Supply Chain Due Diligence – the Case of Conflict Minerals and Beyond (II)

The relevance of introducing a meticulous due diligence scheme in dealing with so-called conflict minerals has been underlined by recent events which have taken place since this topic was introduced on Global Risk Affairs last October (see part I of this article). This second part of the article will briefly reflect on those relevant occurrences before discussing the due diligence guidelines developed to date in order to assist in maintaining a ‘clean’ supply chain free of conflict minerals. Set in wider perspective, conducting supply chain due diligence on business partners and relevant third parties is not only a matter of compliance with legal requirements but also of improving supply chain resilience, displaying business integrity and sustainability, and pursuing a credible policy of corporate social responsibility.

Recent occurrences

The U.S. elections on November 6, 2012, saw a key promoter of the Dodd-Frank Act (DFA), President Obama, winning over the Republican aspirant and former businessman Romney, a result which will likely bolster the political momentum for the enforcement of the SEC rule regarding § 1502 of the DFA, named the conflict mineral rule.(1) At the same time, the conflict mineral rule has been challenged by a lawsuit which influential American business groups filed with the Courts of Appeals for the D.C. Circuit.(2)  While the legal matter was still pending at the time of writing, the rule is expected to be reviewed with regards to the tight schedule for the delivery of the first conflict mineral reports due to be submitted to the SEC by relevant companies in May 2014. The lawsuit immediately drew heavy criticism from the NGO Global Witness, indicating how politically loaded the topic is and to what extent reputation may be put on the line,  if companies decide to take the opposite side in this battle.(3)

In any case, the challenges faced in relation to dealing with conflict minerals will not go away soon. In November 2012, another escalation of fighting in the eastern province of the Democratic Republic of Congo (DRC), involving the notorious rebel group M23 and government forces, lifted the decade long theatre of armed conflict in that region to the top of the international agenda again.(4)  As a consequence, direct or indirect support for armed conflict by way of criminal offenses connected to mining and processing of 3TG minerals (tantalum, tungsten, tin, gold) poses a serious risk which must not be ignored with respect to responsible business conduct.

While some companies decided to sue the SEC, others have already engaged in implementing the OECD due diligence guidance in collaboration with the International Conference of the Great Lakes Region and industry-specific initiatives (see part I). At the end of November 2012, a multi-stakeholder forum involving all progressive actors was hosted by the OECD in Paris.(5)  In view of the extensive documentation, proceedings and discussions surrounding the event, it is clear that the OECD-sponsored due diligence approach, even though itself a voluntary scheme, is clearly gaining momentum and legal force through its increasing application and operational link to binding national and international law. The latter refers to national regulation of the mining sector in the DRC and neighboring countries and to the recent U.S. SEC rule, as well as to binding UN resolutions targeting and sanctioning warlords and perpetrators of human rights abuses in the DRC.

Integrity due diligence in the supply chain

Despite some differences between the UN due diligence guidelines and the OECD due diligence guidance for the conflict minerals supply chain, both documents were designed to be consistent with each other. More generally, seen from a professional due diligence perspective, both guidances also represent a comprehensive risk-based approach to assessing threats to the integrity and resilience of supply chains emanating from economic crime and human rights issues in high-risk countries.(6)

Put in a nutshell, the strategic goal of any supply chain due diligence process enacted by a company is to implement a policy ensuring the integrity of its direct and indirect suppliers. Thus, the integrity due diligence approach is both actor-orientated and risk-based, given that amongst a potentially great number of suppliers those who might, by their associations and practices, pose a serious risk to the compliance and reputation of the contracting company need to be identified (previous articles on Global Risk Affairs treated the integrity due diligence approach in detail).

As with other supply chain management issues, one main purpose for undertaking integrity due diligence in the supply chain is to manage the risk of disruption. Equally important is that  companies are increasingly often held accountable for potentially harmful effects of their foreign operations, including the activities of their direct or indirect suppliers, on the local people and environment. In that sense, supply chain due diligence serves the purpose of assessing and mitigating the risk of harm to people affected by such activities. Given the increasing density of regulations and liabilities in combination with the public exposure of international business operations to NGOs and social media, due diligence in the supply chain provides the necessary safeguard regarding a company’s reputation.

The OECD due diligence guidance

The OECD due diligence guidance represents a common reference for all suppliers and their contractors to investigate the “factual circumstances” of mineral extraction, trade or handling. Such factual circumstances in already high-risk conflict-affected countries particularly involve the risk of alimenting illegal armed groups, of sustaining the violation of human rights, and of fuelling economic and organized crime.

At the same time, a great number of local people depend on trading minerals for a living and, as already mentioned in the first part of this article, various industries depend on the supply of the concerned minerals for manufacturing their products. It should also be mentioned that hundreds of millions of people buy or use products containing those minerals or their smelted derivates, such as cars, aeroplanes, electronic goods and mobile phones, and they may be starting to ask more questions about how the necessary components were supplied.

