Responsible Sourcing Update: May 2021
Five Key Strategic Focus Areas
In 2020, following consultation with stakeholders, LBMA finalised a three-year strategy for the development of its Responsible Sourcing Programme, which re-affirmed LBMA’s commitment to improving the implementation of the OECD due Diligence Guidance. This mid-year update highlights the progress made to date by LBMA on delivery of its Five Key Strategic Focus Areas and provides an update on the audits for 2020.
Introduction: Five Key Strategic Focus Areas
The LBMA Responsible Sourcing Programme (Programme) has been dynamic in its approach to continuous improvement and has strived over the years to reflect on lessons learnt as well as feedback received from stakeholders. The Programme plays a fundamental role in providing trust and confidence in the global precious metals market. All Good Delivery List (GDL) refiners must comply with the Responsible Sourcing requirements, or risk losing their GDL accreditation.
LBMA identified five focus areas, which underpin the priorities for the programme over the next three years.
- Value chain accountability – building leverage
- Advancing standards – defining best practice
- Transparency – improving disclosure and reporting
- Audit programme – enhancing credibility
- Artisanal and Small-scale Mining (ASM) – engaging responsibly
These five key areas are important to help build long-term trust and credibility in the industry globally. While the Programme has achieved significant milestones over the last nine years, the LBMA recognises that much remains to be done.
Stakeholder Engagement: 2021
Central to the LBMA three-year strategy is the need for engagement with stakeholders. Although LBMA administers the Good Delivery List (GDL) — a list of refiners producing gold and silver bars to a mandatory industry standard — ultimately the responsibility to ensure that is metal is ethically sourced is shared across the entire industry, and therefore it is important to work collectively in order to address supply chain risks.
This year, LBMA is focused on several initiatives, which require close collaboration with various actors in the supply chain, as well as with other industry programmes. These initiatives include:
- Engaging with the relevant national authorities at the International Bullion Centres (IBCs) on implementing the OECD guidance, through the development of the LBMA IBC Recommendations.
- Consulting on the next version of the Responsible Gold Guidance (RGG), together with the third-party audit guidance and the supporting toolkit.
- Working with GDL refineries on better disclosure, through the implementation of the Disclosure Guidance.
- Supporting ASM projects.
Each initiative supports the LBMA’s five key focus areas and the overall objective of improving standards through continuous improvement.
Five Key Strategic Focus Areas: Update
1. Value chain accountability – building leverage
A global effort among all the value chain actors, national authorities, and law and enforcement agencies is required to continue addressing the outstanding challenges and risks.
There are limitations to any audit programme. While LBMA can effectively remove a refiner from the Good Delivery List for Responsible Sourcing failures, unauthorised material may still potentially find its way into the Good Delivery system. To address these limitations, LBMA published the International Bullion Centres (IBC) Recommendations that support the OECD Due Diligence Guidance framework and also responds to key findings from the Financial Action Task Force (FATF).
Given the reliance by the international market on the LBMA Good Delivery List, LBMA is well placed to collaborate and engage with IBCs, to advance standards that ultimately aim to address the integrity of the precious metals market. The breadth of the activities undertaken within IBCs and the involvement of international counterparties mean IBCs can be vulnerable to responsible sourcing risks.
IBC Recommendations: development
LBMA has identified three strategic priorities that require particular focus to mitigate threats to the industry: (1) the responsible sourcing of recycled gold; (2) the elimination of cash transactions; and (3) the provision of support for responsible ASM.
In November 2020, LBMA wrote to major IBCs with recommendations that would help to advance global standards for responsible sourcing. Each recommendation represents the overarching objective of integrity, trust and confidence.
- Effective scrutiny and verification of local and regional supply chains;
- Effective regulation of local and regional supply chains;
- Effective enforcement powers;
- Effective co-operation with local, regional and international organisations;
- Develop ASM specific guidance to support and further legitimise responsible ASM supply.
Since sending the initial letter, all 12 IBCs have been supportive of LBMA’s initiative and are proactively working to help the LBMA connect with other relevant organisations. In addition, the OECD is engaging directly with all 12 centres, starting with a meeting in May to further the countries’ work on implementing the Due Diligence guidance.
