Article by Carlo Mazzoleni, Associate Lawyer, Studio Mazzoleni

On 1 January 2021 the EU Regulation 2017/821 of 17 May 2017 (the “Regulation”)[1] will come into force, establishing new mandatory supply chain due diligence obligations for EU-based importers of certain raw materials (tin, tungsten, tantalum and gold) originating from conflict-affected and high-risk areas.

The Regulation aims to prevent that the trade of these minerals directly contribute to finance armed conflicts and/or grave human rights abuses, such as forced labour of mine workers. To this end, the Regulation require EU importers to respect international responsible sourcing standards, set by the Organisation for Economic Co-operation and Development (OECD) in its “Due Diligence Guidance for Responsible Supply Chains from Conflict-Affected and High-Risk Areas”.[2]

1. Companies and Businesses Affected

The Regulation applies to EU-based importers of tin, tantalum, tungsten and gold, whether these are in the form of mineral ores, concentrates or processed metals, provided that certain annual volume thresholds are exceeded. Annex I to the Regulation[3] sets out specific thresholds for most of the covered materials, while the EU Commission has defined the remaining thresholds on 25 June 2020 through a delegated act.[4]

The Regulation does not apply to:

• EU importers where their annual import volume of each of the minerals or metals concerned is below the provided thresholds;
• Recycled metals, which includes “reclaimed end-user or post-consumer products, or scrap processed metals created during product manufacturing, including excess, obsolete, defective, and scrap metal materials which contain refined or processed metals that are appropriate for recycling in the production of tin, tantalum, tungsten or gold”;
• Stocks which were created on a verifiable date prior to 1 February 2013.

Indirectly, the Regulation concerns smelters and refiners of the covered materials, whether they are based inside the EU or not: EU importers will be indeed required to avoid dealing with smelters and refiners whose due diligence practices are insufficient or associated with risks. The EU Commission is expected to establish and keep updated a “list of global responsible smelters and refiners” that are deemed to fulfil the requirements of the Regulation.  

2. Conflict-Affected and High-Risks Areas

The Regulation targets minerals and metals originating from conflict-affected or high risk areas, without being limited to specific geographical locations. The areas considered to be conflict-affected or high-risk are:

• areas in a state of armed conflict;
• fragile post-conflict areas;
• areas witnessing weak or non-existing governance and security, such as failed states;
• in all cases, areas with widespread and systematic violations of international law, including human rights abuses.

The EU Commission is expected to call upon external expertise that will provide an indicative, non-exhaustive, regularly updated list of conflict-affected and high-risk areas.

While no definitive list has been published yet, EU importers are encouraged to make this assessment themselves based on non-binding guidelines issued by the Commission for the identification of conflict-affected and high-risk areas.[5]

3. Due Diligence Obligations

The Regulation requires EU importers to carry out risk-based supply chain due diligence, defined as an ongoing process through which economic operators monitor and administer their trades with a view to ensuring that they do not contribute to armed conflict or adverse human rights impacts.

In practice, EU importers have to comply with five main obligations provided by Articles 4, 5, 6 and 7, which explicitly recall the five-steps framework established by the above mentioned OECD Due Diligence Guidance. EU importers of the covered minerals and metals should:

1. Establish a strong management system and clearly communicate to suppliers and the public their policy, which includes engaging with suppliers to integrate these standards in their supply contracts and develop a traceability system for imported minerals (Article 4);
2.  Identify and assess actual or potential risks in the supply chain, as defined in Annex II of the OECD Due Diligence Guidance (Article 5 (1) (a));
3. Design and implement a strategy to respond to the identified risks in order to prevent or mitigate adverse humanitarian and human rights impacts (Article 5 (1) (b));
4. Carry out independent third-party audit of the company’s activities, processes and systems used to implement supply chain due diligence, in particular regarding the due diligence practices of smelters and refiners (Article 6);
5. Publicly report on supply chain due diligence policies and practices, both to member state authorities and also publicly, and they are obliged to make related information available to their customers (Article 7).

