Investing in crisis in disputed areas

Recently, the Ministry of Natural Resources completed the verification and rectification of the “problem map” of the official websites of 29 Fortune 500 companies. For multinational corporations, ignoring the policy and legal risks behind the “problem map” will not only suffer huge losses in reputation and economy, but also face legal sanctions. And if corporate investment behavior is involved in territorial issues behind the “disputed map” existing in some countries and regions, or participating in and using “conflict minerals” mined in war-torn areas, it will not only bring complicated contradictions between the parties in dispute. The risks, the condemnation of public opinion, and even even more difficult issues of international law.

Foreign companies have a foresight

In the vast desert below the Atlantic coast and in the western Sahara south of Morocco, huge reserves of phosphate deposits are buried. In the Bukra area of ​​Western Sahara alone, phosphate reserves are as high as 1.7 billion tons, so Western Sahara has the reputation of “Potato Kuwait”.

On some maps, Western Sahara is a region rather than a country (pictured). This is because on the land in the list of the United Nations Non-Self-Governing Territories, the “Saharan Arab Democratic Republic”, established by the Moroccan and local independent armed groups “Frente POLISARIO”, which has sovereignty, has been in operation for decades. In recent years, the experience of some foreign companies involved in local disputes is a good example.

Since 2001, some large European and American companies have cooperated with Morocco to get involved in the exploration of oil and gas blocks along the coast of Western Sahara, which has triggered a fierce response from the parties. The fuse was awarded to the United States and French companies by the oil exploration rights of the two coasts of Western Sahara and signed a development agreement. Since the development agreement involves the maritime rights and interests of the “sovereignty” of the West, the involved enterprises were condemned by many governments and international organizations after signing the contract.

Although Western Sahara is not a sovereign state, the “Saharan Arab Democratic Republic” has received diplomatic recognition or support from some UN member states, especially more than a dozen African countries, and is a member of the African Union. As a Non-Self-Governing Territory of the United Nations, Western Sahara enjoys the legal guarantees of the United Nations for the exploitation and utilization of resources in the Non-Self-Governing Territories.

The authorities of the “Saharan Arab Democratic Republic” warned that “the personal safety of employees of foreign companies involved in exploration will not be guaranteed”. The United Nations Office of Legal Affairs issued a statement: “If the agreement is limited to exploration, it is not in violation of the law, but if the region is further explored and developed in disregard of the interests and aspirations of the people of Western Sahara, it violates the international law on the mineral resources of the Non-Self-Governing Territories. Relevant principles.”

Although the US and French companies subsequently renewed the agreement with the Moroccan government, in 2004, the French company Total announced the withdrawal of the oil and gas exploration business in Western Sahara for commercial reasons. In the same year, the Norwegian geophysical company TGS-NOPEC stated that it will not participate in the new project of Xisala before the political settlement of the Western Sahara issue. In December 2015, the European Court of Justice canceled the European and Moroccan agreement on free trade in agricultural products and fishery products, mainly because the agreement involved the sovereignty of Western Sahara.

In addition to Western Sahara, there are also areas that have not been recognized by the international community for various reasons, such as “Somaliland”, which is separated from Somalia’s substantive independence, South Ossetia and Abkhazia from Georgia, and unilaterally separated from Serbia’s Kosovo. Foreign investment in these areas is not only subject to political disputes and risks of international law, but international financial, insurance and trade institutions are also difficult to participate because of the lack of international law guarantees.

European and American legislation to define mineral sources

The rise of the digital economy requires rapid development of high-tech industries such as electronic information technology, while high-tech precision products rely heavily on rare precious metals such as gold, tungsten, antimony and tin. In the context of the increasingly diversified and highly decentralized global supply chain of multinational corporations, once certain links flow into “conflict minerals”, it will not only bring legal risks to the development of enterprises, especially overseas, but also be unethical purchases of conflict minerals. Involved in the whirlpool of negative public opinion, which may lead to boycotts, affecting the company’s reputation and stock price, and even incurring severe sanctions.

In August 2012, the US Securities and Exchange Commission issued the final conflict minerals rule in accordance with Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring publicly traded companies to report annually to African Congolese democracy. Conflict minerals in the Republic or adjacent countries, such as tin, tungsten, antimony and gold. Because of the minerals originating in the Democratic Republic of the Congo and neighboring countries, it is likely to provide financial support for the ongoing armed conflict in these countries.

When the United States strengthened its legal system management, the European Parliament passed the EU Conflict Minerals Regulations in March 2017 to ensure that the mineral resources used by the EU industry are reliable and will not encourage rebellion, conflict and terrorist activities due to trade. The rule requires importers importing tin, antimony, tungsten and gold to commit to due diligence. The regulations require that from January 1, 2021, the control will cover 95% of the above four products. Importers, smelters and refineries in the EU for tungsten, tin, antimony and gold will implement mandatory due diligence when the import volume exceeds the set threshold. The regulations will apply to minerals exported to the EU from any country, including raw materials and metals.

In view of the widespread concern in the “conflict minerals” issue in electronics and other industries, some of the world’s leading companies such as Microsoft, Hewlett-Packard, Intel, Huawei and Apple have already expressed their refusal to use “conflict minerals” in official statements.

Required courses before investing

Faced with the deep participation of internationalization, multinational enterprises in the target countries and regions to carry out investment operations, how to effectively avoid the “controversial map” and “conflict minerals” risks, has become a compulsory course.

In this regard, before conducting business in the target countries and regions, Chinese enterprises should do a good job of “due diligence” on territorial attribution and boundary division, sensitive territorial marking, etc., familiar with international laws and regulations, and develop and utilize the disputed territories and the UN Non-Self-Governing Territories. Provision of resources to strengthen internal review mechanisms. For example, the disputed island between the United Kingdom and Argentina, Argentina marks the Malvinas Islands, and the United Kingdom marks the Falkland Islands. When engaging in activities in similar disputed sea areas, be familiar with the provisions of international laws on the island and surrounding exclusive economic zones to avoid falling into risk.

In addition, the prevention of “conflict minerals” risks requires an internal review of the supply chain and suppliers from a legal perspective, product traceability and verifiable, and a sound information management mechanism to ensure that products comply with target markets such as Europe and the United States. Claim. For example, Japanese companies listed in the US, such as Toyota Motor, Panasonic and Canon, have assumed the obligation to disclose information. Some companies have chosen to propose “no conflict minerals” as a prerequisite in the procurement of parts and materials. Some well-known brands such as Apple, Boeing and Tiffany have established relatively complete information disclosure and public opinion response mechanisms. In the annual report, the due diligence work report will be disclosed to ensure that the minerals used by the company’s products come from responsible channels. In practice, some companies even require suppliers to extend the requirements to subordinate suppliers.