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Export Regulations The Search for Skeletons in the Closet

By Ann C. Logue
Electronics processors have been conducting due diligence on their downstream vendors for years. As more downstream firms get certified, the process should become easier, but recyclers must remain vigilant.

Due diligence, in a legal or business context, is the process of investigating the parties involved in a pending agreement to ensure none has hidden information pertinent to the agreement. It’s the search for skeletons in the closet.

In electronics recycling, the potential skeletons could be cathode-ray tube televisions stockpiled in a storage facility, improper handling and packaging of lithium-ion batteries for recycling, or a container of circuit boards shipped for recycling through a port in a country that bans such material.

Performing due diligence in electronics recycling requires looking at the past, present, and ongoing behavior of companies you do business with to ensure they’re complying with applicable laws, regulations, or business agreements. This tracking must continue to that company’s downstream customers who purchase the electronic devices, their parts, and their scrap commodities—and to service providers who manage focus materials that require special handling or disposal. The downstream tracking ends only with the consumer of the scrap commodity, the company that sells the used electronic product or part to its next user, or the facility that accepts focus materials for disposal.

This downstream due diligence, which began primarily as a requirement imposed by government, institutional, and large corporate suppliers of electronics for recycling, has led to real improvements in environmental, health and safety, and trade practices, industry participants say, but at a significant cost to electronics processors. Over the past decade, groups with an interest in electronics recycling have come up with ways to ease the process, most notably certification to one or more standards.

The need for downstream due diligence is not going away. The good news is that most companies involved in electronics processing are familiar with the requirement, so they are not taken off guard by the request for information, nor should they consider such requests odd or unreasonable, says Darrell Kendall, director of the Recycling Industry Operating Standard™. (ISRI established RIOS™ and R2/RIOS™, which combines RIOS with the R2 standard for electronics recyclers from Sustainable Electronics Recycling International in Boulder, Colo.) The growing prevalence of certification should make the downstream due diligence process easier in the future, Kendall says. He estimates that certified companies now handle a vast majority of U.S. scrap electronics, and that proportion is likely to increase.

When your company gets certified to one or more of the standards for electronics recyclers, you undertake a process of proving to a third-party auditor that your operations meet the requirements of that standard. Most certifications must be renewed every few years to ensure your practices remain in compliance. “Certification is a significant investment,” Kendall says, but increasingly suppliers are requiring it. (For the most common certifications in electronics processing, see “A Quick Look at the Standards” on this page.)

Your certification often meets the due-diligence requirements of your upstream suppliers, but it does not make it any easier for you to conduct due diligence on downstream vendors. Certification might even require greater due diligence—more documentation or more frequent audits—than your suppliers require. The benefit comes when your downstream vendors get certified, too. The hope is that downstream vendors will see the benefit of third-party certification to get access to suppliers that require it or prefer it to conducting some or all of their own due diligence.

Paper and In-Person Reviews

HOBI International (Dallas) has been providing electronics recycling services to businesses since 1992, and it was performing downstream due diligence long before certification became the norm, says President Craig Boswell. Even when its downstream vendors are certified, it often conducts additional due diligence because one of the services it offers is reporting on corporate sustainability goals or specific compliance issues a client may face.

HOBI’s staff starts its due diligence by sending an initial questionnaire to downstream vendors asking them to provide documentation of their environmental, safety, and health systems, such as their emergency response plans and focus material plans; their compliance with environmental and health and safety requirements; and their downstream vendors, Boswell says. Companies that present good information at this stage warrant a site visit.

Some due diligence can and should be done without contacting the downstream vendor, these companies say. For example, Kelley Keogh, managing director and co-founder of Greeneye Partners (Santa Rosa, Calif.), recommends searching the U.S. Environmental Protection Agency’s Enforcement Compliance and History Online site, or ECHO (, which contains data for 800,000 facilities on their permits, inspection dates and findings, violations, enforcement actions, and penalties assessed, along with substantial additional information. OSHA has a website that allows you to review facilities’ recent health and safety violations, she adds, and many states and some countries also maintain online databases of environmental violations, health and safety problems, and transportation issues. Not every country makes finding such information as easy as a few keystrokes, but it’s also not impossible, she says. Official forms are difficult to fake, but nonstandard items, such as bills of lading, could be counterfeited if a company had impure motives, however.

Due diligence doesn’t require that you conduct site visits or on-site audits, but many in the industry highly recommend them. A visit to a downstream vendor should include a look at the company’s health and safety practices, on-site waste generation and management, reuse and refurbishment activities, inventory control and storage, site security, and recordkeeping. Over time, “you get a fairly good understanding of what to look for, and you get a pretty good understanding of where [companies] hide the skeletons,” Boswell says. The biggest surprise on these visits, he says, is when a vendor sends a great audit package—providing all the requested documents—but the site’s appearance and operations don’t show the same care and attention as the paperwork did.

