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Embedding ‘OECD Due Diligence Guidelines for Responsible Supply Chains of Minerals in India’s gold ecosystem’-policy perspective

Professor Arvind Sahay, Head, India Gold Policy Centre, IIMA

Ruchi Agarwal, Manager, IGPC, IIMA

Over the past few years the Government of India is steadily moving towards a more transparent, accountable, efficient, inclusive and ethical business environment. Policy interventions such as demonetisation and GST were major steps for enhancing accountability and for mitigating black money transactions in general. The gold sector in India in particular has been in the spotlight; it is a sector with issues of fragmentation among diverse stakeholders in the value chain, large scale smuggling, a lack of transparency and of a record of non-traceable transactions at a granular level, and a mismatch of demand-supply with the regulators painfully making efforts to keep a check on CAD (Current Account Deficit).

The question that we ask is: is it pertinent to advocate OECD guidelines for responsible supply chains in India’s gold ecosystem at this point of time? And how should India proceed in this direction? In order to explore these question in the light of the context in India, we first start with some background on the subject.

OECD is a global standard towards responsible mineral supply chains. Trade and investment in natural mineral resources hold great potential for generating income, growth and prosperity, sustaining livelihoods and fostering local development. However, a significant share of these resources is located in conflict-affected and high-risk areas, where they may contribute, directly or indirectly, to armed conflict, including terrorist financing, human rights violations and hinder economic and social development.The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High Risk Areas clarifies how companies can identify and better manage risks throughout the entire mineral supplychain, from miners, local exporters and mineral processors to the manufacturing and brand-name companies that use these minerals in their products.[1]

There has been an increasing uptake globally of the OECD guidance through the development of programmes and their dissemination since its formal adoption in May 2011 by OECD and non-OECD countries. The guidance essentially integrates recommendations developed by the Financial Action Task Force (FATF) to promote effective implementation of measures to combat money laundering and terrorist financing. Industry initiatives estimate that approximately 90% of all refined gold is covered by industry audit programmes designed to implement the guidance. While industry takes a lead in implementing guidance, governments and international institutions play a pivotal role in advocating the advantages of adopting the guidelines and monitoring resource extraction conditions and trade, capacity building, imparting training through collaterals, case studies and other tools.

In the Indian context, the OECD has developed standards that aim to promote co-operation on FDI. The policy framework outlines systemic and comprehensive approach encompassing multiple facets of taxation, infrastructure, human resources, corporate governance, audit process, membership criteria and the like. The OECD actively supports India’s alignment to international standards in conducting business responsibly. India is included in OECD’s work to develop a better understanding of global value chains and their policy implications. A trade policy paper released by OECD in 2015 titled Developing Country Participation in Global Value Chains (GVCs) focuses on how developing countries engage with and benefit from GVCs. A roundtable to deliberate on sustainability standards in mineral supply chains was held by the World Gold Council, LBMA and OECD jointly in 2015 at New Delhi.[2]

From a policy perspective, regulatory bodies in India overseeing gold industry should see merit in encouraging refineries to adopt OECD DDGfor responsible sourcing of gold (dore and standard gold); this would also increase the transparency of gold related transactions right from the start of the gold value chain. India has about 35 gold refineries of which one is a large LBMA accredited one, 11 are mid-size and follow BIS (Bureau of Indian Standards) and other small refineries operating are independent of these accreditations. There are about 18 nominated agencies for import of bullion and about 60,000 jewellery manufacturers and 400,000 retailers. Increased transparency would lead to greater traceability, more customer trust in gold transactions, better circulation of gold in the economy, and a sense of being a more responsible citizen of the world.

So what are the bottlenecks that prevent stakeholders from adopting OECD or equivalent global standards? Is production capacity or size of operation an issue? Is the OECD audit fee a limiting factor? Are refiners averse to processes involved in certifications and maintenance? Do refineries consider adopting DDG as a cost or investment on their balance sheets? Do they see the long term benefits? Is scrap gold from old melted jewellery traceable? Are govt. policies supportive in adopting DDG by way of sops or implicit business advantages if not direct financial ones impacting their top line and bottom-line in the short term? Is documentation from end to end available in the supply chain from port of entry to end user where it lands going from importer through logistics companies to bullion dealer/ bullion bank to jewellers/ refinery?

To delve deeper into the web of supply chain issues on implementation of OECD DDG in Indian Gold sector, I wish to quote an illustration of DMCC (Dubai Multi Commodity Centre). As Head of IGPC, I have been nominated as a member of the 'Independent Oversight Committee' (IOC) of DMCC. The committee monitors sourcing of gold into Dubai responsibly.DMCC's membership has expanded to seventeen members recently and has two applications in the pipeline. In a meeting held on 11 April 2017, the IOC oversaw transition to new norms of sourcing gold responsibly with the goal to be a benchmark for pricing and to buttress Dubai as a major centre for trade and processing of gold. It is an interesting case study of a quasi-government trade entity adopting OECD DDG by embedding it slowly as a policy norm. There is some resistance to adoption of these norms as it does increase the cost of operation; there is a longer documentation process and the costs of transaction do increase. The audit fees by a reputable agency can amount to a few thousands of dollars quite easily. However, it is also quite clear as the membership of DMCC increases and more members adopt responsible sourcing guidelines as well as other good practices, the reputation of Dubai as a center for transactions in gold would improve.

Taking some cues from DMCC, it may be worthwhile to explore establishing an independent neutral body to work with OECD team in designing customised guidelines, for training, implementing and monitoring OECD DDG for stakeholders in the Indian gold value chain including bullion banks, logistics players, refineries, jewellery manufacturers, industry interlocutors and others. Traceability is an important factor in this industry and the success of any policy implementation depends largely on its inclusiveness to make it effective. Ministry of Commerce, Ministry of Finance, Ministry of Consumer Affairs and Ministry of Mining can consider initiating OECD DDG inviting participation from the gold value chain. Industry associations like WGC could spearhead the task force team initially. Some primary research involving stakeholders may be conducive in laying down the framework for implementation of OECD guidelines in India’s gold supply chain. From a government’s vantage point, all this would help improve ‘Brand India’s global image’ as being more ethical and responsible nation for conducting business.

The gestation period may be a few months to a couple of years but it all begins with a single step before we can accomplish bigger milestones. Embedding OECD Due Diligence Guidelines at a policy level calls for high level of commitment, coherence and collective action that is based on a transparent and traceable system. As the second largest consumer of gold in the world, almost of which is imported, and as a standard bearer of peace and non-violence, it makes philosophical and moral sense, apart from practical sense to adopt responsible sourcing practices.

 

India Gold Policy Centre

Indian Institute of Management, New Campus

Vastrapur, Ahmedabad 380015, Gujarat, India

Website: https://www.iima.ac.in/web/areas-and-centres/research-centers/igpc

Twitter: https://twitter.com/@IndiaGoldPolicy

 

India Gold Policy Centre is funded by the World Gold Council

Disclaimer: Views are personal and not the views of the publisher.