoiding the criminalized trade in the DRC.18xIbid., p. 85. “The Group therefore recommends that where there is manifest failure of individuals and entities to perform due diligence, as outlined in these guidelines, and where there is evidence that this has directly or indirectly benefited an armed group, this should be a criterion for the examination by the Council of the case for the imposition of targeted sanctions.”
The Security Council urged its Member States “to take appropriate steps to raise awareness of the due diligence guidelines […], and to urge importers, processing industries and consumers of Congolese mineral products to exercise due diligence by applying the aforementioned guidelines, or equivalent guidelines, […] as described in the final report (S/2010/596)”.19xResolution of the Security Council of the United Nations, 29 November 2010 (S/RES/1952). The basis for this recommendation has been the Resolution of the Security Council of the United Nations, 30 November 2009 (S/RES/1896). In this resolution the Security Council decided “that the mandate of the Group of Experts […] shall also include the task to produce, […] recommendations to the Committee or guidelines for the exercise of due diligence by the importers, processing industries and consumers of mineral products regarding the purchase, sourcing (including steps to be taken to ascertain the origin of mineral products), acquisition and processing of mineral products from the Democratic Republic of the Congo”. Exactly one year after this resolution, the Security Council confirmed its stance by adopting a new resolution.20xResolution of the Security Council of the United Nations, 29 November 2011 (S/RES/2021). In the years following the 2010 report, the Group of Experts published four other reports on the situation in the DRC,21xUnited Nations 2012 (S/2012/843); United Nations 2012 (S/2012/348); United Nations 2011 (S/2011/738); United Nations 2011 (S/2011/345). which strengthened the sense of urgency and the pressure to meet the legal obligations as enshrined in its reports and in the Security Council resolutions.22xVerbruggen et al. 2011, p. 6.2.2 The OECD and Its ‘Collaborative Government-Backed Multi-Stakeholder Initiative’
The OECD is an international organization that aims to promote policies beneficial to the economic and social well-being of people all around the world.23xSee the OECD's website: <www.oecd.org/about/> (last accessed 12 November 2013). It has developed a Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas in 2012 (‘OECD Guidance’), which is the legally non-binding variant of the UN Due Diligence Guidelines.24xUnited Nations 2010 (S/2010/596), p. 86; Resolution of the Security Council of the United Nations, 29 November 2010 (S/RES/1952); Resolution of the Security Council of the United Nations, 29 November 2011 (S/RES/2021). The OECD Guidance is a product of the joint initiative that was formed by the countries to the International Conference on the Great Lakes Region (hereinafter ‘ICGLR’), the mineral industry, civil society, and the UN Group of Experts.25xThe Group of Eight 2009, p. 48. The G8 here “[encouraged] the OECD, the United Nations and the Global Compact to work with the Conference and engage with key stakeholders to further develop practical guidance for business operating in countries with weak governance”; The Lusaka Declaration of the ICGLR special summit to fight illegal exploitation of natural resources in the Great Lakes Region, 15 December 2010. The ICGRL welcomed the cooperation with OECD in combating illegal exploitation of natural resources and therefore “[endorsed] the OECD Due Diligence Guidance […] and [called] upon companies sourcing minerals from the Great Lakes Region to comply with the six tools and the OECD Due Diligence Guidance”; The 2007 Heiligendamm G8 Summit, Declaration on Growth and Responsibility in the World Economy, p. 30. The G8 here recommended the “development of a consolidated set of principles and guidelines that apply to the international mining sector in developing countries would help ensure that the sector contributes to development while at the same time providing a clear and more predictable set of expectations for investors.” This initiative aims to make companies aware of their contribution to the continuation of the armed conflict by doing business with regional warlords. In particular, the OECD Guidance urged companies to consider human rights when working in conflict areas. They are, moreover, encouraged to be transparent with regards to their supply chains involved in the exploitation of minerals from such areas. This also means that companies should operate in a sustainable way, which requires respect for the environment, and “enabling countries to benefit from their natural mineral resources and preventing the extraction and trade of minerals from becoming a source of conflict, human rights abuses, and insecurity”.26xOECD 2012, p. 3.
The OECD Guidance defines due diligence in the same way the UN Group of Experts did. It applies to companies active in sourcing minerals – in particular tin, tantalum, tungsten and gold – from “conflict-affected or high-risk areas”.27xIbid., p. 12. The OECD defines due diligence as “an on-going, proactive and reactive process through which companies can ensure that they respect human rights and do not contribute to conflict”. The OECD Guidance has set up “a framework for detailed due diligence as a basis for responsible global supply chain management of tin, tantalum, tungsten, their ores and mineral derivatives and gold” to which companies should adhere.28xIbid. An ‘overarching due diligence framework’ has been taken as a starting point to improve the transparency of companies that are active in conflict-affected and high-risk areas.29xOECD 2012, p. 15. This general framework included the five steps developed by the UN Group of Experts that should be taken into account by management systems of companies in order to achieve the main objectives of the OECD Guidance, which have been described above. The OECD Guidance does, however, further elaborate on steps one,30xIbid., p. 18. This requirement is explained as follows: “[companies] should […] [adopt], and clearly communicate to suppliers and the public, a company policy for the supply chain of minerals originating from conflict-affected and high-risk areas. This policy should incorporate the standards against which due diligence is to be conducted, consistent with the standards set forth in the model supply chain policy in Annex II. [The companies should structure] internal management to support supply chain due diligence. [The companies should establish] a system of controls and transparency over the mineral supply chain. This includes a chain of custody or a traceability system or the identification of upstream actors in the supply chain. This may be implemented through participation in industry-driven programs. [The companies should strengthen] company engagement with suppliers. A supply chain policy should be incorporated into contracts and/or agreements with suppliers. Where possible, assist suppliers in building capacities with a view to improving due diligence performance. [The companies should establish] a company-level, or industry-wide, grievance mechanism as an early-warning risk-awareness system.” two,31xIbid. This step is explained as follows: “[companies] should […] [identify] risks in their supply chain as recommended in the Supplements. [The companies should assess] risks of adverse impacts in light of the standards of their supply chain policy consistent with Annex II and the due diligence recommendations in this Guidance.” three,32xIbid. This step is explained as follows: “[companies] should […] [report] findings of the supply chain risk assessment to the designated senior management of the company. […] [The companies should devise] and adopt a risk management plan. […] [The companies should implement] the risk management plan, monitor and track performance of risk mitigation efforts and report back to designated senior management. […] [The companies should undertake] additional fact and risk assessments for risks requiring mitigation, or after a change of circumstances.” four,33xOECD 2012, p. 19. This step is explained as follows: “[companies] at identified points (as indicated in the Supplements) in the supply chain should have their due diligence practices audited by independent third parties. Such audits may be verified by an independent institutionalised mechanism.” and five.34xIbid. This step is explained as follows: “[companies] should publicly report on their supply chain due diligence policies and practices and may do so by expanding the scope of their sustainability, corporate social responsibility or annual reports to cover additional information on mineral supply chain due diligence.” It should be noted that this Guidance also contains a set of common principles which forms “a model mineral supply chain policy”.35xIbid., p. 20 (Annex II). Two supplementary frameworks were designed containing very specific due diligence measures regarding the exploitation of and trade in tin, tantalum, tungsten and gold.36xIbid., pp. 31-111.
Although companies that have been engaged in practising the OECD Guidance face many challenges in complying with it, the OECD recently stated that companies involved in a pilot “demonstrated a marked improvement in their understanding of the issue of minerals from conflict-affected areas, the OECD Guidance, and their supply chains”.37xOECD 2013, p. 13.2.3 The African Institutional Response towards the Trade in Conflict Minerals
It has already been recognized that maintaining the trade in conflict minerals forms a risk to the peace and security of Central Africa as their illegal exploitation and trade finances the wars of armed groups. This notion is explicitly mentioned in the 2006 Pact on Security, Stability and Development in the Great Lakes Region38xThe International Conference on the Great Lakes Region (ICGLR) 2006, see Art. 9 of this pact, which states that this pact aimed to “transform the Great Lakes Region […], into a space of durable peace and security, of political and social stability”. and expressed during the ICGLR.39xThe ICGLR was established in 2004 and came into force in 2006. It was established to respond to the regional conflicts. See for the background of this organization The Norwegian Agency for Development Cooperation (Norad) 2009, p. 6. The preamble of the Lusaka Declaration of the ICGLR special summit to fight illegal exploitation of natural resources in the Great Lakes Region, 15 December 2010. The ICGLR summarizes here the negative impacts of the trade in conflict minerals; it states that the ICGLR is “[f]ully aware of the endemic conflicts and persistent insecurity caused by armed groups in the Great Lakes Region financed through the illegal exploitation of natural resources and trade in minerals, in particular gold, colombo-tantalite, wolframite and cassiterite; and further concerned about the negative impact these armed groups have had on our population in the region including, crimes against humanity, and massive violations of human rights such as, sexual and gender based violence”. Inspired by the Kimberley Process Certification Scheme (KPCS), which will be elaborated on in another section, the ICGLR adopted a strategy to fight the illegal trade in natural resources. This strategy consisted of six measures,40xThese six measures are called ‘six tools’. two of them being the implementation of the Regional Certification Mechanism and the harmonization of national legislation.41xICGLR 2010, at the second point.
The Regional Certification Mechanism was developed to substantiate the 2006 commitment of the ICGLR on establishing “a regional certification mechanism for the exploitation, monitoring and verification of natural resources within the Great Lakes Region”.42xICGLR 2006, Art. 9. This regime “will function in much the same manner as the Kimberley Process Certificates for diamond exports. Only mineral shipments that can demonstrate ‘conflict-free’ origin, transport, and processing will be awarded an ICGLR Certificate. Though there is a phase in period for the ICGLR Scheme, many of the principal mineral producers in the region plan to begin issuing ICGLR Certificates by mid-2011. Certification becomes obligatory for all exports of Designated Minerals after December 15, 2012.”43xICGLR, The Mineral Certification Scheme of the International Conference on the Great Lakes Region, p. 11. Available at <www.oecd.org/investment/mne/49111368.pdf>.
Furthermore, the ICGLR endorsed existing initiatives within the territory of the ICGLR, working towards transparency and certification, such as the International Tin Research Institute (ITRI), the Tin Supply Chain Initiative (iTSCi) and the Certified Trading Chains (CTC) in mineral production.44xICGLR 2010, point 10. In addition, it endorsed the OECD Guidance.45xIbid., point 12. -
3. The Rise of Legislative Initiatives to Tackle the Illegal Trade in Conflict Minerals on the National Level
3.1 Introduction
Different actions have been taken by states to combat the trade in conflict minerals, which have urged companies to operate more transparently. Specific reference can be made to legislative actions taken in the DRC and the adoption of Section 1502 Dodd-Frank Act in the United States, which will be discussed in detail below.
