Category Archives: conflict minerals

Conflict Minerals 2017 Reality Check

As 2017 winds down, interest and activity related to the annual SEC conflict minerals filings is heating up. Here is a short reality check for what you should be thinking and doing.

To begin with, Dodd-Frank Section 1502 and the SEC rules requiring the Form SD/Conflict Minerals Report are still in place and remain in effect as of today. Although SEC Commissioner Michael Piwowar issued a statement of non-enforcement earlier this year, that does not change the fact that the legal obligation to file remains intact. Legislation to eliminate Section 1502 was passed by Congress but has not yet been approved by the Senate or sent to the President for signature. Issuers should continue their conflict minerals RCOI, due diligence and Form SD filing preparation activities.

Issuers may still choose to use specific determination wording, or use none at all. However, should an issuer elect to use the words “DRC Conflict Free” to describe one or more product, an Independent Private Sector Audit (IPSA) must be performed by a qualified non-CPA or CPA audit firm. In researching the CY2016 SEC filings, Development International found nine issuers that classified at least one product as “DRC Conflict Free” in their Conflict Minerals Reports (CMR) but did not file an IPSA. We do not recommend that as a filing approach.

In general, issuers should be following the same path and procedures as last year – nothing has changed from a practical filing perspective, including the content requirements for the Form SD and CMR. By now, the following should be underway or completed at a minimum:

  • Previously identified program improvements
  • Overall program reviews, if desired. We continue to see interest in, and are conducting, program reviews
  • Product screening
  • Supplier screening/identification

There continue to be differing views on the timing for supplier outreach activities. Some issuers elect to request supplier CMRTs before the end of the calendar year; some wait until the calendar year is over. Suppliers may not necessarily have their own assessments, due diligence and CMRTs completed early, and delays are common.

There is also a lingering difference of opinion about including smelter/refiner lists in the CMR. We strongly believe it is a requirement to include the list in the filing.

Confusion remains about the Country of Origin as well. The countries listed in the CFSI audited smelter/refiner lists are the countries where the smelters are located. That is NOT the country where “the rocks come out of the ground”, which is what is meant by the country of origin. An often overlooked element of due diligence is ensuring that countries of origin provided by suppliers are plausible countries of origin, meaning they have known ore reserves or active mining. Several countries that are not plausible were listed in CY2016 CMRs.

Filers should also consider countries and entities that are sanctioned by the US Department of Treasury Office of Foreign Asset Control (OFAC) when reviewing countries of origin. Although this is not an issue related to conflict minerals, it is not a matter to be unresolved and reported in a legal filing.

When reviewing the smelter/refiner list from your suppliers, some form of due diligence is required for facilities that are not listed as a facility audited by CFSI or one of the programs with which CFSI has a mutual recognition agreement. Those facilities cannot be ignored simply because they are not on the list of audited smelters/refiners.

As in past years, we continue to support many companies with all aspects of their conflict minerals processes, filings and IPSAs. Please don’t hesitate to contact us with any questions.

Last Week for Auditor QuickQuiz

Our auditor QuickQuiz will close at the end of the day September 1.  We hope to see more folks will take a few minutes to answer the questions.  It is painless.

Some of the trends we are seeing are:

  • 67% of the respondents have more than 10 years experience, with 75% or more of that experience doing EHS/CSR audits.
  • Only 15% of the respondents had a passing score.
  • There is a gap in knowledge and application of fundamental audit terminology.
  • There is inconsistency in understanding the strength of evidence types, with an over-reliance on interviews over documentation.

Things are likely to improve when we get more responses.

RY2016 Conflict Minerals Disclosure Analysis Now Available From Development International

Dr. Chris Bayer, PhD of Development International has released the latest comprehensive analysis of the SEC conflict minerals disclosures for the 2016 reporting year.  Elm Sustainability Partners is pleased to be one of the report’s sponsors this year.

The report is available to download for free.

 

Is 2017 the Time to Think About 2021?

This may sound like a US presidential election campaign, but thankfully it’s not. The EU conflict minerals directive is now final and reporting is required beginning January 1, 2021 – three and a half years from now. If you aren’t familiar with the upcoming EU conflict minerals due diligence and reporting obligations, take a moment to read what we think is a good, plain-language overview.

We have had many conversations about what the EU Directive means for companies right now. Below is a table of the more common discussion points that may be helpful to those grappling with whether to begin program development and implementation now or wait until the deadline is closer.