Wm. Miller Scrap Iron & Metal Co. (Winona, Minn.), which handles metal and electronic scrap, conducts audits of its scrap suppliers and customers. “We try to do [audits] on both ends so we know the quality of the materials we are buying as well as how our downstream vendors process [them],” says Jeremy Miller, chief financial officer. In many cases, Miller says, downstream companies also need to audit his company to ensure that it appropriately handled whatever it shipped to them. Given that few electronics recyclers are either at the very beginning or the very end of their supply chain, being audited is a fact of life, he says, estimating the company gets five to 10 visits each year from other links in its supply chain plus annual audits that are part of the company’s R2/RIOS certification. “We welcome audits. We’re very proud of our operations,” Miller says. He views the process as one of building strong relationships with customers and suppliers, part of a corporate culture he credits with allowing his family business to have succeeded for more than a century.

Common Obstacles

Performing due diligence on your direct suppliers and buyers tends to be easier than researching the second, third, or further company down the supply chain, but following the entire length of the material chain is important. “That’s where the problems are, and that’s where you have the cost,” Boswell says. Sometimes a partner in the chain is sending material to a noncompliant company but does not want its customers to know that, thus it will object to providing information or allowing a visit, conceal that information, or falsify its records, Kendall says. The biggest objection recyclers hear is regarding proprietary information.

The proprietary argument has two parts, Boswell says. The first is the concern that the due diligence will expose a trade secret, most likely when companies find new markets or develop new ways to process materials. Given how quickly new electronic products enter the market and uses of old electronics change, new markets and processes are not uncommon. When facing that objection, Boswell says, his response is, “We don’t want to know the process. … We just want to understand the results.” HOBI’s staff members will sign nondisclosure agreements in certain circumstances, such as when it’s essential that they see the specifics of a new processing technique.

The second concern downstream vendors often voice is that when you get the list of their customers, you’ll cut out the middleman and take your business directly to the next step in the chain. Boswell says this is not much of an issue for HOBI, given its size, but it can be an issue for smaller companies. As certification becomes more prevalent, this objection will become less common, he adds.

When downstream materials are exported, the due diligence requirements become even tougher. Shipped materials need to comply with the laws, international agreements, and regulations of their origin and destination ports as well as every port in between. If a shipment from the United States headed for France stops at the Port of Montréal, for example, then the materials in the shipment have to comply with laws in both Canada and the European Union. “In America, it is not illegal to export anything,” explains Joe Clayton, vice president of sales for MRP Co. (Baltimore), although the EPA regulates the export of cathode-ray-tube devices. “In other countries, it may be illegal to import things.”

Metals travel freely in most of the world, Clayton says, but electronics equipment does not. For example, some countries do not accept imports of used circuitboards. Others have laws limiting the age of used, functioning equipment they will accept—and the clock keeps ticking when the material is in transit. More than one recycler has faced a crisis, Clayton points out, after shipping electronic equipment that was less than four years old when it left the United States, but it had passed that cut-off age when it arrived at its destination. Part of due diligence work for companies that export is documenting the details of such exports and confirming they are in compliance.

Consultants and Other Resources

HOBI’s environmental, health, and safety manager conducts most of the company’s due diligence site visits, which are annual for its primary downstream partners. It and many other companies use consultants for some overseas visits to downstream traders and processors. Consultants can reduce the work involved and can be less costly than doing the work yourself, recyclers say.

Greeneye Partners is one of several consulting firms that prepare due-diligence reports for electronics recyclers, including reports that require overseas travel. By working for several clients at once, consultants often can undertake such travel more cost-effectively than each recycler going on its own. Ideally, the consultants’ familiarity with electronics processing in the countries they’re visiting will allow them to better address cultural issues that might affect the visit. Greeneye Partners’ auditors visit some sites annually and overseas smelters every three years, Keogh says. She recently returned from India, where she visited the world’s only CRT glass furnace still in operation, she adds.

More certification of downstream vendors overseas also will ease the due diligence burden somewhat. SERI plans to expand the market for its R2 certification program internationally this year, starting with companies in Latin America and Asia, says Sharada Rao, director of quality.

Within the United States, a good resource for ISRI members is the association’s Superfund Recycling Equity Act Reasonable Care Compliance Program reports. The reports, which document scrap consumers’ environmental compliance with federal laws and regulations, cost as little as $25 each. Keogh says she’s surprised more companies don’t take advantage of this service, as it greatly simplifies the due-diligence process.