This paragraph aims to evaluate the positive consequences and the drawbacks of public legislation of regulating the trade in conflict minerals. As the Dodd-Frank Act is the most influential and most recent public Act on this subject to date, an analysis of this Act would enable the authors to make a well-founded prediction of the impact of possible future EU public legislation. In this fashion, this chapter brings to light the benefits and points of debate surrounding Section 1502 of the Dodd-Frank Act. First, however, it will give a brief overview of the efforts made by the government of the DRC in countering the trade in conflict minerals.3.2 The DRC's Efforts in Dealing with the Conflict Mineral Problem
In recent years, the DRC's government has taken different steps to encourage transparency and traceability in the supply chain of minerals coming from the DRC. The Congolese 2002 Mining Code requires permission for companies that want to extract and export minerals.46xThe Mining Code of 2002 (Law No. 007/2002). Title II, Chapter III of this Act regulates “the procedure for granting mining or quarry rights and the issuing of mining and quarry titles”. Title III, Chapter II provides the general rules regarding the exploitation of minerals. Although the authorities ought to provide ‘detailed certifications’ of the origin of the extracted minerals and the location of the mines, the local authorities do not always fulfil their obligation in issuing such documents.47xUnited Nations 2010 (S/2010/596), p. 79. It should be noted that the DRC currently works on a new oil and mining code. Global Witness, an NGO established to tackle natural resource-related conflict, strongly recommended the DRC legislator to adopt transparency measures on the supply chain of the minerals in the new code on oil and mining.48xGlobal Witness 2010.
3.3 The United States Approach: Section 1502 of the Dodd-Frank Act
In the United States, the 2010 Dodd-Frank Act has been adopted to restructure the financial industry after the financial crisis. However, it also contained a specific section on conflict minerals, which requires companies to take due diligence measures in the supply chains of minerals from the DRC. This piece of legislation is comparable to the US Clean Diamond Trade Act which was designed to implement the KPCS and to tackle the trade in conflict diamonds, with the difference that a failure to disclose the required information is not sanctioned by the Dodd-Frank Act.49xThe Clean Diamond Trade Act of 2003 (Pub. L. No. 108-19) 117 Stat. 631, consideration 6 of this act: “Without effective action to eliminate trade in conflict diamonds, the trade in legitimate diamonds faces the threat of a consumer backlash that could damage the economies of countries not involved in the trade in conflict diamonds […]. To prevent that, […] more than 30 other countries are involved in working, through the ‘Kimberley Process’, toward devising a solution to this problem. […] [The] United States has an obligation to help sever the link between diamonds and conflict and press for implementation of an effective solution.”
3.3.1 Developments Leading to the Establishment of Section 1502
The Dodd-Frank Act was signed by the US Congress as a response to the financial crisis of 2008 and regulated, inter alia, conducts of banks and other financial institutions.50xDrimmer & Phillips 2012, p. 139. Its final rules were issued on 22 August 2012 by the Securities and Exchange Commission (SEC), which was charged with implementing this law.51xVan der Heijden 2012, p. 133.
However, the Dodd-Frank Act does not only aim to reform the financial system in terms of economic stability in the United States. Namely, Section 1502 aims to improve the social and economic situation in the DRC and that of its neighbouring countries. To achieve this goal, it regulates the use of conflict minerals. Congress decided to employ securities laws to address the current situation in this region due to the many atrocities committed there.52xVan der Heijden 2012, p. 136. “It is in the sense of the Congress that the exploitation and trade of conflict minerals originating in the [DRC] is helping to finance conflict characterized by extreme levels of violence in the eastern [DRC], particularly sexual- and gender-based violence, and contributing to an emerging humanitarian situation therein, warranting the provisions of section 13(p) of the Securities Exchange Act of 1934.”
The adoption of Section 1502 was a result of similar, though slightly different, legislation. It is based on the KPCS and the Extractive Industry Transparency Initiative (EITI). EITI was initiated by governments, civil society organizations, investors, companies, and international organizations. It requires companies in the extractive industry, for instance mining, to publish what they pay to countries and governments to disclose what they receive for granting extraction right to companies. It aims to reduce poverty through transparency and accountability, while companies are able to clearly show their contribution to a – often developing – country's economy.53xVan der Heijden 2012, p. 138. While both these initiatives became well known on the international level, Congress argued in 2008 that a mandatory disclosure regime, complimenting already-existing voluntary initiatives, was required to reach major international improvements in payment transparency. This was mostly due to the fact that, in the opinion of Congress, there were not sufficient participants involved with EITI in particular.54xUnited States Court of Appeals for the District of Columbia Circuit 2012, pp. 10-11. “We currently have a voluntary international standard for promoting transparency. A number of countries and companies have joined [EITI], an excellent initiative that has made tremendous strides in changing the cultural secrecy that surrounds extractive industries. But too many countries and too many companies remain outside this voluntary system. […] 156 Cong. Rec. S3815 (May 17, 2010) (Sen. Cardin).”
Initially, an absolute ban on conflict minerals was pursued. However, lack of support led to the creation of the Congo Conflict Minerals Act, which was introduced in April 2009. One year later, this Act became Section 1502 of the Dodd-Frank Act.55xDrimmer & Phillips 2012, p. 142.3.3.2 Content and Scope
As can be found in Section 1502 itself, its goal is to address “the exploitation and trade of conflict minerals originating in the DRC […] helping to finance conflict characterized by extreme levels of violence in the eastern DRC”.56xThe Dodd-Frank Wall Street and Consumer Protection Act of 2010 (Pub. L. No. 111-203) 124 Stat. 1376, see Section 1502 (a) of this Act, at 124 Stat. 2213.
The previous paragraph already showed that Section 1502 replaces voluntary participation in initiatives such as EITI and the KPCS with mandatory participation. In fact, the SEC, the most powerful regulatory body in the US corporate context, has been given enforcement powers by Congress.57xSee, in general, Seligman 1982, referenced by Drimmer & Phillips 2012, p. 150.
First and foremost, Section 1502 requires companies with a listing at the New York Stock Exchange for which the use of conflict minerals is ‘necessary to the functionality or the production’ of their products or manufacturing process to submit a conflict minerals report to the SEC, which has to be published on the company's website as well. By obliging companies to publish the report on their website, the SEC aims to provide investors and other members of the public to access the information the report contains as well.58xUnited States Court of Appeals for the District of Columbia Circuit 2012, p. 14. Whether conflict minerals are ‘necessary to the functionality’ of a product, an issuer should consider (i) whether a conflict mineral is contained in and intentionally added to the product or any element of the product and is not a naturally occurring by-product; (ii) whether a conflict mineral is essential to the product's function, use or purpose and (iii) if a conflict mineral is incorporated for purposes of ornamentation and whether the primary purpose of the product is ornamentation.59xSecurities and Exchange Commission, Final Rules on Sections 1502 and 1504, 17 CFR PARTS 240 and 249b (release No. 34-67716), 13 November 2012, pp. 139-140. Available at: <www.sec.gov/rules/final/2012/34-67717.pdf>.
It should be noted that Section 1502 only applies to cassiterite, coltan, wolframite, gold and their derivatives that originated in the ‘Covered Countries’,60xSection 1502 (e) (1) and (e) (4) Dodd-Frank Act. which implies the DRC and its neighbouring countries. If conflict minerals originated outside this territory or if they came from recycled or scrap sources, no conflict minerals report is necessary.61xThe Dodd-Frank Wall Street and Consumer Protection Act of 2010 (Pub. L. No. 111-203) 124 Stat. 1376, at 2019-2221.
The conflict minerals report must adhere to a number of criteria. First, it must describe due diligence the company conducted on the conflict minerals’ supply change. Second, the products that are not DRC conflict free must be described. Third, the facilities that processed the conflict minerals are to be defined. Fourth and fifth, the conflict minerals’ country of origin and the mine or facility must be indicated. Sixth, the report must include a description of the due diligence used in making the issuer's determination. Finally, an independent private-sector audit62xSecurities and Exchange Commission, Final Rules on Sections 1502 and 1504, 17 CFR PARTS 240 and 249b (release No. 34-67716), pp. 205-208. This was also referenced by Van der Heijden 2012, p. 138. “The audit must provide: (1) a description of the manufactured product or the agreed to manufactured product that is not DRC conflict free; (2) the locations where the minerals originated; (3) the country or countries where the minerals originated; (4) information what the company has done to designate the mine or location of the mine. The mine (or location) of the conflict minerals must be indicated with the greatest possible specificity.” must be submitted of which the report must describe the issuer.63xSection 1502 (b) (1) (A) Dodd-Frank Act; also see Drimmer & Phillips 2012, pp. 144-147.
As can be noted, Section 1502 of the Dodd-Frank Act does not empower the SEC to impose sanctions. It only requires companies within the scope of this provision to submit a conflict minerals report.64xDrimmer & Phillips 2012, p. 144.3.3.3 Direct Implications and Externalities
3.3.3.1 Amelioration of Conflict in the DRC
As can be recalled, the main purpose of Section 1502 is to ameliorate the conflict in the DRC through increased transparency and accountability. Consumer behaviour studies confirm this causal relationship. Namely, the publication of an open-access report implicating a company of using conflict diamonds in their production line will most probably lead consumers to disfavour that company resulting in falling revenue. Therefore, companies will turn to other mineral providers to regain the favour of consumers. As a result, warlords in the eastern DRC will be unable to finance their rebellion with conflict minerals.65xIbid., pp. 148-149.
Theoretically, this rationale makes sense. However, it remains unproven whether it functions as such in practice.66xDrimmer & Phillips 2012, p. 149. This notion was confirmed in a report to the US Committee on Foreign Affairs, which states, “There is not yet a compelling body of evidence to prove the case that improved transparency will bring improved governance and economic development.”67xReport to the Members of the Committee on Foreign Relations United States Senate 2008 (S. PRT. 110-149), p. 5.
A negative externality of this development is the decrease of income of miners in the DRC and its neighbouring countries. These miners, apart from being a participant in a supply chain that finances civil wars, are often victims of the situation themselves. Without the meagre income they make by mining these conflict minerals, it is likely that their situation will worsen.68xIbid.3.3.3.2 Negative Consequences for Companies
As cassiterite, tantalum, coltan and gold are found in many products and the DRC and ‘Covered Countries’ account for about 20 percent of these minerals, approximately 1,200 companies fall within the scope of Section 1502.69xDrimmer & Phillips 2012, p. 148; Van der Heijden 2012, pp. 136-137. It is reported that the compliance costs for companies cannot be quantified70xUnited States Court of Appeals for the District of Columbia Circuit 2012, pp. 21-24.; however, the SEC estimates in its Proposed Rules that these will amount to $16.5 million per company and $4 billion across all issuers.71xDrimmer & Phillips 2012, p. 148.
Section 1502 of the Dodd-Frank Act might also lead to indirect costs for companies within its scope. The fact that companies are required to publish the content of their conflict minerals report online could lead to inaccurate or misleading statements, which could then result in lawsuits. Litigation costs could therefore be an indirect result of Section 1502.72xIbid.