2. Advancing Standards: Responsible Gold Guidance version 9
In keeping with LBMA’s commitment to continuous improvement, LBMA will deliver an updated Responsible Gold Guidance (RGG). You can contribute to the RGG by contacting LBMA’s Responsible Sourcing Manager: alan.martin@lbma.org.uk.
Version 8 of the Responsible Gold Guidance, launched in 2018, marked a major strategic expansion to include Environmental, Social and Governance (ESG) issues. The revised draft (RGG version 9) will be released later this year after undergoing a thorough public stakeholder consultation, and will be applicable for refiners beginning 1 January 2022.
The key objectives of the RGG review process include:
- Reflecting the strategic priorities identified as part of the IBC Recommendations
- Addressing stakeholder feedback received to date, as and where applicable
LBMA is working to expand on its previously published IBC Recommendations in the following ways:
- Responsible sourcing of recycled gold
RGG version 9 will provide further clarity on the due diligence expectations for recycled material including what forms of paperwork are required to give assurance of origin and legality. It will be expected that the refiner’s assessment of the supplier should cover all precious metals activities carried out by the supplier rather than refiner’s direct supply chains only.
The revision will categorise types of recycled gold by the level of risk posed and provide additional due diligence and enhanced due diligence guidance per category. To address calls to extend due diligence beyond Tier 1 suppliers, version 9 will stipulate the requirement for secondary refiners supplying recycled melted gold to LBMA Good Delivery refiners to undergo independent assurance on conformance with an OECD-approved responsible sourcing scheme. - Elimination of cash transactions
RGG version 9 will prohibit all cash transactions except for when dealing with ASM between mine site and national level aggregator only. These cash transactions will require senior management approval. - Provision of support for responsible ASM
The guidance will continue to stipulate LBMA’s support for measures to create economic and development opportunities for ASM miners and assist legitimate ASM producers to build secure, transparent, and verifiable gold supply chains from mine to market. The guidance will be updated to provide streamlined due diligence requirements for legitimate ASM supply chains.
Stakeholder feedback following the implementation of RGG v8 covered the following areas:
- Origin of material
Definitions of gold sources (i.e., mined gold, recycled gold, mining by-products, grandfathered gold, and gold from owned mines) will be clarified in version 9 and due diligence requirements will address each source. This detail and clarification will help to further strengthen the Country-of-Origin data.
In addition, measures within this area of focus will outline an integrated approach to risk assessment covering location or origin, supplier, and type of material-based risks together. This will help strengthen the due diligence process and ensure refiners are covering all LBMA requirements including sourcing from conflict and high-risk areas (CAHRAs), money laundering, sanctions, and environmental, social, and governance (ESG). - ESG
In 2018 LBMA launched RGG version 8 with a scope extension to environmental, social, and strong corporate governance responsibilities (ESG). While LBMA acknowledge the inclusion of ESG to be a significant step change for refiners, LBMA’s vision is to deploy a graduated programme of implementation for this important aspect of precious metals due diligence. In RGG version 9, ESG focus will be extended from suppliers’ compliance with ESG regulation in version 8 to conformance with expected industry benchmarks for suppliers of primary sources. This not only aligns LBMA with the efforts of the OECD, the EU, other industry associations, and stakeholders in this regard, but also ensures that LBMA Refiners and their miners continue to have access to a market where ESG is becoming critical. - Risk mitigation requirements
RGG version 9 will clarify the risk mitigation strategies to be taken by LBMA refiners and complete the alignment with the OECD due diligence guidance. - Auditor independence and audit quality
Refiners will be required to rotate auditors every 10 years in line with the EU mandatory audit firm rotation requirements to enhance independence. In addition to ensure audit quality is consistently maintained and any high risk or zero tolerance non-conformances are identified in a timely manner, we will require refiners to undergo a reasonable level of assurance each year. - Disclosure guidance
To promote better reporting practices in 2020 LBMA released the Disclosure Guidance document. Conformance with this document will become mandatory with RGG version 9. At a minimum, refiners will be required to disclose any high-risk supply chains where mitigation strategies have been applied, as well as any medium- or high-risk non-conformances with the RGG. All suppliers in high-risk locations will continue to be reported to the LBMA through the Country-of-Origin annex (see focus area 3). - Other guidance documents
In addition to the RGG, LBMA is — in parallel — revising the third-party audit guidance, the refiner’s toolkit, and formalising standard operating procedures for the Country-of-Origin data analysis and Incident Review Process.