4. Implementation

According to Article 10, the enforcement of the Regulation will be up to the EU member states, which are expected to designate one or more competent authorities responsible for the application of the Regulation. Competent authorities will carry out appropriate ex-post checks of how EU importers comply with the regulation, which includes audits of records as well as on-the-spot inspections (Article 11). In any case, it is worth recalling that the Regulation will enter into force on 1 January 2021.

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[1] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32017R0821

[2] https://www.oecd.org/corporate/mne/mining.htm

[3] ANNEX I “List of minerals and metals within the scope of Regulation (EU) 2017/821 classified under the Combined Nomenclature”

[4] https://ec.europa.eu/transparency/regdoc/rep/3/2020/EN/C-2020-4164-F1-EN-ANNEX-1-PART-1.PDF

[5] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32018H1149

by Luca Albertoni, Direttore Cc-Ti

The initiative that we will vote on November 29 is presented as “for responsible multinationals”, but it is actually called “for responsible business”.
A difference that should not be underestimated and that should make you think deeply, because it means that the additional rules would not be imposed only to some giants, frequently considered as “unsympathetic”, but to all Swiss companies active directly or indirectly in the international arena. This includes small and medium companies.

The figures speak for themselves: there are at least 80’000 Swiss companies potentially involved at an international level, among them 5’364 in Ticino. This data has been highlighted by the Federal Council and not contested.
It would be therefore an important percentage of Swiss and Ticino economy which will be confronted with the application of the irrational supplement of rules foreseen by the initiative. For example, we cite the presumption of guilt. Violations would no longer have to be proven by those who invoke them, but there would be an obligation for the companies involved to prove their innocence, even if they are pure allegations. Assumptions that would result in incalculable reputational, regardless of the outcome of the proceedings. Damages based on simple accusations and, for the vast majority of cases, never really materialized to judicial authorities.
No one, the economic world of our country first and foremost, intends to support those who do not respect human rights or the environment, an indefensible attitude. But it is precisely the excellent international reputation of Swiss companies (or companies based in Switzerland) that has amply demonstrated that this sensitivity is already very much felt and taken on board today. All those who betray this human and corporate seriousness have to sentence their own mistakes and have to respond according to the rules of the host country, as it is already the case today. We do not need other rules.

Those who operate internationally are currently, and already long ago, confronted with a whole series of complex and strict rules, both for their activities on a national and international level. An example: the gold refinery sector, which is very present in Ticino, often criticized and arbitrarily accused, is a sector that must submit to dozens of very strict rules and it is considered at the forefront of both environmental and social sustainability.
If, as provided in the text of the initiative, Swiss companies would be declared responsible not only for the conduct of the companies directly employed and controlled by them, but also for those companies that are associated with any business relationship, it is well understood how this constraint would make most of the collaborations impossible, as controls of this kind are absolutely impractical.

Another example: bear in mind that an iPhone has about 10’000 components and 40 raw materials, with suppliers for each category that can vary depending on the markets and therefore, often, even daily. The same characteristics also apply to many Swiss industrial products.
In turn, the suppliers have their own chains, even those often located in the international area.
The immense difficulty of the continuous search for feedback in the dense network of business contacts shows that the application of the initiative would only be an additional obstacle for Swiss companies (and only for our realities), not resolving or alleviating any problems related to the protection of human rights and the environment.

The counter-proposal of the Parliament, which would come into force in case of rejection of the initiative, constitutes in fact, a sufficient additional restrictive legal basis, which puts Switzerland ethically at the forefront of the world.

The popular vote on the Responsible Business Initiative will take place on November 29, 2020 and the campaign will start this summer. On that date, the Swiss people will be able to vote for or against the initiative.
If the population accepts the initiative, it would still have to be implemented on a statutory level. If the initiative does not reach the majority of votes, the indirect counter-proposal will be adopted (subject to a referendum). The reporting and due diligence obligations would then need to be observed for the first time in the financial year commencing one year after the entry into effect.

