Conflict Minerals: Reporting requirements, compliance, due diligence

Conflict minerals are defined as natural resources extracted in conflict zones and sold to perpetuate fighting. The term typically refers to four minerals: tantalum, tin, tungsten, and gold, collectively known as 3TG. These minerals are essential in the manufacturing of various electronic devices and other products. However, their extraction and trade have been linked to severe human rights abuses and financing armed conflict, particularly in the Democratic Republic of Congo (DRC) and adjoining countries.

To address these issues, various regulations and guidelines have been established, most notably Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Legal Framework

Dodd-Frank Act Section 1502

Section 1502 of the Dodd-Frank Act mandates that companies publicly traded in the United States disclose their use of conflict minerals originating from the DRC and adjoining countries. The primary aim is to reduce the funding of armed groups involved in human rights abuses.

Key Provisions

1. Disclosure Requirements: Companies must file a specialized disclosure report (Form SD) with the Securities and Exchange Commission (SEC) if they use conflict minerals necessary to the functionality or production of their products.
2. Due Diligence: Companies must conduct a reasonable country of origin inquiry (RCOI) to determine whether their conflict minerals originated from the DRC or adjoining countries.
3. Conflict Minerals Report (CMR): If the RCOI indicates that the minerals may have originated from the DRC or adjoining countries, companies must conduct due diligence on the source and chain of custody of the minerals and file a CMR.

SEC Conflict Minerals Disclosure Guide

SEC Final Rule

The SEC issued a final rule to implement Section 1502 of the Dodd-Frank Act. The rule outlines the specific requirements for disclosure and due diligence.

Important Aspects

1. Form SD: Companies must file Form SD annually by May 31.
2. Reasonable Country of Origin Inquiry (RCOI): The inquiry must be reasonably designed and performed in good faith.
3. Due Diligence Framework: Companies must use a nationally or internationally recognized due diligence framework, such as the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.

SEC Final Rule on Conflict Minerals

OECD Due Diligence Guidance

The OECD Due Diligence Guidance provides a framework for companies to ensure responsible sourcing of minerals. It includes a five-step framework:

1. Establish Strong Company Management Systems: Adopt and clearly communicate a company policy for the supply chain of minerals originating from conflict-affected and high-risk areas.
2. Identify and Assess Risk in the Supply Chain: Identify the risks of adverse impacts in the supply chain.
3. Design and Implement a Strategy to Respond to Identified Risks: Devise and adopt a risk management plan.
4. Carry Out Independent Third-Party Audit of Supply Chain Due Diligence: Ensure that the due diligence practices are audited by an independent third party.
5. Report Annually on Supply Chain Due Diligence: Publicly report on supply chain due diligence policies and practices.

OECD Due Diligence Guidance

Reporting Requirements

Form SD

Form SD is the primary document that companies must file with the SEC to disclose their use of conflict minerals. The form includes:

1. Company Information: Basic information about the company.
2. Description of Products: A description of the products that contain conflict minerals.
3. RCOI Summary: A summary of the reasonable country of origin inquiry conducted by the company.
4. Due Diligence Measures: If applicable, a description of the due diligence measures taken by the company.

SEC Form SD Instructions

Conflict Minerals Report (CMR)

If a company's RCOI indicates that conflict minerals may have originated from the DRC or adjoining countries, the company must file a Conflict Minerals Report (CMR) as an exhibit to Form SD. The CMR must include:

1. Due Diligence Framework: A description of the due diligence framework used by the company.
2. Due Diligence Measures: Detailed information on the due diligence measures taken.
3. Product Description: A description of the products that are not DRC conflict-free.
4. Independent Private Sector Audit: If required, an independent private sector audit of the CMR.

SEC Conflict Minerals Report Requirements

Compliance Obligations

Reasonable Country of Origin Inquiry (RCOI)

The RCOI is a critical component of the compliance process. Companies must design and perform an inquiry that is reasonably designed to determine whether any of their conflict minerals originated in the DRC or adjoining countries.

