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This article was first published in the May 2016 international edition of Accounting and Business magazine.

In May 2015 the European Parliament voted for mandatory disclosure requirements to be imposed on European Union companies whose products contain so-called conflict minerals sourced from conflict-affected areas such as the Democratic Republic of Congo and adjoining countries. The aim of the legislation (which mirrors the 2010 US Dodd-Frank Act) is to prevent profits from the trade and exploitation of tantalum, tin, tungsten and gold (3TG) being used to finance armed groups. The minerals are commonly employed in industries such as consumer electronics for laptops, tablets, smartphones and the like.

Almost a year on, the final version of the legislation is still a work in progress. A new round of negotiations began in Brussels in February with the EU institutions attempting to come to a conclusion on whether disclosure should be mandatory or voluntary, and which type of companies should fall under the rule.   

Comments made by MEP Maria Arena suggest a great divide between the positions of the different institutions. The council proposes a voluntary reporting system that would apply only to companies importing minerals and metals; the parliament – a mandatory system across the entire supply chain; and the commission – a system compulsory on just one part of the supply chain.  

Mid-June is the proposed deadline for a resolution to the ‘conflict’, but the outcome is still anybody’s guess. Some observers are betting on a form of compulsory disclosure for companies whose products contain 3TG, rather than just for importers of the minerals, echoing the US Dodd-Frank Act. 

As to the financial impact, there have been mixed forecasts. Last year I reported on European Commission estimates that mandatory reporting will affect roughly 1,000 of the 7,959 EU-listed companies and potentially 800,000 downstream firms – mainly SMEs – at an initial cost of €8.4bn, plus €1.7bn annually thereafter as a result of due diligence requirements.

In contrast, researchers in the US estimated that between 23 July 2013 and 2 June 2014, 1,300 US filing issuers worked a total of six million hours on their conflict mineral programme and reporting – a total extrapolated labour cost of US$421m; to this they added US$150m spent on (non-IT) related external resources such as consultants and lawyers; US$41m on gap analysis of IT systems; and US$97.5m on the actual IT project. In total, it was estimated that US issuers incurred expenditures of US$709.7m.

Initially, EU companies affected by a Dodd-Frank-like rule can expect a transition period to allow them to put the resources and structure in place to begin assessing the 3TG content of their products. Over time, risk mitigation is likely to become a bigger focus for companies, rather than disclosure alone.

Suppliers along the chain will feel pressure to produce better information and, as part of the focus by companies on mitigating risk, scrutiny of suppliers’ policies and compliance procedures will increase. Larger commercial customers will request enhancements to suppliers’ compliance programmes and other corrective action. US companies are also requesting product-level disclosure from suppliers. Finally, companies will move towards an auditable disclosure format. 

Ramona Dzinkowski is a Canadian economist and editor-in-chief of
the Sustainable Accounting Review