4.4 Due Diligence and Transparency Obligations in Connection with Conflict Minerals and Child Labor pursuant to Art. 964j-l Code of Obligations

4.4.1    Companies within the scope of application

The new supply chain due diligence obligations and specific reporting obligations regarding the prevention of child labor and the ethical sourcing of conflict minerals, as defined in Art. 964j-l CO, are applicable to companies with a registered office, head office, or principal place of business in Switzerland that:

• Import minerals and metals containing tin, tungsten, tantalum, or gold from conflict and high-risk areas into Switzerland or process these minerals and metals in Switzerland, or 

• Offer products or services that may reasonably be suspected to have been produced using child labor. Companies must prove that they have carried out the necessary verification to establish whether such suspicion is warranted regarding their products/services.

Entities that would be subject to Art. 964j-l CO include, in addition to a Swiss group, all Swiss direct and indirect subsidiaries of a foreign parent, in each case, however, only if they meet the above requirements. Swiss holding companies would generally not be subject to Art. 964j-l CO. Also, the new supply chain due diligence obligations and specific reporting obligations do not apply on a consolidated basis, i.e., they only apply to the entity within a group that satisfies the relevant criteria.

Companies with their registered office abroad could fall within the scope of the new regulation if their head office or principal place of business is in Switzerland. “Head office” refers to the place where the executive management is based. The “principal place of business” is deemed to be the place where there is a recognizable, actual center of business activity.

The new provisions regarding child labor are not limited to an offering of products or services in Switzerland. If a company has its registered office, head office, or principal place of business in Switzerland and only offers products and/or services abroad, such as through foreign subsidiaries or third-party distributors, then the new provisions on child labor still apply.

4.4.2 Exemptions

Exemptions from the conflict minerals and metals due diligence obligations apply for companies that, on a consolidated basis, do not reach certain import thresholds for conflict minerals and metals. For companies that do reach the threshold but only import or process recycled conflict minerals or metals, only limited due diligence obligations apply.¹

Exempt from the due diligence requirement on child labor are (i) companies for which the risk of child labor in the supply chain is considered low because they source or manufacture products according to the designated origin in countries with a “due diligence response” rated as “Basic” in UNICEF’s Children’s Rights in the Workplace Index, or primarily provide or procure services there, as well as (ii) small and medium-sized enterprises (SMEs). SMEs are defined as entities that fall below two of the following three criteria (when assessed in conjunction with their controlled entities) for two consecutive financial years:

• Total assets of CHF 20 million

• Sales revenue of CHF 40 million, and

• An annual average of 250 full-time employees (FTEs)

However, where the risk of child labor involvement is evident, the two exemptions above are not available, regardless of the UNICEF rating and whether the company meets the criteria of an SME. The SME and low-risk exceptions apply only to the child labor due diligence obligations and, as such, an SME that imports minerals from conflict or high-risk areas (at a volume above the import threshold exemption) will still be subject to (the scope of) Art. 964j-l CO. No industry-specific exemptions apply.

There is a more general exemption for companies that comply with equivalent frameworks that are internationally recognized, e.g., the OECD Due Diligence Guidance on Promoting Responsible Supply Chains for Minerals and ILO Conventions Nos. 138 and 182. To qualify for this exemption, companies have to name the relevant international framework in a public report and apply that framework’s regulations in their entirety (see Annex 2 to DDTrO) in lieu of Art. 964j et seq. CO.

4.4.3 Due Diligence Obligations

The due diligence obligations defined in Art. 964j CO and the DDTrO include:

• Implementing a management system that, in particular, includes a supply chain policy addressing the matter of (y) possible conflict minerals and/or (z) products/services potentially involving child labor and ii) specifies the tools used by the company to determine, assess, eliminate, or mitigate the risk of potential harmful impacts on its supply chain (conducting on-site checks; obtaining information from public authorities, international organizations, and civil society; consulting experts and specialist literature; obtaining assurances from economic operators in the supply chain and other business partners, using recognized standards and certification systems); 

• Implementing a supply chain traceability system;

• Introducing a reporting procedure that allows all interested parties to raise concerns regarding conflict minerals or child labor. 

• Communicating the supply chain policy to the public and suppliers

• Assessing risks regarding adverse effects relating to conflict minerals or products where there is a risk of child labor in the supply chain;

• Preparing a risk management plan to address those risks, including risk mitigation measures and establishing a complaints procedure;

• Documenting these procedures effectively.

4.4.4 Report on the implementation of due diligence obligations

The new regulations require companies that are subject to the due diligence obligations to report annually on the fulfillment of these obligations. There is no shareholder approval requirement.

Where a Swiss company is controlled by a legal entity domiciled abroad and this legal entity prepares a report that is equivalent to requirements under Swiss law, the Swiss company will be exempt from that particular reporting requirement. There is no guidance as to what constitutes an equivalent standard. Reporting under the EU Conflict Minerals Regulation would likely qualify. On the other hand, reporting on Form SD under applicable US SEC regulations may not, as the scope of these regulations is geographically much more limited than the worldwide scope of the Swiss regulations.

If a reporting company is required to establish consolidated financial statements, then it must also prepare a consolidated report. Any company included in a consolidated report is exempt from producing its own report. As many ultimate group parent companies will be holding companies, the practical impact of this consolidated reporting requirement may be limited. If the group parent company does prepare a consolidated report, even if not legally required to do so, the exemption should also apply.

4.4.5 Audit requirement

According to Art. 964k para. 3 CO, compliance with due diligence requirements on conflict minerals and metals must be audited by an independent expert. There is no auditing obligation with regard to compliance with the due diligence obligations on child labor.

According to Art. 16 para. 1 DDTrO, the audit must be performed by a licensed audit firm that meets the independence requirements for auditors according to Art. 728 CO. The audit firm does not necessarily have to be the statutory auditor. The audit firm must review whether there are facts from which it can be concluded that the due diligence obligations pursuant to Art. 964k para. 1-2 CO have not been complied with (negative assurance; cf. Art. 16 para. 2 DDTrO).

4.4.6 Publication of report

The report must be published in electronic form immediately upon approval and must remain accessible for at least ten years.