Steps in RCOI

1. Supplier Engagement: Engage with suppliers to gather information about the origin of conflict minerals.
2. Documentation Review: Review documentation provided by suppliers, such as certificates of origin.
3. Risk Assessment: Assess the risk of conflict minerals originating from conflict-affected areas.

Due Diligence

Due diligence involves a thorough investigation of the source and chain of custody of conflict minerals. Companies must follow a recognized due diligence framework, such as the OECD Due Diligence Guidance.

Due Diligence Steps

1. Policy Development: Develop and implement a conflict minerals policy.
2. Supplier Assessment: Assess suppliers' due diligence practices.
3. Risk Mitigation: Implement measures to mitigate identified risks.
4. Third-Party Audits: Conduct third-party audits of due diligence practices.
5. Reporting: Report on due diligence activities and findings.

Independent Private Sector Audit

In certain cases, companies are required to obtain an independent private sector audit of their Conflict Minerals Report. The audit must be conducted in accordance with standards established by the Government Accountability Office (GAO).

GAO Conflict Minerals Audit Standards

Due Diligence

OECD Due Diligence Guidance

The OECD Due Diligence Guidance provides a comprehensive framework for responsible mineral sourcing. It is widely recognized and used by companies to ensure compliance with conflict minerals regulations.

Five-Step Framework

1. Establish Strong Company Management Systems: Develop a conflict minerals policy, establish internal management systems, and engage with suppliers.
2. Identify and Assess Risk in the Supply Chain: Conduct risk assessments to identify potential sources of conflict minerals.
3. Design and Implement a Strategy to Respond to Identified Risks: Develop and implement risk management plans.
4. Carry Out Independent Third-Party Audit of Supply Chain Due Diligence: Ensure that due diligence practices are independently audited.
5. Report Annually on Supply Chain Due Diligence: Publicly report on due diligence activities and findings.

OECD Due Diligence Guidance

Industry Initiatives

Several industry initiatives support companies in their due diligence efforts. These initiatives provide tools, resources, and frameworks to help companies comply with conflict minerals regulations.

Responsible Minerals Initiative (RMI)

The Responsible Minerals Initiative (RMI) provides tools and resources to help companies address conflict minerals issues in their supply chains. RMI's flagship program, the Responsible Minerals Assurance Process (RMAP), offers third-party audits of smelters and refiners.

Responsible Minerals Initiative

Conflict-Free Sourcing Initiative (CFSI)

The Conflict-Free Sourcing Initiative (CFSI) is another industry initiative that supports responsible mineral sourcing. CFSI provides tools and resources, including the Conflict-Free Smelter Program (CFSP), which audits smelters and refiners to ensure they do not source conflict minerals.

Conflict-Free Sourcing Initiative

Government Resources

Securities and Exchange Commission (SEC)

The SEC is the primary regulatory body overseeing conflict minerals disclosure requirements. The SEC provides guidance, rules, and forms related to conflict minerals reporting.

SEC Conflict Minerals Disclosure Guide

Government Accountability Office (GAO)

The GAO conducts audits and provides reports on the effectiveness of conflict minerals regulations. The GAO's reports offer insights into compliance trends and challenges faced by companies.

GAO Conflict Minerals Reports

U.S. Department of State

The U.S. Department of State provides information and resources on conflict minerals, including policy statements and international initiatives aimed at addressing the issue.

U.S. Department of State Conflict Minerals

Conflict minerals regulations, particularly those established under Section 1502 of the Dodd-Frank Act, play a crucial role in promoting responsible sourcing and reducing the funding of armed conflict. Companies must adhere to stringent reporting requirements, conduct thorough due diligence, and engage in industry initiatives to ensure compliance.

By following recognized due diligence frameworks, such as the OECD Due Diligence Guidance, and leveraging resources provided by industry initiatives and government agencies, companies can effectively manage the risks associated with conflict minerals and contribute to ethical and sustainable supply chains.