In a case before the Washington, DC Court of Appeals, numerous complaints and suggestions of industry commentators were put forward. Next to the negative financial consequences,73xUnited States Court of Appeals for the District of Columbia Circuit 2012, p. 21. they asked for exemption from duties resulting from Section 1502 in case a host state's laws would prohibit disclosure of economic activities. Without such an exemption, they argued, companies could be barred from bidding on projects and could be forced to discontinue current projects.74xIbid., p. 20. Both the SEC and the Court, however, refused to grant exemptions under these circumstances as, first, no domestic laws prohibiting disclosure are known; second, host countries could be asked for permission and, third, host countries might be discouraged from passing such laws due to international developments favouring transparency.75xUnited States Court of Appeals for the District of Columbia Circuit 2012, p. 21. Furthermore, such exemptions would undermine the goal of Section 1502.76xIbid., p. 20.
Industrial commentators also suggested submission of the conflict minerals report on a confidential basis. In this case, the SEC would aggregate all issuers’ information on a per-country basis. Again, both the Court and the SEC agreed that this would not be possible as it would undermine the goals of Section 1502.77xIbid., pp. 3, 17, 18. “Existing Exchange Act disclosure provisions require issuers to publicly file annual, quarterly and current reports; Section 13(q) (3) (B) – which follows the provision that directs the Commission ‘to the extent practicable’ to make available online a ‘compilation of the information’ the resource extraction issuers are required to submit – makes clear that, at a minimum, any public compilation must include each issuer's individual government-level and project-level disclosures; and Section 13 (q) (2) requires that the disclosures be submitted in an interactive data format, which suggests that Congress intended the information to be provided in a format that allows users to easily extract information most relevant to them.”3.3.4 Criticism from the Foreign Policy Paradigm
While not necessarily a direct consequence or externality of Section 1502, some regard the adoption of this provision foreign policy in the shape of corporate legislation. Drimmer and Phillips believe that the intended ultimate effect of Section 1502 lies outside the border of the United States,78xDrimmer & Phillips 2012, p. 152. and Van der Heijden even labels it as an ‘interventionist approach’,79xVan der Heijden 2012, p. 134. which finds support in the fact that the United States currently regulates, inter alia, the conduct of multinational corporations in ten African nations.80xThe DRC and the ‘Covered Countries’ as described by Section 1502 (b) (1) (A) include the DRC, the Republic of the Congo, the Central African Republic, Sudan, Uguanda, Rwanda, Burundi, Tanzania, Zambia and Angola. Moreover, Senator Cardin stated that Section 1502 is to make the United States the global “leader in creating a new standard for revenue transparency in the extractive industries”.81x156 Cong. Rec. S5873 (July 15, 2010) (Sen. Cardin). Following this line of reasoning, one could conclude that the Dodd-Frank Act was intended as a foreign policy tool as well.
-
4. Private Responses: Initiatives Taken by the Industry to Eliminate Trade in Conflict Minerals
Legislative developments in the United States, the establishment of different due diligence measures by international organizations, and steps taken by the ICGLR increased pressure on companies to take regulatory steps to meet the desired conflict-free trade in minerals coming from Central Africa.
4.1 Examples of Private Initiatives against the Exploitation and Trade in Conflict Minerals
4.1.1 The Tin Supply Chain Initiative of the ITRI
An example of industry-driven initiatives can be found in the Tin Supply Chain Initiative. The ITRI recognized the international need for improving due diligence on the supply of minerals. Therefore, it adopted a set of measures to improve due diligence regarding trade in minerals from the DRC,82xInternational Tin Research Institute (ITRI), Towards a Responsible Cassiterite Supply Chain 2009. including a detailed ‘phased system’, which allows for gradual implementation of due diligence.83xITRI, ITRI Tin Supply-chain Initiative (iTSCi) 2009, p. 6.
The ITRI initiative was criticized by Global Witness, which was also involved in the creation of the KPCS.84xSee, for instance, the Global Witness initiative on blood diamonds. Global Witness 1998. Global Witness argued that the iTSCi missed in its initiative ‘the heart of the problem’, namely, how to avoid the trade with local warlords. In the NGO's view, companies could give a false impression that they had fulfilled their obligations, which would in turn relinquish them from their obligations under the ITRI's initiative.85xGlobal Witness 2009; Nwete 2007, p. 313. Global Witness’ suspicion of the involvement of warlords in the mineral trade was expressed in a 2011 report on the DRC's minerals trade.86xGlobal Witness 2011. This report claims that “[several] well-informed individuals whom Global Witness interviewed in April 2011 highlighted the risk of FARDC officers pursuing their illegal activities through civilian proxies, even after they have withdrawn from mining areas.” In addition to these criticisms, it should be said that the iTSCi does not require its members to publish regular statements elaborating on how they comply with the objectives of the initiative.87xITRI, iTSCi 2009, p. 7. The ITRI states that “providing a system to control large numbers of individual miners in the DRC is neither feasible nor practicable. Therefore, the system has to be implemented at a reasonable and pragmatic level while ensuring, at the same time, that the objectives are substantially met.”4.1.2 The Conflict-Free Smelter
In 2009, the Electronic Industry Citizenship Coalition and Global e-Sustainability Initiative established the Conflict-Free Smelter (‘CFS’) Assessment Program. This program favours conflict-free trade and endorses the OECD Guidance. The CFS Assessment Program carries out (i) business process review, which entails that a processor evaluates the policies of a company including its codes of conduct relating to conflict minerals, and (ii) material analysis review, which consists of an evaluation of the origin of a mineral and its possible recyclability.88xElectronic Industry Citizenship Coalition (EICC) – Global e-Sustainability Initiative (GeSI) 2012.
4.1.3 The Conflict-Free Gold Standard
In October 2012, the World Gold Council (WGC) published the Conflict-Free Gold Standard. The WGC completely endorsed the OECD Guidance Supplement on Gold. The main aim of this standard is to provide producers of gold ‘a common approach’ to avoid indirect support for the armed conflicted.89xWorld Gold Council 2012.
4.1.4 The London Bullion Market Association Responsible Gold Guidance
Finally, reference could be made to the London Bullion Market Association Responsible Gold Guidance, which contained a strategy to avoid trade in conflict minerals and to that end also endorsed the OECD Guidance Supplement on Gold.90xLondon Bullion Market Association (LBMA) 2012. Meanwhile, similar private due diligence initiatives in the gold industry have been taken in the DRC, Uganda, and recently in the United Arab Emirates.91xUnited Nations 2012 (S/2012/843), p. 196.
4.2 Private Initiatives in Perspective, Some General Advantages and Disadvantages of Self-Regulation: Flexibility versus Free-Riding
The self-regulatory initiatives listed above are considered as a form of ‘informal international law’ as they are not shaped within the modalities of classic international law. This has to do with the ‘output, process and actors’ involved in establishing such rules.92xPauwelyn et al. 2011, p. 8. The authors state that “the term ‘informal’ international law-making in contrast and opposition to ‘traditional’ international law-making. IN-LAW is ‘informal’ in the sense that it dispenses with certain formalities traditionally linked to international law. These formalities may have to do with output, process or the actors involved. It is exactly this ‘circumvention’ of formalities under international and/or domestic procedures that generated the claim that IN-LAW is not sufficiently accountable. At the same time, escaping these same formalities is also what is said to make IN-LAW more desirable and effective. Lipson, for example, explains that ‘informality is best understood as a device for minimizing the impediments to cooperation, at both the domestic and international levels.’” The traditional way of making law has been considered as a time-consuming process. As a result, some problems cannot be solved through public law and, therefore, informal law became inevitable.93xPauwelyn et al. 2011, p. 17.
Shaffer and Pollack argue that informal law-making is cheaper, provides more flexibility, the cooperation of states with other states becomes easier, and its instruments are “directly applicable to a wide range of non-states entities”.94xShaffer & Pollack 2010, p. 717. Furthermore, it can also be used as a strategy to invite private actors in the process of thinking about solutions as it brings stakeholders together in this process of establishing private rules.95xPauwelyn et al. 2011, p. 26. “The rise in the international political power of private actors, and the desire of governments to include them in regulatory processes, has shifted cooperation away from intergovernmental organizations and/or formal treaties as these formal processes and output would not allow for their inclusion.”
Despite these advantages, there is one major drawback to informal law-making: the question of accountability and legitimacy.96xWe only indicate this negative aspect that adheres to this development; we will not elaborate this here in depth. This law-making process takes place in an informal sphere, without the presence of a monitory body. Against this background, different questions arise on the way this process is guided. Furthermore, how private actors can be held accountable for their conduct is also a question unsolved.97xBovens 2007, pp. 447-469; See also Berman 2005, pp. 487-555; Curtin & Senden 2011, pp. 163-188. Curtin and Senden provide some possibilities to deal with the problem of lack on accountability and how to deal with legitimacy. See, furthermore, Vytopil 2012, pp. 155-169. Vytopil pays attention to the legal meaning of CSR via applying the codes of conduct. This is especially relevant in politically unstable areas where the authorities are prone to fraud and where corruption is prevalent. According to the 2012 corruption perceptions index of Transparency International, the DRC falls within the top fifteen most corrupt countries in the world.98xTransparency International 2012. Apart from the difficulties caused by the armed conflict in the extraction areas, the reliability of the certificates issued by local authorities may be questionable.99xSee, for instance, Global Witness 2007, p. 13. In this report Global Witness indicates different ‘questionable’ payments by companies to military powers. The same might go the inspection of the extraction sites, which is required under the ICGLR Mineral Certification Scheme.100xICGLR, The Mineral Certification Scheme of the International Conference on the Great Lakes Region, p. 11. “The ICGLR Mine Site Inspection and Certification Standards are designed to ensure that Designated Minerals are sourced only from mine sites that are conflict-free and meet minimum social standards (for example, no child labour). […] Under the ICGLR Scheme, mine sites are inspected annually by a government mines inspector. These government inspections are cross-checked by annual Independent Third Party Audits carried out by an ICGLR accredited auditor.”
These self-regulatory regimes by private parties may also lead to free-riding, which is inherent to an inability to hold companies accountable combined with a corrupted political sphere.101xSee for acknowledgments of this inherent problem Baden et al. 2009, p. 433; Utting 2007, p. 704; King & Lenox 2000, p. 702. King & Lenox only acknowledge the free-rider problem in large groups in contrast to smaller groups. Therefore, the question may arise whether self-regulation does not suffice in promoting transparency, which is of importance to marginalize the trade with warlords. In 2007, Global Witness stated that some “companies seem to favour voluntary frameworks precisely because they are not comprehensive and cannot be enforced. Such companies seem to present an ethical stance to the public while reserving the right to set the limits of their own responsibility in the event that human rights abuses or other crimes do take place. Thus there is no guarantee that soft-law approaches will develop into anything harder and more effective.”102xGlobal Witness 2007, p. 18 (emphasis in original). This NGO rightly pointed out that “[e]ven if voluntary frameworks could be adapted to provide the necessary degree of clarity and specificity, the problem remains that companies which do not want to be bound by a voluntary framework will simply opt not to join. This problem will grow as extractive companies from China, India, Russia and other countries play an increasing role in resource extraction, because companies from these countries have typically not been exposed to the kind of pressure from activist shareholders, non-governmental organisations and class-action plaintiffs that have made Western-based multinationals more sensitive to their reputations on human rights than they used to be.”