KKS counter1. Key elements of the Initiative-proposal

The RBI seeks to introduce a new article 101a to the Federal Constitution. This article proposes the following key requirements for companies with registered office, central administration or principal place of business in Switzerland (Swiss companies) :
– Respect all internationally recognized human rights and international environmental standards in Switzerland and abroad and ensure that companies under their (actual) control do the same.
– Conduct appropriate due diligence with respect to risks to human rights and the environment by identifying actual and potential impacts, take measures to prevent and cease existing violations, and report on such measures. These obligations extend to controlled companies (subsidiaries and suppliers).
– Accept liability for damage caused by companies under their control by violation of internationally recognized human rights and international environmental standards in the course of business, unless they prove to have complied with their due diligence obligations (reversal of the burden of proof).

The Swiss Parliament supports the main goal of the initiative that is the respect for human rights and the environmental through business, but concluded that the initiative went too far and would significantly weaken the attractiveness for Switzerland as a business hub. Instead, it supports the indirect counter-proposal.

2. Key elements of the indirect counter-proposal

Non-financial reporting duties

A new proposed provision in article 964bis ff. of the Swiss Code of Obligations would require public companies, banks, insurance companies and other supervised companies in the financial sector, which together with controlled companies in Switzerland and abroad (the Group) :
(i) have at least 500 full-time employees on annual average, and
(ii) exceed either total assets of CHF 20 million or revenues of CHF 40 million, to report annually on non-financial matters in a separate report.
These provisions are in line with the Non-Financial Reporting Directive of the EU.

The report must contain information necessary to understand the Group’s business development, performance, position and impact of its activity on environmental (incl. CO2 targets), social, employee, human rights and anti-corruption topics. The report has to include but is not limited to a description of :
(i) the business model,
(ii) policies pursued and due diligence carried out,
(iii) main risks resulting from the Group’s own operations and, where relevant and proportionate, from its business relationships, products or services,
(iv) measures taken and assessed, and
(v) the main non-financial key performance indicators.

The report may be based on national, European or international reporting standards, such as the OECD guidelines for multinational enterprises or the standards of the Global Reporting Initiative (GRI) among others. A reporting company may choose not to report on topics with respect to which the Group does not pursue policies. This would, however, require the report to provide a clear and reasoned explanation. Furthermore, the report is subject to approval by the board of directors and by the general meeting of shareholders but it does not need to be audited.

Due diligence obligations in connection with conflict minerals and child labor

Swiss Companies that (i) import or process minerals or metals containing tin, tantalum, tungsten or gold from conflict or high-risk areas, or (ii) offer products or services where there are reasonable grounds to suspect that child labor was involved, are subject to special due diligence and related reporting obligations with respect to their supply chain. The Federal Council may define certain exceptions.
Companies would be required to implement a management system with a defined supply chain policy and a system to trace back the supply chain, identify and assess actual and potential risks of adverse impacts in their supply chain, implement a risk management plan with measures to prevent or mitigate such risks, and issue an annual report on the compliance with these obligations. Additionally, companies importing or processing minerals or metals must appoint an independent third party to carry out audits on the compliance with the abovementioned obligations.

As far as criminal liability is concerned, the proposed provisions foresee that anyone who makes false statements in, or fails to provide, a required non-financial report will be fined with up to CHF 100’000.

Florence Schurch
Secretary general of STSA, is at your disposal to answer your questions:
+41 22 715 29 90 / florence.schurch@stsaswiss.ch

This year the Lugano Commodity Trading Association (LCTA) celebrates its 10th anniversary. LCTA is a non-profit organization that brings together operators active in the commodity trading, shipping, insurance and financing of this sector. In order to comment on the growth and evolution of the association, we interviewed the president, Thomas Patrick.

What has LCTA done for the commodity trading industry over the years?