One start-up company has a novel approach to easing downstream vendors’ concerns about sharing proprietary information. The mission of DownStream Security (Cleveland) is to help scrap companies track their inventory and ensure that all of their downstream vendors hold either R2 or e-Stewards® certification—without revealing those companies’ names to their upstream clients. “We’ve worked with a lot of companies in the R2 process,” says Bo Lurch, the company’s vice president. “We’ve all sat around and complained about the same things.” Certification registrars such as Perry Johnson Registrars (Troy, Mich.), SGS (Geneva), and Orion Registrar (Arvada, Colo.) do not yet support the idea of a private data repository, Lurch says, but he and company president Scott Brainard think they can make the case for a completely confidential database that standards organizations such as SERI will support. The registrars will have access to all the information stored on DownStream Security’s database during each client audit, he explains. The company is testing the system with local, private e-scrap companies in Ohio and plans to demonstrate it at the E-Scrap Conference in September, Lurch says.

Constant Vigilance

The due-diligence process is just that—a process—which means it’s ongoing. “All certifications are event-based audits,” Clayton says. “An ISO certification is of the day that the auditor was there.” That’s the greatest risk in due diligence: Things change all the time, for all sorts of reasons. A common problem, Kendall says, is that a downstream company changes one of its vendors and does not notify the upstream companies. “That’s absolutely a game-changer in terms of the business relationship,” he says: It not only knocks the upstream company out of compliance, but it also might indicate that the downstream company isn’t always doing the right thing.

Some problems only become evident over time. An electronics processor might have a few CRTs on site on the first visit, which is reasonable. After several visits, it will become clear whether the company has a problem with CRT accumulation. (The EPA and some states regulate the storage of intact and broken CRTs as well as CRT glass; storing such material beyond specified volumes and time frames can trigger hazardous waste regulations.) That’s why annual site visits and certifications matter.

SERI plans to increase its audits of certified firms to ensure they adhere to the R2 standards after they achieve certification, Rao says. “Unless we have some rigorous oversight, recyclers won’t respect it.” Although recyclers rely on certification as evidence that a buyer or seller is following proper procedures, they will need to verify that the certification is current.

Even when you perform an on-site audit, “window dressing” is a risk. A company might move excess volumes of CRTs to a storage locker, hand out personal protective equipment to show a concern for safety, and clean up the processing facility the day before an auditor visits, for example. Kendall says window dressing takes effort—effort companies could have put into bringing a site into compliance. Nevertheless, it has happened, he says, which makes frequent audits important. It’s more difficult to pull off the act many times or on short notice.

Boswell says it’s difficult to get window dressing past a proper auditor, in part because so much of the documentation required for certification or due diligence is standard. That doesn’t mean it doesn’t happen. “If [a company is] willing to lie to me and defraud me, that can be difficult to detect,” he says. And that, ultimately, is a risk of being in business.

By this point, almost all U.S. electronics recycling businesses have encountered the certification or due diligence process, as have many outside of the United States. Some still need to be convinced that there is a business reason for adopting such practices. Over the long run, Rao says, smaller operators that do not do so will get out of the market. There will be fewer and fewer recycling firms run by one person in a garage, and that will reduce the risk to the industry, she says.

Whether you’re conducting due diligence for certification or just as a good business practice, it’s the right thing to do for workers and communities, recyclers say. It can be a hassle, but it can prevent greater future hassles. A due-diligence report is the starting point in a relationship, not an endpoint, Clayton notes. “Some people trust,” he adds. “Some people trust but verify.”

Ann C. Logue is a freelance writer based in Chicago. This article originally appeared in the March/April 2015 issue of Scrap magazine. Reprinted with permission.

A Quick Look at the Standards

Recycling Industry Operating Standard™

  • Established in 2004 by ISRI
  • Emphasis is on quality, environmental protection, and health and safety
  • For recyclers of paper, metal, plastics, rubber, glass, or textiles
  • Integrated with ISO 9001, ISO 14001, and OHSAS 18001
  • R2 Standard for Responsible Recycling

  • Established in 2008 by a group of electronics manufacturers, recyclers, and other stakeholders with the input of the U.S. Environmental Protection Agency
  • Managed by Sustainable Electronics Recycling International
  • R2/RIOS™

  • Established in 2009 by ISRI by combining the R2 standard with the RIOS standard
  • e-Stewards®

  • Established in 2009 by the Basel Action Network
  • Integrated with ISO 14001
  • Coordinated with OHSAS 18001
  • ISO 14001

  • Established in 2004 by the International Standards Organization and undergoing revision
  • Current standards emphasize environmental management systems; revised standards will emphasize environmental performance
  • ISO 9001

  • Established in 1987 by ISO
  • Addresses quality management systems
  • Revised standards expected later this year
  • OHSAS 18001

  • Established in 1999 by the British Standards Institution
  • Addresses occupational health and safety
  • Will be replaced by a new standard, ISO 45001, in 2016
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