Two years have passed since companies started reporting their use of so-called conflict minerals—tin, tungsten, tantalum and gold—to the U.S. Securities and Exchange Commission (SEC) in accordance with rules adopted under the 2010 Dodd-Frank Act.
The rules, which have been the subject of a First Amendment challenge in the D.C. Circuit Court of Appeals, impose supply chain diligence requirements relating to the sourcing of such minerals from mines and smelters that support militant groups in the Democratic Republic of Congo and adjoining countries (DRC Region).
Since the rules apply manufacturers or those who outsource production, a wide array of companies throughout the supply chain have been impacted, including in the apparel and accessories (jewelry, zippers, buckles, clasps, eyelets, gold thread and the like), toys, gaming machines, medical devices, lighting, home products, automotive and furniture sectors, to name just a few.
This year marks the third year of “conflict mineral” reporting to the SEC, despite the fact that the pending litigation against the SEC rules hasn’t yet been resolved and data suggests that violence and poverty in the DRC Region have increased since the adoption of the rules.
Industry efforts, particularly those led jointly by the Electronic Industry Citizenship Coalition and the Global e-Sustainability Initiative, commonly referred to as EICC-GeSI, have made significant strides in facilitating diligence efforts and in certifying “conflict-free” mines and smelters throughout the world through the Conflict Free Sourcing Initiative’s Conflict Free Smelter Program.
There is now a slew of information out there to help facilitate supply chain compliance that simply didn’t exist when the SEC rules were adopted in 2012:
Step One. Besides the rules, the key document on supply chain diligence for conflict minerals is the guidance provided by the OECD, which can be downloaded from the Organization’s website at http://mneguidelines.oecd.org/mining.htm.
Note that there are two supplements to reference as well as the main guidance document—one for tin, tantalum and tungsten, and a separate supplement for gold. The guidance, which is internationally recognized for this purpose, provides sample policies as well as procedures to incorporate into an enterprise-wide protocol for conducting supply chain diligence and managing associated risks.
Step Two. Once you have reviewed the OECD guidance and considered your company’s position in the supply chain, then consider appropriate measures for a compliance protocol. An internal compliance group or task force should be organized, comprised of individuals from the manufacturing, product development, purchasing, internal audit, IT, and legal and compliance teams to ensure appropriate input and consideration of issues. One of the first responsibilities of the task force will be to identify products containing the subject minerals and the associated suppliers, if not sourced directly from mines or smelters.
Step Three. EICC-GeSI has developed a downloadable diligence reporting template that has become the standard form used by companies in all industries, not just technology companies. The template can seem a bit unwieldy to use at first, but the majority of entities throughout the global supply chain are likely to have been asked to complete it by one or more SEC reporting companies over the past three years. The template is distributed to all of the company’s suppliers and seeks specific disclosures on the presence of the subject minerals in products, parts or components provided to the company, as well as information, to the extent known, on smelters and refiners.
Step Four. Repeated follow-up can often be required with recalcitrant suppliers who either do not respond at all or provide incomplete information. The onus is on the reporting company to pressure its suppliers to make inquiries of sub-suppliers and upward through the chain back to the original smelter and mine. There, of course, is an economic incentive for the supply chain to be cooperative—the potential risk of losing the business or having it significantly curtailed can be a strong motivator. But the ability to wield this economic threat depends on one’s position in the supply chain.
Step Five. Risks and related mitigation measures need to be identified. The Conflict Free Sourcing Initiative, sponsored by EICC-GeSI, has developed an auditing and certification program for smelters and refiners, identifying which ones are “conflict-free,” meaning they are sourcing from mines which do not support, directly or indirectly, militant groups or abuses in the region.
A list of certified smelters and refiners for each of the four minerals is available on the Initiative’s website at: http://www.conflictfreesourcing.org/conflict-free-smelter-program/.
The U.S. Department of Commerce publishes a comprehensive List of World-Wide Conflict Mineral Processing Facilities at: www.ita.doc.gov/td/forestprod/DOC-ConflictMineralReport.pdf, however the list does not attempt to identify whether the listed entities are conflict-free.
Measures to mitigate risks may range from working with suppliers to eliminate the risk to terminating ties with an uncooperative supplier. Where practical, some companies, particularly in the fashion industry, are redesigning products and merchandise to eliminate the use of the subject minerals, for example by replacing metal zippers with nylon or molded plastic. Other companies have adopted an approach of simply prohibiting suppliers from sourcing from the conflict region. Restricting sourcing to non-conflict regions can also have the unfortunate effect of damaging the commerce of the “good guys,” including artisanal miners in the DRC Region.
Step Six. The company’s task force will need to develop a record-keeping and tracking system memorializing the steps undertaken in its diligence process, suppliers contacted, follow-up required, and risk mitigation efforts. Additional data may be required as well to ensure sufficient information is captured to comply with the applicable regulatory disclosure and reporting requirements, once finalized.
Even if you are not a SEC reporting company, chances are you will be required by your customers to participate in their diligence efforts. Consequently, a suitable compliance program must be established in order to provide the necessary reports or certifications throughout the supply chain.
By Barbara A. Jones, Esq., shareholder, Greenberg Traurig, LLP