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Apparel Companies Struggle With Conflict Minerals Rule

Zippers could be a greater cause for concern than most apparel importers realize.

“What’s the risk that there are conflict minerals in your supply chain?” asked Barbara Jones, a shareholder in Greenberg Traurig’s corporate and securities practice group, speaking Wednesday at Regulation Education, a half-day workshop hosted by Sourcing Journal at LIM College Townhouse in New York.

She was referring to Section 1502 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires companies using tin, tantalum, tungsten and gold (3TG) to make efforts to determine if those materials came from the Democratic Republic of Congo (DRC) or an adjoining country and, if so, to carry out due diligence on their supply chains to ascertain whether those minerals were purchased from mines or smelters that support armed groups in those regions.

“When the rule first came out, everyone was trying to assess ‘How does this apply to my company?’” Jones recalled, noting that it applies across all industries, and tin in particular is a common presence in buckles, zippers, eyelets, handbags and other products within the fashion industry.

May 31 is the reporting deadline every year and 2016 is the third year that public companies have had to file “conflict mineral” reports with the SEC, she said, despite pending litigation against the rules that hasn’t yet been resolved, as well as data suggesting that violence and poverty in the DRC region have actually increased since the rules came into play.

Furthermore, because the law only requires companies to disclose their use of the minerals, not stop using them, some critics have christened the process a burden.

“Sadly, you do have to worry about it,” Jones confirmed, noting that even private companies are asked by their customers to participate in diligence efforts.

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In an SEC filing last month Nike described how, after a reasonable country of origin inquiry, it had reason to believe that a portion of the 3TG necessary to the functionality or production of some of its athletic footwear, apparel and equipment that it contracted to manufacture may have originated in the DRC region, and may not have come from recycled or scrap sources.

After carrying out due diligence on its supply chain, Nike reported, “We cannot say with certainty that the covered 3TG from the smelters or refiners identified on the CMRTs (conflict minerals reporting template) by covered suppliers are contained in our products. In addition, the smelters and refiners identified by the covered suppliers may not be all of the smelters and refiners in the supply chains of our products, since not all of the covered suppliers were able to identify all of the smelters and refiners used to process the covered 3TG, and a small portion of the covered suppliers did not respond to our inquiries.”

Nike concluded, “Following our due diligence process, we do not have sufficient information to determine the country of origin of at least a portion of the covered 3TG in each of our in-scope products.”

That, in a nutshell, is the issue most companies come up against.

“If you don’t get a 100 percent—or pretty close to a 100 percent—satisfactory response you have to do further diligence,” Jones said. “You have to look through the first-tier suppliers to the mines where those minerals or gold came from. That’s a complicated process for those of you who have gotten those inquiries from people in your downstream supply chain. It’s not a fun process. It takes a long time. You’re looking at a year’s worth of products in your supply chain and sources from your suppliers coming into your supply chain. That’s the scope.”

And it’s a struggle: Tulane University and New York-based consulting firm Assent Compliance conducted a survey of more than 1,200 companies that filed conflict mineral reports in 2014 found that almost all (90 percent) could not determine whether their products were conflict free.

“There’s a lot that goes into complying with this rule, simply because you’re a public company. Keep in mind that the impact is all the way up the supply chain. That’s really the point I want to drive home to you,” Jones stressed. “The narrative is expanding because as the rule becomes more incorporated within companies, and the processes become more incorporated, the SEC and NGOs who are looking at your reports and are watching the results of these reports are expecting companies to have done more and more diligence every year to list out all of your smelters and mines.”

She added, “It’s an ongoing process but the key point here is that each year NGOs and the SEC expect more disclosure, not less disclosure, and they except you to be doing a better job at capturing that information than you did in the prior year.”

The rule is not unique to the U.S. either. A number of countries have imposed, or considered imposing, similar rules, including Australia, Canada and the European Union.

At the end of the day, while it’s “merely a statement of your diligence and who you talked to,” it’s caused a lot of pressure within the supply chain. “You have to keep tracing it back until somebody has the answer,” she continued. “There’s a cost impact on that and you have to decide what’s reasonable for your company.”

That’s another reason why companies consider the rule a burden, in addition to the fact that it’s supposed to put pressure on the supply chain to not do business with the militant groups in the DRC region, but has ended up hurting the good guys, too.

“The unexpected negative impact of the rule has been exactly that—companies have simply avoided doing any sourcing in the region,” Jones said. “Miners in the region have been adversely impacted by the rule because their customers have just pulled out of the region. Those were the ones who the rule was designed to help and now they’re not getting business.”