Nwete explained the free-riding problem of voluntary self-regulatory regimes. “Some of the companies want to be seen as environmentally friendly – washed in green. They also want to be associated with the noble principles of transparency and CSR but will not be seen implementing them in their activities. As such, companies benefit by being associated with CSR and transparency principles, without actually putting them into practice. It becomes a public relations gimmick that serves no good to the public. This is because the companies are not held accountable by any one including their shareholders for not doing what they preach. There is no law mandating them to do so.”103xNwete 2007, p. 330. This is fully in line with Global Witness's warning on the counterproductivity of the ITRI initiative.104xGlobal Witness 2009. “Global Witness warned that a blanket endorsement of ITRI's proposals, in their current form, could be counter-productive, giving the impression that companies have done enough and discouraging them from being more rigorous. Instead, the Congolese government should push companies further with a view to cutting out armed groups and military units from their supply chain once and for all.” -
5. The EU Response: Towards a Balanced Approach?
5.1 Introduction and Proceedings and Deliberations of the EU
In the previous sections, it was discussed which approaches towards conflict minerals from the DRC have been taken at different levels of governance: on the one hand, public initiatives on the international and the national level, and, on the other, private initiatives. Each level of governance has their own advantages and disadvantages in terms of desirability and effectiveness. This section discusses which approach the EU, as one of the main importers of raw minerals from that area, should take.
While the EU has not yet initiated any legislation concerning the elimination of trade in conflict minerals,105xUnited Nations, Final Report of the Group of Experts on the DRC submitted in accordance with paragraph 4 of the Security Council resolution 2021/2011, 15 November 2012 (S/2012/843), p. 194; see also Van der Heijden 2012, p. 142. it did express its support for previous initiatives.106xVerbruggen et al. 2011, p. 14. At this moment, it is proposed to amend Directive 2004/19/EC (the Transparency Directive) such that it requires more transparency on social issues; see also Van der Heijden 2012, p. 142. However, this proposal does not include conflict mineral disclosure; see European Commission 2011 (MEMO/11/734), p. 8. Both the EU and the African Union have indicated their wish to cooperate on issues relating to raw materials, such as the improvement of transparency of contracts of mining companies.107xEuropean Union 2010, see especially pp. 3, 29. The European contribution to the fight against conflict minerals became more concrete after the appearance of the OECD Guidance and the legislative discussion in the United States.108xVerbruggen et al. 2011, p. 13. Shortly after the adoption of the Dodd-Frank Act, the EU Parliament asked the European Commission to consider the possibilities for adopting a European variant of the US ‘Conflict Laws’.109xEuropean Parliament, 2010 (P7_TA(2010)0350), point 14. The European Commissioner on Trade argued with reference to the Dodd-Frank Act, the KPCS and the EITI that the EU, as the main importer of raw materials, should adopt serious measures in promoting transparency.110xDe Gucht 2010, p. 7. On behalf of the EU De Gucht makes the next statement: “as the world's largest importer of raw materials, should not hesitate to live up to its own responsibilities in this, including those of our own companies. The European Commission has been considering the issue of transparency in the extractive industries within the wider context of EU-financial regulatory reform, and my Colleague Commissioner Barnier is conducting a public consultation to gather stakeholders’ views on financial reporting by multinational companies.”
In 2011, the European Commission endorsed the OECD Guidelines and listed a set of intentions to establish a monitoring programme on critical raw materials.111xEuropean Commission 2011 COM(2011) 25 final, p. 15. The Commission notes that “securing supplies of raw materials is essentially the task of companies and the role of public authorities is to ensure the right framework conditions to allow companies to carry out this task. The Commission intends to explore with the extractive, recycling and user industries the potential for targeted actions, notably with regard to recycling. It is also ready to examine with Member States and industry, the added value and feasibility of a possible stockpiling programme of raw materials.” Although the EU acknowledged that trade in conflict minerals implies the continuation of the armed conflict in Central Africa, it did not adopt innovative measures that could be of importance in reducing, let alone eliminating, the trade in conflict minerals. As said, the EU already endorsed the OECD Guidance and is now working on a disclosure on financial transparency. Such rules are of importance to support the desired transparency in mineral trade from conflict-ridden areas.112xRoadmap of the European Commission, Initiative on Disclosure 2011. However, no initiatives have been taken to promote transparency in supply chains yet.
Thus, the question remains which approach the EU should take. In paragraph B, the general approach of the EU towards corporate regulation is discussed. It is submitted that the EU should take a functional approach in that respect. It is argued that the function of corporate regulation from the European perspective is to ensure that corporations comply with their duties towards all stakeholders. The concept of CSR may prove to be a useful model to determine these duties. As to the question at which level of government the EU should promote regulation, it is submitted that it should assess at which level the strongest incentives are provided to corporations to comply with their duties towards stakeholders. Paragraph C assesses whether an obligation exists for corporations towards their stakeholders to disclose their business with regard to conflict minerals since some authors have argued that these obligations are part of foreign policy instead of corporate regulation. It is submitted that such an obligation can be derived from the concept of CSR. In paragraph D, the advantages and disadvantages of regulating conflict minerals at the different levels of governance are discussed. It is submitted that the EU should take a balanced approach towards conflict minerals in which elements of private and public regulation are combined. Paragraph E discusses the advantages and disadvantages of such an approach by taking a closer look at a successful example of such an approach in the diamond industry: the Kimberley Process.5.2 Corporate Regulation and the EU: A Functional Approach
5.2.1 Assessing Different Levels of Governance from an EU Perspective: A Functional Approach towards Corporate Regulation
The reality of the multiplication of legal sources in the EU has been discussed extensively by academics.113xAn overview of existing literature can be found in Michaels & Jansen 2006, p. 843 and Smits 2011. In the context of private law, Jan Smits has noticed that “[d]ifferent authorities can legitimately compete on the same territory or about the same relationship without a higher authority deciding the conflict once and for all.”114xSmits 2011, p. 6. This process also takes place in the area of corporate regulation. The discussion whether the EU should be regulating the conflict minerals problem is only one example.115xFor an overview of European legislation with regard to company law and corporate governance, see <http://ec.europa.eu/internal_market/company/index_en.htm> (last accessed 10 November 2013). For a discussion what this situation means for corporate law in the Netherlands, see Timmerman 2003, pp. 1638-1639.
As we have seen in the previous chapters, initiatives are taken at different levels of governance. In this legal environment, it is important for the EU to follow a strategy with regard to the question whether European regulation is a suitable level of governance for a certain topic. The question whether the EU should regulate certain topics or should leave it to other levels of governance is a normative question. As stated by Smits, it is necessary to develop a theory to come up with solutions with regard to this question “that allows us to decide not only at which geographical level of regulation private relationships are best dealt with (the local, regional, national, European or supranational level), but also by whom (legislators, regulatory agencies, courts or the parties themselves) and for which topics”.116xSmits 2011, p. 8. Smits then proposes two principles from which such a theory may be derived: the principle of subsidiarity as laid down in Article 5(3) of the Treaty of the European Union (TEU) and the function of private law.
The principle of subsidiarity as laid down in Article 5(3) TEU demarcates EU competences from national competences in areas which do not fall within its exclusive competence such as those mentioned in Article 3 of the Treaty on the Functioning of the European Union. The principle entails that “the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or the effects of the proposed action, be better achieved at Union level.”117xArticle 5(3) TEU. This means that legislation should be taken at the lowest appropriate level of government.118xSmits 2011, pp. 9-10. By analogy, Smits proposes that the principle of subsidiarity may also be useful as a criterion for determining whether the EU should leave legislation to other levels of governance, such as private regulation, or take action itself.
The question that follows is what the lowest appropriate level of government is. The principle of subsidiarity provides a starting point for answering this question, but does not as such give substantive reasons for regulating corporate behaviour at one level rather than another.119xIbid., p. 10. In finding these reasons, Smits suggests to develop criteria on the basis of a “functional view of the regulation of relationships between private parties”120xIbid.: “What are actually the functions that private law at the ‘natural’ national level serves and could these functions not be achieved in a better way at another level?”121xIbid.
We submit that this approach may also prove to be a helpful strategy for corporate regulation. In the following sections, an attempt is made to give the principle of subsidiarity substance in the context of corporate regulation. It is submitted that the function of corporate regulation may be deduced from the CSR model (Section 5.2.2). Consequently, it is discussed which kind of obligations may be derived from this model (Section 5.2.3). Finally, it is discussed under which conditions the EU can assume that this function should be regulated at the European level taking into account the principle of subsidiarity (Section 5.2.4). Ultimately, the question as to what level of regulation of corporate behaviour with regard to conflict minerals is most appropriate will be answered from the perspective of the function of corporate regulation in paragraph D.5.2.2 The Function of Corporate Regulation from an EU Perspective: CSR
Corporate law regulates the relationship between corporations, participants in activities of corporations and states.122xSutherland 2010, p. 271. In order to determine its function, it is necessary to take a brief look at contemporary corporate law theory. Generally, two views are distinguished, which differ in their conception of what the function of corporate law is: contract theory and CSR. On the one hand, contract theory provides an account of corporations as a nexus of contracts.123xIbid., p. 272. Generally, two conclusions are drawn from this theory with regard to corporate law: first, peremptory regulation of corporations is inefficient and inappropriate and, second, corporate law should facilitate maximization of shareholder value. On the other hand, CSR dictates that “corporate law and corporations are […] not merely aimed at promoting the interests of shareholders but are primarily concerned with a much wider range of stakeholders.”124xIbid., p. 274. It is submitted that the CSR perspective is the most desirable strategy for the EU with regard to corporate regulation in general and with regard to conflict minerals in particular. Moreover, the CSR perspective fits best in already existing policy of the EU with regard to corporate regulation.
CSR requires engagement of companies with their stakeholders. As such, it “can bring benefits in terms of risk management, cost savings, access to capital, customer relationships, human resource management, and innovation capacity”.125xEuropean Commission 2011 COM(2011) 681 final, p. 3. Indeed, consumers and other stakeholders appear to attribute more and more importance to corporate social behaviour. Recent studies show that a significant percentage of global consumers expect social consciousness from corporations.126xDrimmer & Phillips 2012, p. 133. Furthermore, social corporate behaviour appears to affect investment-making decisions.127xIbid., pp. 133-135. There is also evidence that acknowledges a correlation between social responsibility practices and increased market value of companies.128xIbid., p. 135. The costs of failing these expectations may be considerable for corporations though; for instance, consider negative media coverage or human rights-related litigation.129xIbid., pp. 135-136. Thus, not only may fulfilling social obligations be more appropriate corporate conduct, but it also appears to increase economic value.130xBacker 2007, p. 605.
