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The Daily

On Question of Whether They Use Conflict Minerals, 90 Percent of Companies Shrug

Chris Gaetano
Published Date:
Aug 11, 2015
ConflictGoldThe SEC's conflict mineral regulations, implemented as part of the 2010 Dodd-Frank Act, asks filers whether their products use certain materials imported from the Democratic Republic of Congo (DRC). But according to the Wall Street Journal, with increasingly complex global supply chains, this question isn't all that easy to answer: Roughly 90 percent of companies have said they simply don't know. They are, however, spending a lot of money to try to figure it out—according to the Journal, roughly $709 million and six million staff hours were devoted to compliance on the measure last year. 

The regulations mandate that filers who manufacture or “contract to manufacture” goods that include conflict minerals ― defined as coltan, cassiterite, gold, wolframite or any other mineral determined by the secretary of state to be financing conflict in the DRC or any adjoining country―as an essential component to their functionality or production conduct “a reasonable country of origin inquiry” on where their minerals come from. If, based on this inquiry, the company learns or has reason to believe that it has conflict minerals that originated in the DRC or adjoining countries, it must submit a Conflict Minerals Report to the SEC. Even if the inquiry reveals that the company did not utilize conflict minerals from the relevant areas, it must disclose this determination and briefly describe how it came to this conclusion. The report would also need to describe the measures the company took in order to exercise due diligence on the source and chain of custody of its conflict minerals.

The DRC, the second largest country in Africa, has been wracked with a series of long-running civil conflicts, many of which have been financed through the sale of conflict minerals. Consequently, according to the final rule, the purpose of the measure is to help "end the human rights abuses in the DRC caused by the conflict" through inhibiting "the ability of armed groups ... to fund their activities by exploiting the trade in conflict minerals." Because of this, the measure was well received by human rights groups such as the Enough Project and World Vision

Since its finalization, however, the rule's intention of supply chain transparency in the interests of human rights protection has collided with the practicalities of actually complying with the policy, a point that had been raised by several industry groups in comment letters to the commission. A major difficulty is that supply chains today, in a globally connected economy, have become so long and complex that proper oversight and risk management is not only difficult but very expensive. Companies enlist contractors, who enlist subcontractors, who enlist their own subcontractors and so forth, leading to multiple supply tiers, of which the company is generally aware of just the first few.

Seventy-seven percent of manufacturing firms cited this complexity, even outside the need to manage conflict mineral monitoring, as the fastest growing risk to business continuity for those in the manufacturing industry, according to a March poll. Indeed, a survey conducted by PwC last year found that most companies had only just begun the process of preparing their conflict minerals report, in part because just half of affected entities had been able to adequately check their suppliers, and 80 percent reported problems with the quality of the reports they were receiving. 

These issues aren't unique to conflict minerals: Companies all over the world, despite controls, can find that it's a struggle to actually determine where and how the products they sell were actually made. The British horse meat scandal is one example. Despite the existence of procedures designed specifically to prevent such debacles, supermarkets none the less found themselves stocked with meat that was labeled as beef but, in reality, was horse.

A long feature in the Huffington Post, meanwhile, points out how this complexity has also undermined efforts to improve labor standards in the clothing industry, as well. It said that, given the long and complex supply chain between retailers and manufacturers, both are often completely ignorant of each other: The factories don't know which companies they're supplying, and companies don't know which factory is supplying them. For example, after a deadly fire in Bangladesh killed 117 and injured 200, Wal-Mart was found to have been 60 percent of its business—which was news to Wal-Mart. The company said it had never actually placed an order with that factory and had, in fact, banned its suppliers from using it. 

"Here’s how its products ended up at Tazreen anyway: Wal-Mart hired a megasupplier called Success Apparel to fill an order for shorts. Success hired another company, Simco, to carry out the work. Simco—without telling Success, much less Wal-Mart—sub-contracted 7 percent of the order to Tazreen’s parent company, the Tuba Group, which then assigned it to Tazreen. Two other sub- (or sub-sub-sub-) contractors also placed Wal-Mart orders at Tazreen, also without telling the company," the Huffington Post said. 

And so, in the case of conflict minerals, monitoring the supply chain is no small endeavor, which could explain why, according to the Wall Street Journal, only 34 percent of public companies are currently in compliance with the rules. The Journal also notes that, starting next year, companies will no longer be able to simply say they don't know whether their products use conflict minerals. They will need to describe the following in their reports: 

  • Products manufactured or contracted to be manufactured that are “DRC conflict undeterminable.” 
  • The facilities used to process the conflict minerals in those products, if known. 
  • The country of origin of the conflict minerals in those products, if known. 
  • The efforts to determine the mine or location of origin with the greatest possible specificity. 
  • 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, including any steps to improve due diligence.
What's more, beginning next year, outside audits of the reports will be required, something that, when it was voluntary, only four companies did, according to another WSJ article. In anticipation of this, the AICPA has compiled a list of resources for firms that plan to conduct such audits.