Pros

Cons

Third party service provider costs are low at this time due to maturity of conflict minerals reporting in US Program implementation costs and effort not yet necessary
Limited incremental costs for EU companies already reporting conflict minerals information to US customers or the SEC Program implementation costs and effort not yet necessary; regulatory uncertainty exists until member states adopt their own supporting mandates.
Flexibility in reporting Reporting format unknown at this time; regulatory uncertainty exists until member states adopt their own supporting mandates.
Potential competitive advantage may be gained with customers and corporate reputation Market awareness may be low currently, so investment now may not show a return
Acquire experience and correct program errors and gaps in advance of legal deadline, reduce risk of fines, penalties, customer pressure and reputational damage Further options and third party information sources likely to develop and improve over time, leading to better reporting at legal deadline

 

Feel free to contact us with any questions.

No Indication of Conflict Minerals Cutbacks in SEC FY2018 Budget

SEC Chairman Jay Clayton presented the FY2018 budget for the Securities and Exchange Commission to Congress today.  The conflict minerals disclosure was not specifically mentioned but the budget did contain some interesting details:

  • More than half of the Commission’s total headcount is assigned to enforcement activities of various types.
  • The SEC has not launched any new research initiatives to gather feedback from investors on the usefulness of disclosures since FY2012.  Apparently, the actions of Michael Piwowar concerning the conflict minerals disclosure were not based on formal research from the SEC itself about investor views.
  • The number of filings reviewed by the Division of Corporation Finance for CY2017 was 4900, and is expected to remain the same for CY2018.  Sarbanes-Oxley requires the SEC to review company filings at least every three years, so perhaps there is some level of review by the SEC of conflict minerals disclosures, even if no enforcement actions have (or apparently will) resulted.

 

Conflict Minerals is Dead! Long Live Conflict Minerals!

The deadline for filing the CY2016 SEC conflict minerals disclosure has now passed, although there are likely to be a few late filers. It is too early to glean anything from the filings and at least three analyses will be conducted, including the Development International study, which is the most comprehensive of them. We all anxiously await these reports.

The future of the SEC disclosure requirement is murky and there is a chance that this may be the last year of mandated filing in the US. Many clients and others are asking us questions about the future of conflict minerals, and what the past results have been. These are our thoughts.

Looking forward, we do not know what is in store for the SEC rule. There are many moving parts politically and publically. We will know what happens when it happens. I’d like to think there will be adequate advance notice to those impacted, but even that is not assured.

But the review mirror tells a story too. While aspects of the rule’s impact are hotly debated, one thing is indisputable – it resulted in much greater visibility into material sourcing and other companies deep in supply chains. This has allowed some companies to reduce business risk by optimizing their supply chains – concentrating spending power or diversifying their supply base to manage potential disruptions. Companies identified that, unbeknownst to them, entities sanctioned by the US Department of Treasury Office of Foreign Asset Control (OFAC) may have been present in their supply chains. Supplier audits/screening improved in many cases.  Appropriate auditor qualifications in light of global reliance on audit results has also become a major question in the scheme of things.

Of course, the rule brought human rights abuses in the DRC and other countries out of the shadows and into the light of the public. But has the population of the DRC benefitted? Experts continue to argue both sides of the question. Without taking sides, earlier this year we attempted to evaluate one major criticism of the SEC rule – that it directly resulted in hundreds of thousands, if not millions, of jobs lost in the 3TG mining sector. The question we posed ourselves was what impact did the 2008 – 2010 global economic recession have on artisanal and small miner (ASM) job losses which are currently attributed only to Dodd-Frank Section 1502? Did the timing of 1502 coincidentally occur at a time when mining jobs were already in decline because of pre-existing macroeconomic conditions?

Our intent was to rely on existing literature rather than creating original research as this was an unfunded effort on our own part. After a few months, we ran into two insurmountable obstacles:

  • The existing DRC-specific literature we found does not acknowledge or give any consideration to potential impacts of the 2008 – 2010 global economic recession. Yet analyses from The World Bank, the World Economic Forum (WEF) and the International Finance Corporation (IFC) demonstrate that global economic downturns play a major role in commodity prices and mining jobs worldwide, including ASM.
  • The DRC has a uniquely major informal economy which some literature indicated accounts for up to 80% of the country’s total economic activity annually. There is a significant gap in available information on DRC’s informal economy and what is available was sometimes inconsistent with other data on the same matter or irrelevant to our study.

We found only two sources referencing global 3TG price influence on prices paid to DRC ASMs.  Other data supported the position that a very large number of ASM miners in DRC move between multiple jobs based on income potential, so when ore prices were low in the past, miners moved to agriculture or other income sources. There was a meaningful amount of anecdotal information supporting the hypothesis that several factors other than Section 1502 (such as the DRC’s own taxation and mining policies) had a direct effect on DRC ASM job losses within the timeframe of interest, but we were not willing to rely on non-empirical information. We put down our pen (or mouse) and moved on to other things.