It is part of the EU's CSR policy to promote transparency on social issues.131xEuropean Commission 2011 COM(2011) 681 final, p. 5. The European Commission defines CSR as “the responsibility of enterprises for their impacts on society”.132xIbid., p. 6. It has also identified “the need to consider self- and co-regulation schemes, which are an important means by which enterprises seek to meet their social responsibility”.133xIbid., p. 5. In addition, it held that, in order to meet the needs of companies and stakeholders, transparency duties should only apply to material information and should be cost-effective to collect.134xIbid., p. 11. Given the critique on public regulation, such as the Dodd-Frank Act, it should be considered whether the promotion of self-regulation with regard to transparent behaviour of corporations involved in the mineral exploitation sector would be an alternative for the EU.5.2.3 CSR as the Function of Corporate Regulation: Which Obligations Can Be Derived from This Approach?
If promoting CSR is the correct perspective from which the function of corporate regulation can be analyzed, another question can be posed which asks which obligations can be derived from this perspective. As stated in literature, CSR suggests a theory “grounded in the treatment of economic entities as institutional individuals with obligations to all other individuals with which it engages in transactions or interactions”.135xIbid., p. 607. This is also supported by the CSR strategy of the European Commission.136xEuropean Commission 2011 COM(2011) 681 final, p. 6. CSR interpreted as a model of corporate governance might provide some interesting insights about the function of corporate regulation. Such an account is provided by Sacconi,137xSacconi 2006. who defines CSR as
a model of extended corporate governance whereby who runs a firm (entrepreneurs, directors, managers) [the agents] have responsibilities that range from fulfillment of their fiduciary duties towards the owners to fulfillment of analogous fiduciary duties towards all the firm's stakeholders.138xIbid., pp. 296-297.
In essence, a fiduciary duty is a duty of trust. The trustor (the owner or shareholder) delegates the control over his resources to the trustee (the agents of the corporation). The trustee is now empowered to choose actions and goals with regard to these resources.139xIbid., p. 297. However, this choice is restricted by the fact that the results of these actions and goals should satisfy the trustor's interests. As such, the trustee has a fiduciary duty towards the trustor. As discussed above, the rise of CSR as a model of corporate governance has provoked an academic debate whether corporations are obliged to fulfil such duties only towards the shareholders or towards a broader range of stakeholders. Sacconi suggests the latter.140xIbid., p. 302. He defines stakeholders as
those individuals whose interest is involved because they undergo the ‘external effects’, positive or negative, of the transactions performed by the firm, even if they do not directly participate in the transaction, so that they do not contribute to, nor directly receive value from the firm.141xIbid., p. 298.
Assuming that corporations have indeed ‘extended’ fiduciary duties towards all stakeholders, the question arises what these obligations entail in concreto. With regard to non-owners, such as employees and local communities affected by the corporation's business, Sacconi makes a distinction between those who are party to transactions of the corporation and those who are not. Towards the former, the corporation is obliged to abstain from activities that impose negative effects on them or offer them compensation for those effects. With regard to the latter, the company should remunerate them “with pay-offs (monetary or of other kinds, for example in terms of the quantity, quality and prices of goods, services, working conditions etc.) which, taken for granted a fair status quo, must contain a part tied to the firm's economic performance such to approximate fair/efficient shares of the surplus”.142xIbid., p. 308. However, it should not be disregarded that the owners made the largest investment in the company. Therefore, the corporation is obliged to maximize shareholder value provided that this is compatible with corporations’ extended fiduciary duties towards the non-owners.143xIbid.5.2.4 Determining the Best Level of Regulation: The Principle of Subsidiarity
Assuming that the principle of subsidiarity in the context of corporate regulation means that a certain topic should be regulated at the most appropriate level of government and that the function of corporate regulation is to ensure that corporations comply with their duties towards stakeholders, the EU should assess whether European legislation is more effective in forcing corporations to comply than national legislation or private regulation. In other words, an attempt to regulate companies should be through legal or non-legal norms that provide incentives to the agents of the companies to comply with their ‘extended fiduciary duties’.144xIbid., p. 315. Therefore, it is interesting to analyze which level of regulation, public or private self-regulation, provides the strongest incentives to companies to comply with these ‘extended fiduciary duties’.
5.3 Disclosure and Conflict Minerals in the Context of CSR: An Obligation towards Stakeholders?
The pressure on the EU to take appropriate measures on corporate minerals has increased, especially since July 2010 when the US Congress enacted the Dodd-Frank Act.145xVerbruggen et al. 2011, p. 13. The EU is one of the largest importers of raw materials from the DRC and its neighbouring countries and should take responsibility to address the problem. Verbruggen et al. argued that, due to the absence of comprehensive EU legislation regarding the trade in conflict minerals, this problem can be addressed within the context of the EU policy on the endorsement of CSR.146xVerbruggen et al. 2011, p. 14. The authors argue that “the most feasible and efficient way to tackle the issue of reporting obligations for companies active in the extractive industries, is possibly to frame it in the context of the broader European Corporate Social Responsibility Policies of the EU. Moreover, addressing this specific problem in a broader perspective has the advantage of leaving open possibilities to include other situations in which EU companies have a direct effect on the occurrence of human rights violations.” The most feasible method of addressing this problem is to impose transparency duties on corporations.147xIbid., p. 14. One of the leading points in stimulating CSR is transparency in the supply chain and the financial system, which has been acknowledged by the EU as well.148xIbid. In this context, the EU will propose an initiative on disclosure of non-financial information by companies.149xIbid., p. 3. The main question in this paragraph is whether a duty to disclose can be derived from the CSR perspective as described in paragraph B.
At this stage, the remaining question is whether it can be argued from the CSR perspective that companies have a fiduciary duty towards their stakeholders to disclose the whereabouts of minerals used in the production of their products or manufacturing processes. There has been some academic debate on how public regulation of social issues ought to be viewed.150xDrimmer & Phillips 2012, p. 150. In the light of the aim of Section 1502 of the Dodd-Frank Act – the amelioration of the conflict in the DRC – it is at least questionable whether disclosure duties may impose (legal or non-legal) obligations on corporations in relation to their stakeholders. In the first place, the language of Section 1502 does not offer support for the view that the provision is even meant as investor protection.151xIbid., p. 151. Secondly, as discussed above, it is suggested that the provision is foreign policy by the United States to tackle the financing of militant groups in the region.152xIbid., pp. 141, 152.
Nevertheless, Section 1502 has also been viewed as a new kind of mechanism to compel companies to respect human rights in the conduct of their business by raising the cost of violating them.153xIbid., p. 152. As such, it sets a precedent that economic regulation by nation states does not necessarily require a strong connection to investor protection, but can be used to oblige companies to comply with human rights standards.154xIbid., p. 153. By obliging transparency on human rights issues, public regulation provides incentives to companies to comply with their responsibilities towards stakeholders. Transparency allows investors to make an informed decision on participation in a company and to hold the company accountable for its behaviour. Moreover, although a failure to comply with Section 1502 cannot be followed by a sanction, companies might be held accountable by a wide range of other stakeholders that may be impacted, such as advocacy groups or local communities.155xIbid., pp. 135-136.
This view is supported by the UN ‘Guiding Principles on Business and Human Rights’, which in essence states that companies should respect human rights. Accordingly, companies should address possible human rights violations that may be caused by their activities.156xUnited Nations 2011, Principle 11. In order to comply with this obligation, they should have human rights due diligence processes “to identify, prevent, mitigate and account for human rights impacts”.157xIbid., Principle 15. For example, Principle 21 states that business enterprises should be prepared to communicate their human rights impacts, particularly when concerns are raised by or on behalf of affected stakeholders. Thus transparency responsibilities arise for companies where there is a risk of human rights impacts in their conduct of business. -
6. Conclusion: Assessing Different Levels of Corporate Disclosure Regulation from a CSR Perspective
It is widely recognized that action is required to discourage companies from trading conflict minerals. This is supported by the development of international norms such as the OECD Guidance, which aims to increase awareness amongst companies of their responsibility in the continuation of the armed conflict in the DRC by doing business with warlords. Moreover, several private initiatives have been taken in order to improve due diligence concerning the trade of conflict minerals, such as the ITRI. Recently, the problem has also been addressed by public legislators, such as the adoption of Section 1502 of the Dodd-Frank Act in the United States. An inspiring example of mixed regulation is the KPCS. This global initiative was developed by the diamond industry, governments and other relevant actors, such as NGOs, with more or less the same objectives as the current set of initiatives that have been taken in the struggle against conflict minerals. These initiatives have in common that they address the problem by imposing transparency obligations on companies.
These developments urge the EU, a major importer of raw materials, to regulate corporate behaviour with regard to conflict minerals. The question is how the EU should address the problem, via public regulation or by promoting private self-regulation. On the one hand, an analysis of the self-regulatory regimes learned that, despite their advantages, these regimes do often not provide incentives to companies to comply because of the lack of enforcement mechanisms. On the other, the adoption of Section 1502 of the Dodd-Frank Act has been critiqued for being ineffective and too costly.
It has been suggested in this research that the EU should frame such regulation from the perspective of CSR. This fits within the strategy of the European Commission to make companies responsible for their impacts on society. As such, the Commission has stressed the importance of transparency of companies. From a theoretical perspective, it was shown that companies have indeed social obligations towards stakeholders in the broad sense. The function of corporate regulation should be to provide incentives to companies to comply with these duties. It follows from developments such as the Dodd-Frank Act and the Guiding Principles on Business and Human Rights that companies have indeed the duty towards stakeholders to be transparent. Accordingly, the EU should promote regulation at the level that provides the strongest incentives for companies to comply with these duties.
Although further empirical research is necessary to measure the exact impacts of public and private standards, it is possible to provide a preliminary conclusion on the basis of previous experiences with public regulation and private self-regulation. Since both regulatory regimes have limitations in achieving the objective of regulating conflict minerals, it suggested that the EU should adopt a mix of both regimes. As such, the development of transparency norms can be delegated to companies, stakeholders and other affected parties, whereas the EU could provide for an effective accountability mechanism to enforce these norms. The structure of the KPCS concerning the diamond industry provides an example of how this can be achieved. Bibliography L.C. Backer, “From Moral Obligation to International Law: Disclosure Systems, Markets and the Regulation of Multinational Corporations”, 39 Georgetown Journal of International Law 2007, pp. 591-653.
D.A. Baden, I.A. Harwood & D.G. Woodward, “The Effect of Buyer Pressure on Suppliers in SMEs to Demonstrate CSR Practices: An Added Incentive or Counter Productive?”, 27(6) European Management Journal 2009, pp. 429-441.
P.S. Berman, “From International Law to Law and Globalization”, 43 Columbia Journal of Transnational Law 2005, pp. 487-555.
M. Bovens, “Analysing and Assessing Accountability – A Conceptual Framework”, 13(4) European Law Review 2007, pp. 447-469.
N. Cook, Conflict Minerals in Central Africa: U.S. and International Responses, Washington, DC, Congressional Research Service 2012.
