Intended to address financial reforms, the Dodd-Frank Wall Street Reform and Consumer Protection Act included requirements that companies publicly disclose their use of conflict minerals that originated in the Democratic Republic of Congo or an adjoining country. The new rule, which was mandated by Section 1502 of the Dodd-Frank Act, took effect on November 13, 2012.
The term “conflict minerals” refers to tantalum, tin, gold, or tungsten. The Securities Exchange Commission (SEC) explains that if any of those minerals are “necessary to the functionality or production of a product” manufactured by those companies or contracted by those companies to be manufactured, the companies must publicly disclose whether the minerals originate in the Democratic Republic of Congo or adjoining countries.
At the heart of the issue is concern over exploitation and trade in the minerals by armed groups in an effort to help finance conflict in the region.
In its publication, The Definitive Guide to Conflict Minerals Compliance for Manufacturers, MetalMiner notes that overseas suppliers and original equipment manufacturers (OEMs) not owned by U.S.-based companies may be exempt from conflict minerals reporting in their home country but must comply with U.S. reporting requirements if they are supplying a U.S.-based company.
The MetalMiner report examines two approaches to ensuring supplier compliance. One it dubs “supplier-centric” and the other “part-centric.”
The report suggests that U.S. companies with a large number of purchased SKUs that contain the minerals could find the supplier-centric approach more efficient. Dealing with a limited number of suppliers, each of which is responsible for a large number of SKUs, can help contain the cost and burden of compliance.
If, on the other hand, a company can isolate the parts that contain the minerals, it may be able to survey just the supplier base for those parts to ensure compliance.
In all likelihood, the report continues, companies will need a combination of the supplier-centric and part-centric approaches to be effective.
As the SEC points out in explaining compliance, “Under the final rule, a company that uses a conflict mineral is required to conduct a reasonable country-of-origin inquiry that must be performed in good faith and be reasonably designed to determine whether the conflict minerals originated in the covered countries or are from recycled or scrap sources.”
Results of the inquiry must be filed on a special disclosure form (Form SD) with the SEC.
If the company knows its conflict minerals did not originate in the covered countries or that they came from recycled or scrap sources, it must file the Form SD disclosing its reasonable country-of-origin inquiry determination and provide a brief description of the inquiry it undertook and the results of the inquiry. The same is true if the company has no reason to believe that its conflict minerals may have originated in the covered countries or may not be from recycled or scrap sources,
The company also is required to disclose this information on its publicly available Internet website and provide the Internet address of that site to the SEC in its Form SD.
If a company knows or has reason to believe that its conflict minerals may have originated in the covered countries; and knows or has reason to believe that its conflict minerals may not be from recycled or scrap sources, the company must undertake “due diligence” on the source and chain of custody of its conflict minerals and, unless the company determines through its due diligence that its conflict minerals are not from the covered countries or that they come from recycled or scrap sources, file a Conflict Minerals Report as an exhibit to its Form SD filing.
In addition, the company is required to disclose in its Form SD filing that its Conflict Minerals Report is filed as an exhibit to the filing, make its Conflict Minerals Report publicly available on its Internet website, and provide the Internet address of that site in its Form SD.
For companies required to file a Conflict Minerals Report, its due diligence measures must conform to a nationally or internationally recognized due diligence framework, such as the Organisation for Economic Co-operation and Development’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (“OECD Due Diligence Guidance”), says the SEC.
After this due diligence/chain of custody process, the company may determine its products originated in the covered countries but did not finance or benefit armed groups in those countries.
In this case, the company must describe in its Conflict Minerals Report the measures it has taken to exercise due diligence. It must obtain an independent private sector audit of its Conflict Minerals Report and certify that it obtained such an audit. It must then include the audit report as part of the Conflict Minerals Report, and it must identify the auditor.
If that process determines the products are not conflict free, the Conflict Minerals Report must describe the products manufactured or contracted to be manufactured that have not been found to be “DRC conflict free.” It must also describe the facilities used to process the conflict minerals in those products, the country of origin of the conflict minerals in those products, and the efforts to determine the mine or location of origin with the greatest possible specificity.
For a temporary two-year period for all companies and a four-year period for smaller reporting companies, if the company is unable to determine whether the minerals in its products are DRC Conflict Free, the products are “DRC conflict undeterminable.” The company must still describe in its Conflict Minerals Report the measures it has taken to exercise due diligence.
The Conflict Minerals Report must also describe its products manufactured or contracted to be manufactured that are “DRC conflict undeterminable” and the facilities used to process the conflict minerals in those products, if known. It must also include the country of origin of the conflict minerals in those products, if known.
The company must also describe the efforts to determine the mine or location of origin with the greatest possible specificity, and the steps it has taken or will take, if any, since the end of the period covered in its most recent Conflict Minerals Report to mitigate the risk that its necessary conflict minerals benefit armed groups. This includes any steps to improve its due diligence.
For those products that are “DRC conflict undeterminable,” the company is not required to obtain an independent private sector audit of the Conflict Minerals Report regarding the conflict minerals in those products.
Under the final rule, companies are required to provide conflict minerals disclosure in the new Form SD. All affected companies will file the new form for the same period – a calendar year – regardless of their fiscal year end. They will be required to make their first Form SD filing on May 31, 2014 for the 2013 calendar year, and annually on May 31 for each calendar year thereafter.