What are CAHRAs and why do they matter to due diligence?

The identification of ‘conflict-affected and high-risk areas’ (CAHRAs) is a critical early step in the responsible sourcing of minerals and metals. Significant and growing numbers of companies operating in minerals and metals supply chains are impacted by regulatory or market compliance requirements that require companies to establish processes for determining whether minerals and metals have originated from, or transited through, CAHRAs.

The concept of CAHRA identification is not new, having been defined by the OECD’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas which was first published in 2011. Nevertheless, for many companies it remains an elusive and ambiguous topic. For example, in the industry engagement undertaken by the London Metals Exchange (LME) during 2020 on the LME’s new Responsible Sourcing requirements, how to identify CAHRAs has been the one of the most common questions from industry stakeholders.

So, what exactly are CAHRAs and how should companies go about identifying them?

In considering this question, it is worth first busting a few myths:

Myth #1: CAHRA simply means the DRC and adjoining countries

Many industry stakeholders have – and quite a few still do, in our experience – consider “CAHRA” to simply mean “Democratic Republic of Congo (DRC)” and its bordering countries, as these are the focus of the Conflict Minerals Rule contained within the US Dodd Frank Act. However, the OECD Guidance is very clear that it applies globally. Whilst many countries in central Africa may indeed be classified as CAHRAs, there are plenty of other countries in other continents that would also fit that classification.

Myth #2: CAHRA identification can focus just on conflict risks

This misunderstanding results from the common use of the term ‘conflict minerals’. Whilst it is understandable that people may take this view, given that this term is even incorporated into the naming of regulation based on the OECD Guidance, this is an overly narrow interpretation.

The OECD defines CAHRAs as follows:

“Conflict-affected and high-risk areas are identified by the presence of armed conflict, widespread violence or other risks of harm to people. Armed conflict may take a variety of forms, such as a conflict of international or non-international character, which may involve two or more states, or may consist of wars of liberation, or insurgencies, civil wars, etc. High-risk areas may include areas of political instability or repression, institutional weakness, insecurity, collapse of civil infrastructure and widespread violence. Such areas are often characterised by widespread human rights abuses and violations of national or international law.”

It should be noted that the operative term is conflict-affected AND high-risk areas: in other words both areas that may be affected by armed conflict (which obviously creates harm to people) and/or areas where there is a high-risk of harm to people even in the absence of armed conflict may be considered as CAHRAs.

Myth #3: There will soon be an official, published list of CAHRAs

Ever since the publication of the OECD’s Guidance, there have been complaints from industry stakeholders that the CAHRA definition is too open-ended and difficult to interpret, and that the OECD or a similar organisation should just publish an ‘official list’ of CAHRAs to make everyone’s life easier.

There is a widely held assumption that there will be a ‘European Commission list’ of CAHRAs as part of the programme of work supporting industry with the implementation of the EU Conflict Minerals Regulation.

It is certainly true that the Commission is committed by the Regulation to funding the development of a list of CAHRAs and that this work is in development. However, the tender documents for this project (available online) say, very clearly with lots of bold text for added emphasis, that “…the Commission does not expect to produce its own list of CAHRAs…”, that the list will be “…indicative and non-exhaustive, and only as a tool to facilitate companies’ due diligence…” and that “…By no means will the list relieve companies from their obligations…”. Moreover, the tender goes on to state that the list will focus only on CAHRAs linked to minerals under the scope of the EU Regulation. So, if you are an aluminium, cobalt, copper, lead, nickel or zinc producer impacted by the LME’s requirements, it is unlikely to be much help. 

CAHRA analysis a crucial step in mineral supply chain due diligence

CAHRA analysis is a critical, and mandatory, step in mineral supply chain due diligence under the OECD’s framework. It is not a ‘box ticking’ exercise. Failure to undertake an adequate CAHRA analysis may leave a business exposed to significant risks.

Businesses may unwittingly be sourcing minerals from suppliers that are committing serious abuses, resulting in the risk of reputational damage, loss of commercial relationships and potentially future liabilities (ignorance is not a defence).