D. Curtin & L. Senden, “Public Accountability of Transnational Private Regulation: Chimera or Reality”, 38 Journal of Law and Society 2011, pp. 163-188.
K.L.G.E. De Gucht, A Partnership of Equals (speech of the EU Trade Commissioner on the occasion of the 20th Session of the ACP-EU Joint Parliamentary Assembly), Kinshasa 2010.
J.C. Drimmer & N.J. Phillips, “Sunlight for the Heart of Darkness: Conflict Minerals and the First Wave of Sec Regulation of Social Issues”, Human Rights & International Legal Disclosure 2012, pp. 131-158. Available at: <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1812063>.
Electronic Industry Citizenship Coalition (EICC) – Global e-Sustainability Initiative (GeSI), EICC®-GeSI Conflict-Free Smelter (CFS) Assessment Program, Washington, DC, EICC-GeSI 2012.
European Commission, Initiative on Disclosure of Non-financial Information by Companies, Brussels, European Commission 2011.
European Commission, Proposal for Directive on Transparency Requirements for Listed Companies and Proposals on Country by Country Reporting – Frequently Asked Questions, 25 October 2011 (MEMO/11/734).
European Commission, A Renewed EU Strategy 2011-2014 for Corporate Social Responsibility, 25 October 2011 COM(2011) 681 final.
European Commission, Tackling the Challenges in Commodity Markets and on Raw Materials, 2 February 2011 COM(2011) 25 final.
European Parliament, Resolution on Failures in Protection of Human Rights and Justice in the Democratic Republic of Congo, 7 October 2010 (P7_TA(2010)0350).
European Union, Joint Africa EU Strategy 2010-2013, third Africa EU summit on 29 and 30 November 2010 in Tripoli.
Global Witness, Congo's Minerals Trade in the Balance, London, Global Witness 2011.
Global Witness, Global Witness's Recommendations on the Mining Code Revision, London, Global Witness, 10 October 2010.
Global Witness, Oil and Mining in Violent Places. Why Voluntary Codes for Companies Don't Guarantee Human Rights, London, Global Witness 2007.
Global Witness, A Rough Trade, The Role of Companies and Governments in the Angolan Conflict, London, Global Witness 1998.
Global Witness, Tin Industry Supply Chain Current Proposals Insufficient. Congolese Government Should Push Companies to Be More Rigorous, London, Global Witness 2009.
The Group of Eight, Responsible Leadership for a Sustainable Future, L'Aquila, G8 Summit 2009.
V. Hauffler, “The Kimberley Process Certification Scheme: An Innovation in Global Governance and Conflict Prevention”, 89(4) Journal of Business Ethics 2009, pp. 403-416.
The International Conference on the Great Lakes Region (ICGLR), The Lusaka Declaration of the ICGLR Special Summit to Fight Illegal Exploitation of Natural Resources in the Great Lakes Region, 15 December 2010.
The International Conference on the Great Lakes Region (ICGLR), The Pact on Security, Stability and Development in the Great Lakes Region, 14-15 December 2006.
International Tin Research Institute (ITRI), Towards a Responsible Cassiterite Supply Chain, London, ITRI 2009.
International Tin Research Institute (ITRI), ITRI Tin Supply-chain Initiative (iTSCi), London, ITRI 2009.
London Bullion Market Association (LBMA), Responsible Gold, London, LBMA 2012.
A.A. King & M.J. Lenox, “Industry Self-Regulation Without Sanctions: The Chemical Industry's Responsible Care Program”, 43(4) The Academy of Management Journal, August 2000, pp. 698-716.
R. Michaels & N. Jansen, “Private Law Beyond the State? Europeanization, Globalization, Privatization”, 54 American Journal of Comparative Law 2006, pp. 843-890.
The Norwegian Agency for Development Cooperation (Norad), The International Conference on the Great Lakes Region (ICGLR) – Review of Norwegian Support to the ICGLR Secretariat, Oslo, Norad 2009.
B. Nwete, “Corporate Social Responsibility and Transparency in the Development of Energy and Mining Projects in Emerging Markets; Is Soft Law the Answer?”, 8 German Law Journal 2007, pp. 311-340.
OECD, Final Downstream Report on One-Year Pilot Implementation of the Supplement on Tin, Tantalum, and Tungsten, Paris, OECD Publishing 2013.
OECD, OECD Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas, Paris, OECD Publishing 2012.
J. Pauwelyn, R.A. Wessel & J. Wouters, The Exercise of Public Authority Through Informal International Lawmaking: An Accountability Issue?, Jean Monnet Working Paper 06/11, 2011.
Report to the Members of the Committee on Foreign Relations United States Senate, The Petroleum and Poverty Paradox: Assessing U.S. and International Community Efforts to Fight the Resource Curse, 16 October 2008 (S. PRT. 110-149).
L. Sacconi, “Corporate Social Responsibility (CSR) as a Model of ‘Extended’ Corporate Governance: An Explanation Based on the Economic Theories of Social Contract, Reputation and Reciprocal Conformism”, in F. Cafaggi (Ed.), Reframing Self-regulation in European Private Law, Alphen aan den Rijn, Wolters Kluwer Law Business 2006, pp. 289-343.
J. Seligman, The Transformation of Wall Street, Boston, Houghton Mifflin 1982.
S. Shaffer & M. Pollack, “Hard vs. Soft Law: Alternatives, Complements and Antagonists in International Governance”, 94 Minnesota Law Review 2010, pp. 706-799.
J. Smits, “Plurality of Sources in European Private Law, or: How to Live With Legal Diversity?”, available at SSRN: <http://ssrn.com/abstract=1802350> (last accessed 4 February 2013).
D. Sutherland, “Globalization and Corporate Law”, in M.G. Faure & A.J. Van der Walt (eds.), Globalization and Private Law: The Way Forward, Cheltenham, Edward Elgar 2010, pp. 255-340.
L. Timmerman, “Kroniek van het vennootschapsrecht”, 31 Nederlands Juristenblad 2003, pp. 1638-1639.
Transparency International, Corruption Perceptions Index 2012, Berlin, Transparency International 2012.
United Nations, Final Report of the Group of Experts on the DRC, 29 November 2010.
United Nations, Final Report of the Group of Experts on the DRC submitted in accordance with paragraph 5 of Security Council Resolution 1952/2010, 2 December 2011 (S/2011/738).
United Nations, Final Report of the Group of Experts on the DRC, 15 November 2012 (S/2012/843).
United Nations, Final Report of the Panel of Experts on the Illegal Exploitation of Natural Resources and Other Forms of Wealth of the Democratic Republic of the Congo, 16 October 2002 (S/2002/1146).
United Nations, Guiding Principles on Business and Human Rights, Geneva, United Nations 2011.
United Nations, Interim Report of the Group of Experts on the DRC submitted in accordance with paragraph 5 of Security Council Resolution 1952/2010, 7 June 2011 (S/2011/345).
United Nations, Interim Report of the Group of Experts on the DRC submitted in accordance with paragraph 4 of Security Council Resolution 2021/2011, 27 June 2012 (S/2012/348).
United States Court of Appeals for the District of Columbia Circuit, American Petroleum Institute & Others v. Securities and Exchange Commission, No. 12-1398 (2012).
P. Utting, “CSR and Equality”, 28(4) Third World Quarterly 2007, pp. 697-712.
M.J.C. Van der Heijden, “The Dodd-Frank Act's Interventionist Approach to Business and Human Rights”, 5 Tijdschrift voorvennootschaps- en rechtspersonenrecht 2012, pp. 133-143.
D. Verbruggen, E. Francq & J. Cuvelier, Guide to Current Mining Reform Initiatives in Eastern DRC, Antwerp 2011.
L. Vytopil, “Contractual Control and Labour-Related CSR Norms in the Supply Chain: Dutch Best Practices”, 8(1) Utrecht Law Review 2012, pp. 155-169.
World Diamond Council, The Kimberly Process. Third Year Review, New York, World Diamond Council 2006.
World Gold Council, Conflict-Free Gold Standard, London, World Gold Council 2012.
Noten
-
1 United Nations 2002 (S/2002/1146).
-
2 Drimmer & Phillips 2012, pp. 139-140.
-
3 United Nations 2002 (S/2002/1146).
-
4 Resolution of the Security Council of the United Nations, 24 January 2003 (S/RES/1457).
-
5 Cook 2012, p. 2. Conflict minerals are described by Cook as “ores that, when sold or traded, have played key roles in helping to fuel conflict and extensive human rights abuses, since the late 1990s, in far eastern Democratic Republic of the Congo”. Section 1502 of the Dodd-Frank Act provides the following description to conflict minerals: “[…] columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives; or […] any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country”.
-
6 Resolution of the Security Council of the United Nations, 24 January 2003 (S/RES/1457), the Security Council “[n]otes with concern that the plundering of the natural resources and other forms of wealth of the Democratic Republic of the Congo continues and is one of the main elements fuelling the conflict in the region, and in this regard, demands that all States concerned take immediate steps to end these illegal activities, which are perpetuating the conflict, impeding the economic development of the Democratic Republic of the Congo, and exacerbating the suffering of its people”.
-
7 Resolution of the Security Council of the United Nations, 12 March 2004 (S/RES/1533).
-
8 Resolution of the Security Council of the United Nations, 31 July 2006 (S/RES/1698); Resolution of the Security Council of the United Nations, 10 August 2007 (S/RES/1771); Resolution of the Security Council of the United Nations, 31 March 2008 (S/RES/1807); Resolution of the Security Council of the United Nations, 22 December 2008 (S/RES/1857); Resolution of the Security Council of the United Nations, 30 November 2009 (S/RES/1896); Resolution of the Security Council of the United Nations, 29 November 2010 (S/RES/1952); Resolution of the Security Council of the United Nations, 29 November 2011 (S/RES/2021).
-
9 United Nations 2010 (S/2010/596).
-
10 Resolution of the Security Council of the United Nations, 29 November 2010 (S/RES/1952).
-
11 United Nations 2010 (S/2010/596), p. 84. It should be noted that the Group of Experts recommends additional due diligence guidelines for “[i]mporters, processing industries and consumers of mineral products from ‘red flag’ locations […] in order to mitigate the broader risks of directly or indirectly supporting criminal networks and perpetrators of serious human rights abuses, particularly within the armed forces of the Democratic Republic of the Congo, and of directly or indirectly worsening the conflict in the east”.
-
12 Ibid., p. 84, “the Group recommends a risk-based due diligence approach for importers, processing industries and consumers of mineral products, meaning that these individuals and entities need to assess and mitigate the risks of adverse impacts associated with their operations. ‘Mitigate’ here means ‘to moderate in force or intensity’. This standard requires individuals and entities to mitigate their risk of supporting the following armed groups in the eastern part of the Democratic Republic of the Congo: FDLR, ADF, LRA and numerous Mai Maimilitia. Significantly, excluded from the definition is FARDC, the armed force of the constitutional State, not an armed group. Similarly, other armed State services, including PNC, the mining police and ANR, are also not illegal armed groups and are therefore excluded.”