So the debate will continue.

There have been developments beyond just the SEC rule. The European Union adopted their own version of a conflict minerals due diligence rule that impacts a different class of companies and goes into effect in 2021. And the application of the OECD Due Diligence Framework is expanding into other materials (such as cobalt) and other geographies. At the moment, that appears to be just the beginning of that trend and that future is unknown as well.

In the end, what can be said about Section 1502 in consideration of it’s possible end? It all depends on your perspective, but it ain’t over till it’s over.  And it ain’t over.

SEC Conflict Minerals Filings Status – May 15, 2017

For those keeping track, we are two weeks away from the SEC conflict minerals disclosure filing deadline and here is where things stand:

  • The SEC has not issued any further guidance or statements on the disclosure, the rule or Acting Chair Piwowar’s suspension of enforcement.
  • Newly sworn-in permanent Chair Jay Clayton has not given any public indication about his views or possible actions on the disclosure, the rule or Acting Chair Piwowar’s suspension of enforcement.
  • We are not aware of any action related to Senator Elizabeth Warren’s request for an investigation into the Acting Chair’s authority to issue the enforcement suspension.
  • 60 filings have been submitted – 22 conflict minerals reports and 38 SD-only
  • We continue to see variability in issuers including smelter/refiner lists and countries of origin.  In addition, implausible countries of origin continue to be listed as well – France being the most common.
  • Two IPSAs have been filed, both conducted by the same non-CPA firm.  Elm completed two additional IPSAs not yet filed and we expect a handful of other IPSAs when all is said and done.

More Senate Criticism of Piwowar’s Suspension of Conflict Minerals Rule Enforcement

Yesterday, Senators Cory Booker, Richard Durbin, Sherrod Brown, Christopher Coons, Patrick Leahy and Elizabeth Warren sent a letter to Acting SEC Chair Michael Piwowar to “express our deep concern about your recent instruction to halt enforcement of key parts of the conflict minerals rule.”

The group accused the Acting Chair of side-stepping required rule-making processes:

Any steps to repeal or modify the requirements of the law require action by Congress. Any attempt to modify the rule requires a transparent, formal review and opportunity to comment by all stakeholders. An irregular, ad hoc process inviting comments on an Acting Chairman’s statement is no substitute for this process. As Acting Chairman you do not have the authority to halt enforcement.

In addition, the letter attacked the scope of the suspension compared to the more limited scope of the final NAM v. SEC decision on the First Amendment issue:

While your statement effectively suspends enforcement of all due diligence requirements under Section 1502, the court’s decision invalidated only one specific, severable component of the Conflict Minerals Rule. The inquiry and due diligence measures on source and chain of custody are separate and distinct, and they must each be enforced, In fact, when the National Association of Manufacturers requested a stay of the law, the court explicitly denied the request to affirm that the rest of the rule’s requirements were not severable from the requirement found to be unconstitutional.

In conclusion, the group asked the Acting Chair to “immediately to rescind your directive, and allow full enforcement of the conflict minerals law and rule.”

One interesting aspect of the letter is that two of the six signing Senators participated in the April 5, 2017 hearing on the conflict minerals rule held by the Senate Foreign Relations Committee’s Subcommittee on Africa and Global Health Policy.  During the hearing, Senator Booker also read a statement from Senator Durbin into the record as well.

How to Say “DRC Conflict Free” Without an IPSA

As the SEC conflict minerals filing deadline closes in, companies are carefully assessing what to say in their Form SDs and conflict minerals reports, especially in light of the recent statement from the Commission about enforcement of the filings.  Certainly, part of the internal deliberations concern how – or whether – to describe product determinations.  If a company voluntarily chooses to use the words “DRC Conflict Free” in its Conflict Minerals Report, then an Independent Private Sector Audit (IPSA) is required.

But did you know that the words “DRC Conflict Free” can be used without triggering an IPSA?

Without going into the painful explanatory details, issuers who file only a Form SD can use the specific determination wording in the Form SD without needing an IPSA.  As SEC stated in FAQ #19,

An issuer is only required to obtain an IPSA of its Conflict Minerals Report and not of the disclosures contained in the body of its Form SD.

The basic rationale is that when the RCOI results indicate there is no reason to believe that necessary conflict minerals did or may have originated from a covered country,  only a Form SD is required and additional due diligence is not necessary.  Therefore, a Form SD-only filing means that products are “DRC Conflict Free” by virtue of the absence of materials from a Covered Country.

But be careful – this only applies to Form SD language.  We also caution against claiming DRC Conflict Free in a Form SD that includes the CMR exhibit – but the CMR doesn’t mirror the Form SD.

We are happy to answer any questions you may have.  Feel free to give us a call.