Given this obvious dilemma, a perfect solution may not be at hand; instead, the risk-based due diligence approach can help improve the situation by setting out a responsible mineral supply chain policy and checking the factual circumstances against the policy standards (see the five-step framework in the figure below). Any inconsistencies identified indicate relevant risks which then require appropriate action. Such action might involve ending the relationship with a supplier linked to intolerable risks , or mitigating perceived risks by working with the supplier to develop and implement appropriate policy standards. Minor tolerable risks may still require continuous monitoring of relevant suppliers, in particular in high-risk countries.

The risk-based due diligence approach thus represents a process of transforming the mineral supply chain into an ever cleaner business. Companies buying into this approach will be on the safe side; that is, if they undertake a both visible and serious effort, because a major component of this approach is the active involvement of stakeholders and the creation of public transparency.



Due diligence requirements for upstream and downstream companies

The five-step framework displayed above is useful to understand the comprehensive due diligence approach applied by the OECD guidance, generally.  But a major difference with regard to the guidance implementation exists between due diligence requirements for upstream companies and those for downstream companies.

Upstream companies concern those entities involved in the mineral supply chain from mines to smelters, including local and international traders and exporters from the country of origin. Downstream companies comprise the supply chain from smelters to metal traders, component manufacturers, product manufacturers and original equipment manufacturers, and eventually to retailers. Before pointing out some eminent due diligence challenges facing upstream and downstream companies respectively, a basic feature of the due diligence complex should be highlighted.

From the description above it is already clear that the smelters play a pivotal role in the entire due diligence system. They represent the point of transition from upstream to downstream in the supply chain, and thus their involvement and cooperation is essential in order to ensure the traceability of minerals from their mine of origin. In fact, without a working chain of custody or traceability system, by “bagging and tagging” or electronic tracking, it is impossible to determine whether the minerals and their derivates, the metals used in manufacturing products, are conflict-free.

In addition to the validation of traceability conditions, upstream suppliers also need to conduct a thorough risk assessment of the factual circumstances (see step two of the framework) of mineral extraction, trade, handling and export (see also Appendix to the OECD guidance, “Guiding Note for Upstream Company Risk Assessment”). As a major challenge, the information necessary for such a conflict-related risk assessment can only be collected by on-the-ground teams. In order to assess the risk of association with any armed group involved in serious abuses and human rights violations and of providing direct or indirect support to such groups or criminally engaged security forces, data regarding the following risk dimensions need be researched and connected.


This is only a sketch of a rather detailed procedure, but from that it should already be clear that collecting and connecting the relevant information can be quite demanding, even for experienced researchers and investigators. The smelters, in particular, must make sure that the required due diligence practices are conducted by their suppliers, if they seek to be certified as being conflict-free, ie. as using conflict-free minerals. And the smelters will be held accountable for supplying conflict-free metals by downstream companies using those metals in manufacturing processes.

Two basic principles appear to build the foundation of the entire mineral supply chain due diligence scheme set out by the OECD guidance. The first one is a system of layered responsibilities, in which companies further down the supply chain are required to make sure that their suppliers comply with due diligence standards and provide the necessary evidence. This also means that downstream companies need to assess the risks attached to relevant smelters and to validate the smelters’ due diligence practices including third-party audits.

The second principle of the due diligence system could be called a dual system of forward and backward tracing of minerals. As outlined before, forward tracing refers to the chain of custody and to physically tracking the minerals up to the smelter. Backward tracing, however, represents the major challenge faced by downstream companies in identifying the relevant smelters in their supply chain.

Backward tracing means that companies have to find out whether their products contain 3T&G metals, and to then identify the critical suppliers of such metals in the manufacturing process. Given a potentially large number of products and suppliers, adopting a tailored risk assessment approach is key to managing the screening operation efficiently. The goal essentially is to prioritize those suppliers who are in the position to provide the critical information relating to the smelters.

Generating a complete map of all smelters in the supply chain may actually be quite demanding. Even if communication with suppliers seems to be working, the reliability and completeness of information about relevant smelters can still not be taken for granted, and should be cross-checked and verified independently. Finally, in order to adequately assess and manage the risk posed by the possible or given involvement with conflict minerals, downstream companies will have to contact relevant smelters in order to evaluate whether the minerals sourced are conflict-free or not.

As a voluntary scheme, the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas is still in a pilot phase and there are some open questions regarding the congruence between the SEC conflict mineral rule and the OECD guidance. Such details will have be to clarified rather sooner than later if the SEC rule is to be implemented by affected companies in due course.



1.  The minerals of concern include tantalum, tin, tungsten and gold (see part I).

2.  Involved in the lawsuit are the U.S. Chamber of Commerce, the National Association of Manufacturers and the Business Roundtable; the issues for review were recently made republic and eg. reported here


4. The Economist, November 24, 2012. The M23 is allegedly aligned with and supported by the Rwandan government, and due to the lack of a more robust mandate UN peace forces failed to intervene. Both matters require a much stronger diplomatic effort.


6.  Global Risk Affairs will continue to elaborate on assessing corruption and human rights risks in the supply chain more specifically in future articles.