-
13 Ibid. The Group of Experts means by ‘red flag’ locations “the eastern part of the Democratic Republic of the Congo and other countries in the region through which minerals from that area are known to transit, including Rwanda, Burundi, Uganda, Kenya, the United Republic of Tanzania and the Sudan”.
-
14 Ibid., p. 85. “Because of the Group's finding of multiple links between conflict in the eastern part of the Democratic Republic of the Congo and the involvement of criminal networks within FARDC in mineral exploitation and trade, and to promote consistency between global efforts to define the due diligence required to mitigate the risk of trade in ‘conflict’ minerals, including those of OECD, the Group recommends additional due diligence guidance. The additional guidance concerns how to mitigate the risks of direct or indirect support for criminal networks and/or perpetrators of serious human rights abuses within the armed forces and the broader impact of direct or indirect support for conflict in the eastern part of the Democratic Republic of the Congo.”
-
15 United Nations 2010 (S/2010/596), p. 86. “The Group recommends the adoption of the second, expanded due diligence option because it addresses more comprehensively than the first the factors generating insecurity in the eastern part of the Democratic Republic of the Congo. The second option is also more consistent with other due diligence guidance relating to commercial activity in conflict-affected and high-risk areas. If, however, the first, narrower due diligence guidance is endorsed by the Committee, the Group's mandate should include the evaluation of its impact and effect, and whether or not broader due diligence, as proposed in the second option, is required.”
-
16 United Nations 2010 (S/2010/596), p. 86.
-
17 Ibid., see pp. 93-96.
-
18 Ibid., p. 85. “The Group therefore recommends that where there is manifest failure of individuals and entities to perform due diligence, as outlined in these guidelines, and where there is evidence that this has directly or indirectly benefited an armed group, this should be a criterion for the examination by the Council of the case for the imposition of targeted sanctions.”
-
19 Resolution of the Security Council of the United Nations, 29 November 2010 (S/RES/1952). The basis for this recommendation has been the Resolution of the Security Council of the United Nations, 30 November 2009 (S/RES/1896). In this resolution the Security Council decided “that the mandate of the Group of Experts […] shall also include the task to produce, […] recommendations to the Committee or guidelines for the exercise of due diligence by the importers, processing industries and consumers of mineral products regarding the purchase, sourcing (including steps to be taken to ascertain the origin of mineral products), acquisition and processing of mineral products from the Democratic Republic of the Congo”.
-
20 Resolution of the Security Council of the United Nations, 29 November 2011 (S/RES/2021).
-
21 United Nations 2012 (S/2012/843); United Nations 2012 (S/2012/348); United Nations 2011 (S/2011/738); United Nations 2011 (S/2011/345).
-
22 Verbruggen et al. 2011, p. 6.
-
23 See the OECD's website: <www.oecd.org/about/> (last accessed 12 November 2013).
-
24 United Nations 2010 (S/2010/596), p. 86; Resolution of the Security Council of the United Nations, 29 November 2010 (S/RES/1952); Resolution of the Security Council of the United Nations, 29 November 2011 (S/RES/2021).
-
25 The Group of Eight 2009, p. 48. The G8 here “[encouraged] the OECD, the United Nations and the Global Compact to work with the Conference and engage with key stakeholders to further develop practical guidance for business operating in countries with weak governance”; The Lusaka Declaration of the ICGLR special summit to fight illegal exploitation of natural resources in the Great Lakes Region, 15 December 2010. The ICGRL welcomed the cooperation with OECD in combating illegal exploitation of natural resources and therefore “[endorsed] the OECD Due Diligence Guidance […] and [called] upon companies sourcing minerals from the Great Lakes Region to comply with the six tools and the OECD Due Diligence Guidance”; The 2007 Heiligendamm G8 Summit, Declaration on Growth and Responsibility in the World Economy, p. 30. The G8 here recommended the “development of a consolidated set of principles and guidelines that apply to the international mining sector in developing countries would help ensure that the sector contributes to development while at the same time providing a clear and more predictable set of expectations for investors.”
-
26 OECD 2012, p. 3.
-
27 Ibid., p. 12. The OECD defines due diligence as “an on-going, proactive and reactive process through which companies can ensure that they respect human rights and do not contribute to conflict”.
-
28 Ibid.
-
29 OECD 2012, p. 15.
-
30 Ibid., p. 18. This requirement is explained as follows: “[companies] should […] [adopt], and clearly communicate to suppliers and the public, a company policy for the supply chain of minerals originating from conflict-affected and high-risk areas. This policy should incorporate the standards against which due diligence is to be conducted, consistent with the standards set forth in the model supply chain policy in Annex II. [The companies should structure] internal management to support supply chain due diligence. [The companies should establish] a system of controls and transparency over the mineral supply chain. This includes a chain of custody or a traceability system or the identification of upstream actors in the supply chain. This may be implemented through participation in industry-driven programs. [The companies should strengthen] company engagement with suppliers. A supply chain policy should be incorporated into contracts and/or agreements with suppliers. Where possible, assist suppliers in building capacities with a view to improving due diligence performance. [The companies should establish] a company-level, or industry-wide, grievance mechanism as an early-warning risk-awareness system.”
-
31 Ibid. This step is explained as follows: “[companies] should […] [identify] risks in their supply chain as recommended in the Supplements. [The companies should assess] risks of adverse impacts in light of the standards of their supply chain policy consistent with Annex II and the due diligence recommendations in this Guidance.”
-
32 Ibid. This step is explained as follows: “[companies] should […] [report] findings of the supply chain risk assessment to the designated senior management of the company. […] [The companies should devise] and adopt a risk management plan. […] [The companies should implement] the risk management plan, monitor and track performance of risk mitigation efforts and report back to designated senior management. […] [The companies should undertake] additional fact and risk assessments for risks requiring mitigation, or after a change of circumstances.”
-
33 OECD 2012, p. 19. This step is explained as follows: “[companies] at identified points (as indicated in the Supplements) in the supply chain should have their due diligence practices audited by independent third parties. Such audits may be verified by an independent institutionalised mechanism.”
-
34 Ibid. This step is explained as follows: “[companies] should publicly report on their supply chain due diligence policies and practices and may do so by expanding the scope of their sustainability, corporate social responsibility or annual reports to cover additional information on mineral supply chain due diligence.”
-
35 Ibid., p. 20 (Annex II).
-
36 Ibid., pp. 31-111.
-
37 OECD 2013, p. 13.
-
38 The International Conference on the Great Lakes Region (ICGLR) 2006, see Art. 9 of this pact, which states that this pact aimed to “transform the Great Lakes Region […], into a space of durable peace and security, of political and social stability”.
-
39 The ICGLR was established in 2004 and came into force in 2006. It was established to respond to the regional conflicts. See for the background of this organization The Norwegian Agency for Development Cooperation (Norad) 2009, p. 6. The preamble of the Lusaka Declaration of the ICGLR special summit to fight illegal exploitation of natural resources in the Great Lakes Region, 15 December 2010. The ICGLR summarizes here the negative impacts of the trade in conflict minerals; it states that the ICGLR is “[f]ully aware of the endemic conflicts and persistent insecurity caused by armed groups in the Great Lakes Region financed through the illegal exploitation of natural resources and trade in minerals, in particular gold, colombo-tantalite, wolframite and cassiterite; and further concerned about the negative impact these armed groups have had on our population in the region including, crimes against humanity, and massive violations of human rights such as, sexual and gender based violence”.
-
40 These six measures are called ‘six tools’.
-
41 ICGLR 2010, at the second point.
-
42 ICGLR 2006, Art. 9.
-
43 ICGLR, The Mineral Certification Scheme of the International Conference on the Great Lakes Region, p. 11. Available at <www.oecd.org/investment/mne/49111368.pdf>.
-
44 ICGLR 2010, point 10.
-
45 Ibid., point 12.
-
46 The Mining Code of 2002 (Law No. 007/2002). Title II, Chapter III of this Act regulates “the procedure for granting mining or quarry rights and the issuing of mining and quarry titles”. Title III, Chapter II provides the general rules regarding the exploitation of minerals.
-
47 United Nations 2010 (S/2010/596), p. 79.
-
48 Global Witness 2010.
-
49 The Clean Diamond Trade Act of 2003 (Pub. L. No. 108-19) 117 Stat. 631, consideration 6 of this act: “Without effective action to eliminate trade in conflict diamonds, the trade in legitimate diamonds faces the threat of a consumer backlash that could damage the economies of countries not involved in the trade in conflict diamonds […]. To prevent that, […] more than 30 other countries are involved in working, through the ‘Kimberley Process’, toward devising a solution to this problem. […] [The] United States has an obligation to help sever the link between diamonds and conflict and press for implementation of an effective solution.”
-
50 Drimmer & Phillips 2012, p. 139.
-
51 Van der Heijden 2012, p. 133.
-
52 Van der Heijden 2012, p. 136. “It is in the sense of the Congress that the exploitation and trade of conflict minerals originating in the [DRC] is helping to finance conflict characterized by extreme levels of violence in the eastern [DRC], particularly sexual- and gender-based violence, and contributing to an emerging humanitarian situation therein, warranting the provisions of section 13(p) of the Securities Exchange Act of 1934.”
-
53 Van der Heijden 2012, p. 138.
-
54 United States Court of Appeals for the District of Columbia Circuit 2012, pp. 10-11. “We currently have a voluntary international standard for promoting transparency. A number of countries and companies have joined [EITI], an excellent initiative that has made tremendous strides in changing the cultural secrecy that surrounds extractive industries. But too many countries and too many companies remain outside this voluntary system. […] 156 Cong. Rec. S3815 (May 17, 2010) (Sen. Cardin).”
-
55 Drimmer & Phillips 2012, p. 142.
-
56 The Dodd-Frank Wall Street and Consumer Protection Act of 2010 (Pub. L. No. 111-203) 124 Stat. 1376, see Section 1502 (a) of this Act, at 124 Stat. 2213.
-
57 See, in general, Seligman 1982, referenced by Drimmer & Phillips 2012, p. 150.
-
58 United States Court of Appeals for the District of Columbia Circuit 2012, p. 14.
-
59 Securities and Exchange Commission, Final Rules on Sections 1502 and 1504, 17 CFR PARTS 240 and 249b (release No. 34-67716), 13 November 2012, pp. 139-140. Available at: <www.sec.gov/rules/final/2012/34-67717.pdf>.
-
60 Section 1502 (e) (1) and (e) (4) Dodd-Frank Act.
-
61 The Dodd-Frank Wall Street and Consumer Protection Act of 2010 (Pub. L. No. 111-203) 124 Stat. 1376, at 2019-2221.
-
62 Securities and Exchange Commission, Final Rules on Sections 1502 and 1504, 17 CFR PARTS 240 and 249b (release No. 34-67716), pp. 205-208. This was also referenced by Van der Heijden 2012, p. 138. “The audit must provide: (1) a description of the manufactured product or the agreed to manufactured product that is not DRC conflict free; (2) the locations where the minerals originated; (3) the country or countries where the minerals originated; (4) information what the company has done to designate the mine or location of the mine. The mine (or location) of the conflict minerals must be indicated with the greatest possible specificity.”