The lack of a sufficiently robust CAHRA analysis process may result in non-compliance with industry regulation or audit standards, with potentially serious commercial implications. At Kumi, we observe that CAHRA analysis is increasingly an area where non-conformances are identified by auditors for industry schemes. In our view scrutiny of this area by scheme auditors is only going to increase as growing numbers of industry schemes seek to achieve formal recognition of ‘equivalence’ or ‘OECD Alignment’ by the European Commission or the LME.

Key considerations for CAHRA analysis

We would highlight three key factors that companies need to keep in mind when seeking to identify CAHRAs:

1. Ensure all four CAHRA risk factors are considered

There are four risk areas that should inform the determination of a CAHRA:

  • Conflict: The risk that mineral production or trading is financing or otherwise contributing to conflict.
  • Governance: The risk that mineral production or trading supports or is linked to bribery, money laundering or tax evasion.
  • Human rights: The risk that mineral production or trading is associated with serious human rights abuses.
  • Mineral flows: The risk that the origin of minerals may be misrepresented to conceal the association of those minerals with conflict, governance or human rights risks.

A CAHRA analysis that is selective, for example prioritising conflict risks but not considering the other risk factors, cannot, in our view, be considered aligned with the OECD’s recommendations. Therefore, such an approach would not be compliant with the EU Conflict Minerals Regulation or the LME’s Responsible Sourcing requirements. 

2. Avoid weighting CAHRA risk factors

A common practice in corporate risk assessments, generally, is to develop weighting mechanisms to assist in grading and prioritisation. We observe that some organisations do this with CAHRA risks, for example seeking to define a CAHRA based on weighting applied across the different CAHRA risk areas.

However, in our view such an approach is not appropriate for CAHRA identification, for two reasons. First, there is the role that CAHRA analysis plays in minerals supply chain due diligence. The purpose of CAHRA analysis is to determine if further due diligence is needed. CAHRA analysis is just one component of minerals supply chain due diligence – its role is to determine if there are ‘red flags’, warning signs of potential risks that need to be investigated further. If the different CAHRA risk factors are combined into one metric, the significance of one risk area can be downgraded by another risk area, potentially resulting in ‘red flags’ being overlooked.

Secondly, and related to this, is the fact that each of the four CAHRA risk areas are important in isolation. If there is a high risk of money laundering in a location, that risk of money laundering is not necessarily reduced because of the absence of armed conflict. Each risk area needs to be considered on its own merits.

3. Ensure a sufficient breadth of risk data sources

With four different risk factors to consider, it is important that companies’ CAHRA analysis is informed by a sufficiently broad range of data sources. Most of the data sources that companies can utilise for assessing CAHRA risks have not been developed specifically to support risk analysis in the mining and metals sector, so it is important to triangulate risk information to ensure risk analysis is sufficiently robust. This is particularly true for human rights risks, which can take a variety of different forms. For a CAHRA analysis to be credible, there should be a sufficient breadth of data to give confidence that relevant risks are likely to be identified.

Equally, it is important to recognise that CAHRA risks are not static. Risks change over time, new data becomes available and it is important that companies’ management systems incorporate a CAHRA analysis approach that reflects this reality.

CAHRA Map – a user-friendly minerals supply chain due diligence tool

At Kumi our experience has shown that many companies struggle to develop appropriate and robust mechanisms to identify CAHRAs. Indeed, we often see this issue raised as a non-compliance during industry scheme audits.

We observed that when companies develop their own system and approach it can be very time-consuming and resource intensive for the company to maintain. Many companies struggle with developing an effective methodology and then keeping their information up to date.

We created CAHRA Map to solve these problems for companies and create an authoritative, dynamic and user friendly digital tool to support minerals supply chain due diligence and audit compliance. Key features include:

  • Utilisation of 15 different data sources across all four CAHRA risk areas.
  • CAHRA risk data updated monthly.
  • Use of a ‘trigger system’ to identify CAHRAs based on whether information from any of the risk indices raises a red flag.
  • An interface that has been designed with users’ needs in mind, both in terms of how information about risks is presented to inform any subsequent due diligence activities and in the functionality of the tool to enable users to generate a clear audit trail of the CAHRA assessments undertaken that they can combine with other due diligence records that need to be provided to industry scheme auditors.

Further information can be found at www.cahramap.com.