3. Transparency: Mandatory Disclosure Guidance
In December 2020, LBMA issued the first version of the disclosure guidance. The guidance — currently only voluntary to allow implementation, but mandatory as of January 2022 — outlines the disclosure expectation that refiners must adopt as part of their supply-chain disclosure practices. Refiners are encouraged to opt for proactive disclosure, rather than reactive communication with regards to potential risks in the supply chain. The guidance includes a template, which highlights what level of disclosure is expected from refiners.
The following recommendations and principles are provided to guide refiners on enhancing their due diligence disclosure:
- Transparency: Mention the nature of the risks that are being dealt with and give information as to the context in which they might occur. For instance, provide the location in the supply chain and broader geographical area, as well as the identity of the refiner and local exporter located in red flag locations.
- Acknowledge the complexity of risks: Welcome and publicly acknowledge any (new) source of material information with regards to possible risks in the company supply chain and provide external stakeholders with an understanding of the challenges related to the management of these risks.
- Ongoing communication: Demonstrate the company’s efforts in raising awareness about the complexity of the issues.
- Accountability: Assure external stakeholders of the company’s responsibility in managing the potential risks in its supply chain.
- Predictability: Regularly communicate to external stakeholders on the identified issues and on the due diligence steps to be implemented, as per the company due diligence and risk management strategy.
4. Audit Programme – Auditor Training
LBMA recognises that any audit is only as good as the auditor. The ongoing review and enforcement of LBMA’s Approved Service Provider list (list of approved auditors) are important elements for the credibility of the Programme. LBMA engages with auditors through training sessions, webinars and bilateral discussions.
During November – December 2020, LBMA partnered with Synergy Global Consulting to launch a comprehensive training programme for auditors. Participation in this course was mandatory for all LBMA-approved auditors. The training focused on improving auditor understanding of the gold market and gold supply chains, as well as focusing on auditor expectation under the audit programme. Detailed case studies were examined, and a test was carried out to confirm auditor understanding at the end of the three-day course.
5. ASM – Engaging Responsibly
In addition to amendments to the RGG, LBMA is seeking to improve and increase market access of ASM gold to GDL refiners. For this to happen a paradigm shift will be required that sees ASM in a separate light than industrial production. In addition to LBMA’s support for standards such as the CRAFT Code, LBMA will also look to support initiatives that focus on supporting progressive improvement, traceability and due diligence in the ASM sector.
Several GDL refiners are already finding innovative ways to do this, such as PX-Precinox’s construction of a smelter close to ASM mine sites in Peru. LBMA also supports linkages between refiners, NGOs and mining cooperatives seeking to formalise and destigmatise the sector.
2020 Audit Reports
LBMA also continues to review and assess the audit reports for 2020. Every report is assessed against previous years, in order to help determine if refiners are making improvements. During the review process, further questions are raised with both the refiner and auditor — and any medium- or high-risk reports are referred to the Compliance Panel for enhanced review. In line with the LBMA governance process, if all the issues are resolved to the satisfaction of the Compliance Panel then the refiner will be issued with the Responsible Gold Guidance certificate. If there are further concerns then a discussion will take place at Board level, but with only a subset of the Board. This subset includes the three independent NEDs as well as the two Executive Board Directors. The final decision on whether to remove the refiner for failures with the Responsible Sourcing Programme lies with this subgroup.
Feedback
The LBMA welcomes feedback on its approach to Responsible Sourcing. If you’d like to find out more about how this content and outlook fits within LBMA’s commitment to maintaining the highest due diligence standards for sourcing material — and maintaining confidence in the global market — then please get in touch with Sakhila Mirza, LBMA Executive Board Director and General Counsel, who is responsible for the Programme strategy: affairs@lbma.org.uk.