-
63 Section 1502 (b) (1) (A) Dodd-Frank Act; also see Drimmer & Phillips 2012, pp. 144-147.
-
64 Drimmer & Phillips 2012, p. 144.
-
65 Ibid., pp. 148-149.
-
66 Drimmer & Phillips 2012, p. 149.
-
67 Report to the Members of the Committee on Foreign Relations United States Senate 2008 (S. PRT. 110-149), p. 5.
-
68 Ibid.
-
69 Drimmer & Phillips 2012, p. 148; Van der Heijden 2012, pp. 136-137.
-
70 United States Court of Appeals for the District of Columbia Circuit 2012, pp. 21-24.
-
71 Drimmer & Phillips 2012, p. 148.
-
72 Ibid.
-
73 United States Court of Appeals for the District of Columbia Circuit 2012, p. 21.
-
74 Ibid., p. 20.
-
75 United States Court of Appeals for the District of Columbia Circuit 2012, p. 21.
-
76 Ibid., p. 20.
-
77 Ibid., pp. 3, 17, 18. “Existing Exchange Act disclosure provisions require issuers to publicly file annual, quarterly and current reports; Section 13(q) (3) (B) – which follows the provision that directs the Commission ‘to the extent practicable’ to make available online a ‘compilation of the information’ the resource extraction issuers are required to submit – makes clear that, at a minimum, any public compilation must include each issuer's individual government-level and project-level disclosures; and Section 13 (q) (2) requires that the disclosures be submitted in an interactive data format, which suggests that Congress intended the information to be provided in a format that allows users to easily extract information most relevant to them.”
-
78 Drimmer & Phillips 2012, p. 152.
-
79 Van der Heijden 2012, p. 134.
-
80 The DRC and the ‘Covered Countries’ as described by Section 1502 (b) (1) (A) include the DRC, the Republic of the Congo, the Central African Republic, Sudan, Uguanda, Rwanda, Burundi, Tanzania, Zambia and Angola.
-
81 156 Cong. Rec. S5873 (July 15, 2010) (Sen. Cardin).
-
82 International Tin Research Institute (ITRI), Towards a Responsible Cassiterite Supply Chain 2009.
-
83 ITRI, ITRI Tin Supply-chain Initiative (iTSCi) 2009, p. 6.
-
84 See, for instance, the Global Witness initiative on blood diamonds. Global Witness 1998.
-
85 Global Witness 2009; Nwete 2007, p. 313.
-
86 Global Witness 2011. This report claims that “[several] well-informed individuals whom Global Witness interviewed in April 2011 highlighted the risk of FARDC officers pursuing their illegal activities through civilian proxies, even after they have withdrawn from mining areas.”
-
87 ITRI, iTSCi 2009, p. 7. The ITRI states that “providing a system to control large numbers of individual miners in the DRC is neither feasible nor practicable. Therefore, the system has to be implemented at a reasonable and pragmatic level while ensuring, at the same time, that the objectives are substantially met.”
-
88 Electronic Industry Citizenship Coalition (EICC) – Global e-Sustainability Initiative (GeSI) 2012.
-
89 World Gold Council 2012.
-
90 London Bullion Market Association (LBMA) 2012.
-
91 United Nations 2012 (S/2012/843), p. 196.
-
92 Pauwelyn et al. 2011, p. 8. The authors state that “the term ‘informal’ international law-making in contrast and opposition to ‘traditional’ international law-making. IN-LAW is ‘informal’ in the sense that it dispenses with certain formalities traditionally linked to international law. These formalities may have to do with output, process or the actors involved. It is exactly this ‘circumvention’ of formalities under international and/or domestic procedures that generated the claim that IN-LAW is not sufficiently accountable. At the same time, escaping these same formalities is also what is said to make IN-LAW more desirable and effective. Lipson, for example, explains that ‘informality is best understood as a device for minimizing the impediments to cooperation, at both the domestic and international levels.’”
-
93 Pauwelyn et al. 2011, p. 17.
-
94 Shaffer & Pollack 2010, p. 717.
-
95 Pauwelyn et al. 2011, p. 26. “The rise in the international political power of private actors, and the desire of governments to include them in regulatory processes, has shifted cooperation away from intergovernmental organizations and/or formal treaties as these formal processes and output would not allow for their inclusion.”
-
96 We only indicate this negative aspect that adheres to this development; we will not elaborate this here in depth.
-
97 Bovens 2007, pp. 447-469; See also Berman 2005, pp. 487-555; Curtin & Senden 2011, pp. 163-188. Curtin and Senden provide some possibilities to deal with the problem of lack on accountability and how to deal with legitimacy. See, furthermore, Vytopil 2012, pp. 155-169. Vytopil pays attention to the legal meaning of CSR via applying the codes of conduct.
-
98 Transparency International 2012.
-
99 See, for instance, Global Witness 2007, p. 13. In this report Global Witness indicates different ‘questionable’ payments by companies to military powers.
-
100 ICGLR, The Mineral Certification Scheme of the International Conference on the Great Lakes Region, p. 11. “The ICGLR Mine Site Inspection and Certification Standards are designed to ensure that Designated Minerals are sourced only from mine sites that are conflict-free and meet minimum social standards (for example, no child labour). […] Under the ICGLR Scheme, mine sites are inspected annually by a government mines inspector. These government inspections are cross-checked by annual Independent Third Party Audits carried out by an ICGLR accredited auditor.”
-
101 See for acknowledgments of this inherent problem Baden et al. 2009, p. 433; Utting 2007, p. 704; King & Lenox 2000, p. 702. King & Lenox only acknowledge the free-rider problem in large groups in contrast to smaller groups.
-
102 Global Witness 2007, p. 18 (emphasis in original). This NGO rightly pointed out that “[e]ven if voluntary frameworks could be adapted to provide the necessary degree of clarity and specificity, the problem remains that companies which do not want to be bound by a voluntary framework will simply opt not to join. This problem will grow as extractive companies from China, India, Russia and other countries play an increasing role in resource extraction, because companies from these countries have typically not been exposed to the kind of pressure from activist shareholders, non-governmental organisations and class-action plaintiffs that have made Western-based multinationals more sensitive to their reputations on human rights than they used to be.”
-
103 Nwete 2007, p. 330.
-
104 Global Witness 2009. “Global Witness warned that a blanket endorsement of ITRI's proposals, in their current form, could be counter-productive, giving the impression that companies have done enough and discouraging them from being more rigorous. Instead, the Congolese government should push companies further with a view to cutting out armed groups and military units from their supply chain once and for all.”
-
105 United Nations, Final Report of the Group of Experts on the DRC submitted in accordance with paragraph 4 of the Security Council resolution 2021/2011, 15 November 2012 (S/2012/843), p. 194; see also Van der Heijden 2012, p. 142.
-
106 Verbruggen et al. 2011, p. 14. At this moment, it is proposed to amend Directive 2004/19/EC (the Transparency Directive) such that it requires more transparency on social issues; see also Van der Heijden 2012, p. 142. However, this proposal does not include conflict mineral disclosure; see European Commission 2011 (MEMO/11/734), p. 8.
-
107 European Union 2010, see especially pp. 3, 29.
-
108 Verbruggen et al. 2011, p. 13.
-
109 European Parliament, 2010 (P7_TA(2010)0350), point 14.
-
110 De Gucht 2010, p. 7. On behalf of the EU De Gucht makes the next statement: “as the world's largest importer of raw materials, should not hesitate to live up to its own responsibilities in this, including those of our own companies. The European Commission has been considering the issue of transparency in the extractive industries within the wider context of EU-financial regulatory reform, and my Colleague Commissioner Barnier is conducting a public consultation to gather stakeholders’ views on financial reporting by multinational companies.”
-
111 European Commission 2011 COM(2011) 25 final, p. 15. The Commission notes that “securing supplies of raw materials is essentially the task of companies and the role of public authorities is to ensure the right framework conditions to allow companies to carry out this task. The Commission intends to explore with the extractive, recycling and user industries the potential for targeted actions, notably with regard to recycling. It is also ready to examine with Member States and industry, the added value and feasibility of a possible stockpiling programme of raw materials.”
-
112 Roadmap of the European Commission, Initiative on Disclosure 2011.
-
113 An overview of existing literature can be found in Michaels & Jansen 2006, p. 843 and Smits 2011.
-
114 Smits 2011, p. 6.
-
115 For an overview of European legislation with regard to company law and corporate governance, see <http://ec.europa.eu/internal_market/company/index_en.htm> (last accessed 10 November 2013). For a discussion what this situation means for corporate law in the Netherlands, see Timmerman 2003, pp. 1638-1639.
-
116 Smits 2011, p. 8.
-
117 Article 5(3) TEU.
-
118 Smits 2011, pp. 9-10.
-
119 Ibid., p. 10.
-
120 Ibid.
-
121 Ibid.
-
122 Sutherland 2010, p. 271.
-
123 Ibid., p. 272.
-
124 Ibid., p. 274.
-
125 European Commission 2011 COM(2011) 681 final, p. 3.
-
126 Drimmer & Phillips 2012, p. 133.
-
127 Ibid., pp. 133-135.
-
128 Ibid., p. 135.
-
129 Ibid., pp. 135-136.
-
130 Backer 2007, p. 605.
-
131 European Commission 2011 COM(2011) 681 final, p. 5.
-
132 Ibid., p. 6.
-
133 Ibid., p. 5.
-
134 Ibid., p. 11.
-
135 Ibid., p. 607.
-
136 European Commission 2011 COM(2011) 681 final, p. 6.
-
137 Sacconi 2006.
-
138 Ibid., pp. 296-297.
-
139 Ibid., p. 297.
-
140 Ibid., p. 302.
-
141 Ibid., p. 298.
-
142 Ibid., p. 308.
-
143 Ibid.
-
144 Ibid., p. 315.
-
145 Verbruggen et al. 2011, p. 13.
-
146 Verbruggen et al. 2011, p. 14. The authors argue that “the most feasible and efficient way to tackle the issue of reporting obligations for companies active in the extractive industries, is possibly to frame it in the context of the broader European Corporate Social Responsibility Policies of the EU. Moreover, addressing this specific problem in a broader perspective has the advantage of leaving open possibilities to include other situations in which EU companies have a direct effect on the occurrence of human rights violations.”
-
147 Ibid., p. 14.
-
148 Ibid.
-
149 Ibid., p. 3.
-
150 Drimmer & Phillips 2012, p. 150.
-
151 Ibid., p. 151.
-
152 Ibid., pp. 141, 152.
-
153 Ibid., p. 152.
-
154 Ibid., p. 153.
-
155 Ibid., pp. 135-136.
-
156 United Nations 2011, Principle 11.
-
157 Ibid., Principle 15.