LCTA originally formed in 2010 as an association of 8 members all active in the commodity sector with an initial primary goal to improve the understanding of the economic contribution made by the commodity trading in Ticino. Commodity trading does not have brand name recognition and as such does not depend on advertising as a marketing medium to sale products; which makes the sector uniquely private. Commodities companies are rarely listed (Glencore being an exception) with the majority privately owned and often including management as shareholders. Other stakeholders include the banks, insurance companies, ship brokers, warehousing agents and forwarding agent, without which the industry could not operate. The business knowledge base is vested in these partner companies and organizations which operate confidentially given the complexity and specialty nature of operations managed by commodity traders. Brand awareness being absent, the companies must discern themselves through service quality and risk management skills critical to the sustainability in the commodity sector. It is not common for commodity companies to trade together due to the sensitively to sharing market price and customer information, which is where LCTA enters as an important channel for communication within the commodity sector. LCTA has established a common voice for its members that can be more clearly understood when representing the sector before local, regional and federal authorities.

So, is LCTA also involved in training?

Sure. A highly developed skill set is necessary to efficiently and safely move commodities through the supply chain, which is dependent on professionals more than plant and equipment. LCTA organizes a series of annual training modules or courses open to members staff to extend or tailor their operational knowledge. Moreover, LCTA offers a scholarship to at least one candidate enrolled in the University of Lucerne’s Advanced Studies for Commodities Professionals course (CAS), organized in collaboration with LCTA and the Zug Commodity Association. The investment in skills development and higher education focused on commodities is central to the importance that professionals play in the success of the commodities business.

How LCTA has evolved over the last 10 years?

As mentioned, LCTA formed in 2010 with 8 founding members. Today’s membership has increased to 55 spanning a wide business range including: energy, gains and metals trading; precious metals refining; insurance and banking; and shipping and materials handling.

There is a significant concentration of companies active in the commodity sector in both Geneva and Zug, represented by respectively by the Swiss Trading & Shipping Association (“STSA”) and the Zug Trade Association (“ZTA”). In 2015 STSA established itself as the umbrella association for the entire Swiss commodities sector, LCTA and ZTA joining as Institutional Members. This was an important development given the need to collectively confront matters at the Federal level, with STSA best positioned to address.

How important is the commodity trading for canton Ticino?

The private character of the commodities companies makes it difficult to fully assess the economic contribution made collectively by the business active in the sector. In Ticino, we estimate that there are approximately 120 companies active in the commodities with around 75 million Swiss francs in tax revenue and provide an important contribution to the Canton’s GDP. In the international context, Switzerland is the world’s biggest commodities trading hub. Its global market share is estimated at 35% for oil, 60% for metals and 50% for sugar and cereals respectively. Some of the world largest companies are commodity trading firms domiciled in Switzerland. The importance of the sector in the safe and efficient global movement of goods should not be understated.

After more than a decade of globalization that promoted open markets and reduced trade barriers, the current movement is marked by the challenge of protectionist actions and retrenchment to nationalist policies invoking tariffs and quotas that are complex for commodity traders to navigate. The role of the commodity trader remains essential for moving goods and managing all the risk involved, but the difficulty of managing today means fewer small companies can survive. It is less about trading and more about shipping and storage of goods, payment risk mitigation, and capacity to finance an extended supply chain. This makes LCTA and its affiliate associations more important as a place where information can be shared between members and skills developed to meet the challenges of a changing marketplace.

What is your wish at LCTA for its 10th anniversary?

This is LCTA’s 10^th year anniversary, which unfortunately is marked by the most threatening public health scary of our lifetimes. While there is no doubt that we will survive the health crisis, it is likely that the “new normal” will reflect a change in behavior both personally and professionally. I am an optimist by nature and believe that the changed behavior will be for the better not worse. For LCTA I believe and hope that the association will be made stronger platform and provide a more forceful channel for information sharing among its members, as well as a stronger voice to educate the public on the importance of the sector in moving basic goods from the source of origin or production to the point of consumption.