Why Critical Minerals Demand a Compliance Revolution

Over the past 25 years, critical minerals have gained ground in global agendas and in specific national priorities. This evolution can be observed in the growing number of agreements, such as memorandums of understanding (MOUs), that the US has signed with other governments to secure access to these resources, which have been identified as essential. 

Historically, compliance has focused on overseeing the private sector, particularly corporate practices. However, given the specific challenges of intergovernmental agreements and the strategic importance of critical minerals (from sourcing them in specific regions to fostering industries that could redefine political and economic frameworks), could this be an opportunity for compliance to evolve — or perhaps to return to its roots?

The roots of compliance

The origins of corporate ethics and compliance in the US are closely tied to the need to combat fraud and corruption, ultimately to protect investors and ensure trust in financial and stock markets.

Though compliance regulation is primarily associated with the private sector, its foundation lies in the concept of oversight traditionally led by public institutions. In other words, compliance arose, to some extent, as a response to the insufficiency of state supervision over companies. The main objective was to complement regulatory oversight with the implementation of internal control mechanisms to prevent legal and reputational risks.

Certain events marked turning points, exposing the weaknesses in how oversight was conceived at a given moment. The corrupt practices uncovered during the Watergate scandal in the 1970s and the collapse of Enron in 2002 highlighted an increasing need to establish new controls that were not only internal but also robust and effective. These and other cases served as catalysts for the enactment of laws that formalized and institutionalized compliance practices.

Regulatory compliance initially emerged due to the inadequacy of external controls, derived from laws that, one could say, stemmed from a public need but which had private application. However, we can observe how compliance, which began in the public sphere and transitioned to private governance, is increasingly being discussed in public matters. We might be looking at how compliance could become a better tool for public institutions by focusing more on prevention rather than ex post facto accountability.

This return to roots may be giving way to the reintroduction of a concept of compliance that allows what has been learned in the private sector to be adapted for public institutions. The new challenges presented by global agendas could demand a redefinition of compliance, one that addresses the complexities of issues, particularly those related to the energy transition, without putting at risk the foundational institutions of the US.

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The paradoxes of the green transition and the critical minerals imperative

Critical minerals, such as lithium, cobalt and rare earth elements, are essential to the new global economic and political landscape. Actions tied to the energy transition, such as the production of electric vehicles and renewable energy storage, rely on these materials. However, the development of this new infrastructure poses risks at every point in the supply chain. Specifically, the extraction, transportation, handling, commercialization, processing, smelting, refining and alloying of critical minerals are fraught with recurring issues of human rights abuses, environmental damage, corruption and financial crimes.

While these risks may intensify at certain points of the supply chain more than others, the assumption that only extraction and/or trade are significant is the first common mistake, often leading to even greater errors.

Around the world, governments have recognized the strategic importance of critical minerals. No one wants to be left behind in this new geopolitical race. As noted in these pages, “Whichever countries dominate critical minerals will set the rules for the modern economy.”

Over the past 25 years, hundreds of memoranda of understanding have been signed to promote collaboration in the extraction, processing and trade of critical minerals.

To put this into perspective, there has been greater interest in securing access to critical minerals than in strengthening effective water management, which, in the case of lithium, is crucial to ensure mining activities do not exacerbate environmental vulnerabilities or harm communities linked to extraction sites.

The critical minerals supply chain has more paradoxes than we would like. These materials are essential for green energy, but their extraction causes irreversible environmental damage. A just transition is often discussed, yet the extraction of these minerals leads to displacements, forced labor and violations of the rights of vulnerable sectors, such as indigenous peoples and other groups connected to mining activities.

Risks related to the signing of MOUs

Like any agreement, an MOU reflects the mutual commitment to work toward a common goal. Within this framework, an MOU also involves recognizing that, in general, the proposed objectives are impossible to achieve individually or, at the very least, extremely difficult. This acknowledgment leads the parties to make concessions to honor the mutual commitment undertaken.

The areas where intergovernmental MOUs are usually signed include minerals and natural resources, technology development, trade and defense and security. In other words, these are topics of great relevance to a country, which in many cases can represent progress or setbacks in a specific area or sector.

All MOUs involve risks related to sovereignty, corruption, fraud and the reputation of the countries and their representatives, but depending on the subject matter, there may be additional risks specific to the sector, as is the case with critical minerals.

There are specific risks associated with the signing of MOUs that involve critical minerals. Among these are:

• Sovereignty and ownership over natural resources.
• Royalties.
• Lack of consideration for vulnerable sectors in the supply chain.
• Environmental risks, among others.

Risks related to sovereignty and ownership over natural resources

In the best-case scenario, an MOU could solely involve issues of sovereignty over natural resources. However, there are internal problems in each country that affect the ownership of these resources.

A notable example is the case of lithium in Argentina, where agreements related to this sector have already been signed, involving multiple levels of ownership. Since Argentina has a federal system, the regions where lithium mines are located also have local jurisdiction. Therefore, in addition to national regulations and challenges, local issues must also be considered, along with particular problems, such as the rights of indigenous peoples in northern Argentina. The Argentine state recognizes these peoples as the original owners of the lands they occupy, which makes the execution of the MOU more complex, taking into account aspects that often go beyond its text.

Environmental impact risks

Mining activities, despite preventive measures, cause environmental damage during the extraction of critical minerals. This introduces issues related to current environmental regulations, in addition to the inherent challenges posed by MOUs.

Risks related to royalties, fraud and corruption

One of the key aspects of mining is the royalties generated by extraction. In the case of critical minerals, and in some instances due to these being less-established markets, material prices are not always publicly available and may be part of private agreements between companies that are generally not required to disclose this information.

This means that, even if MOUs between countries establish transparency in certain aspects, the companies involved in mining activities may not comply with this requirement, compromising the integrity of the agreement.

Corporate compliance lessons that can be applied to intergovernmental MOUs

The application of compliance in the private sector has a long history, and significant lessons can be drawn from it to adapt to MOUs, some of which are especially relevant in strategic sectors like critical minerals.

Due diligence

Acting diligently involves conducting a prior evaluation before signing an agreement. However, in the case of MOUs, this practice is often not carried out, as it could imply a delay in the signing process. In many cases, the agreement itself is the starting point that allows the rest of the actions to develop in cascade.

An adapted solution would be to implement express due diligence, tailored to the sector, that primarily enables the identification of potential companies involved in the MOU and includes a background analysis, such as prior complaints, especially those related to offenses against public administration.

Stakeholder engagement

In MOUs related to minerals, it is essential to include all sectors linked to the supply chain, especially the most vulnerable ones, such as Indigenous communities.

Continuous monitoring and audits

Incorporating independent audits to evaluate the execution of the MOU and the fulfillment of commitments made, allowing the detection of risks such as conflicts of interest, corruption, among others, aimed at various public and private offices and entities.

This approach could be seen as a delay in the signing of MOUs. It might be perceived — and thus executed — as a bureaucratic burden, leading to delays in key sectors like critical minerals.

However, rethinking the role of compliance in this context can have the opposite effect, as long as systems and programs are effective and remain focused on the context, the objectives and the different parties involved in the MOUs.