Tag Archives: 3TG

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.

ALERT: European Parliament Announces Conflict Regulation for Finalization

In a press conference concluded minutes ago, Bernd Lange, Chair of the International Trade Committee, Iuliu WINKLER, rapporteur with Cecilia MALMSTRÖM, Member of the EC in charge of Trade and Council presidency and Ivan LANČARIČ, Ministry of Economy of Slovak Republic announced what is called “informal deal on a regulation” for the EU conflict minerals scheme. This action will be legally binding and is aligned with the June 2016 political understanding. The final text will be voted on by the member states on December 7, 2016, with a vote in the plenary expected in the first half of 2017.

Details are forthcoming, but what is known now is:

  • Due diligence is based on the OECD Guidelines.
  • The scheme is mandatory for importers of 3TG and applies to companies with more than 500 employees but small volume importers will be exempt from these obligations.  The “small” threshold was not provided in the public announcements. Previous reports place the threshold at 100kg for gold.
  • The regulation allows companies to become a responsible importer by declaring in writing to the competent authority in a member state that it follows the due diligence obligations set in the regulation. A list of these importers will be published by the Commission. The competent authorities will carry out checks to ensure that EU importers of minerals and metals comply with their due diligence obligations. Details about the checks were not provided in the public announcement.
  • The legal deadline for implementation is January 1, 2021 but the EP specifically invites voluntary early entry into the program by EU manufacturers and sellers not otherwise subject to the law.
  • The Commission will draft a handbook including non-binding guidelines to help companies, and especially SME’s, with the identification of conflict-affected and high-risk areas.

Press releases from the EP are available here and here.  A more detailed press release is here.

We will continue to follow these developments and will post updates as they are available.

Safety in Numbers Means Survival for Fish, Problems for Conflict Minerals

An article published earlier this summer highlights potential risks of an overly-broad supplier conflict minerals survey approach combined with providing supplier/response metrics in a Conflict Minerals Report (CMR).  The piece from gamesindustry.biz singled out Disney:

… the media giant surveyed its 1,365 suppliers of retail merchandise, and said it received responses from just 40 percent of them. Even if the vast majority of them are only going to say they don’t use conflict minerals, it’s embarrassing that a company the size of Disney can’t even inspire a simple majority of its partners to respond to the survey as a requirement of doing business… Based on that sad response rate and its own review of the merchandise it sells, Disney determined that 22 of its suppliers manufactured items containing conflict minerals for the company.

The specific text from the filing itself states:

In 2014, we identified 1,365 suppliers of retail merchandise and received responses from 542 (40%) of these suppliers. The vast majority of the suppliers who completed the survey responded that the retail merchandise they supplied us did not contain any necessary Subject Minerals. Based on survey responses and our further review of the retail merchandise supplied, we identified 22 suppliers who manufactured retail merchandise for us that contained necessary Subject Minerals.

This implies Disney did not pre-screen their suppliers for 3TG content, choosing instead to take what we call the “shotgun approach”. Disney is not unique in this – many companies intentionally send CMRTs/surveys to all suppliers as part of their RCOI. We even received a request to complete a CMRT from one company to whom we provided advisory services.

At least two of our clients are peers of Disney; they invested substantial time in evaluating products and suppliers in order to focus efforts where it was really necessary.  We have long advocated supplier screening, although our message has been centered on reducing RCOI and data management effort. But the gamesindustry.biz article makes clear that other risks exists where there is a large gap between all suppliers and only those that are relevant (something we pointed out in our 2014 article).

Five “Must Know’s” About SEC’s New Conflict Minerals Q&A

With a few days gone by since SEC published their new Q&A, we have been able to read them more carefully and thoughtfully.  Most of the Q&A address matters we already considered resolved or that we felt had an emerging industry consensus already aligned with the answers provided.  Given that, we won’t rehash those.  Instead, we highlight and comment on some of details and subtleties we believe shed new light on the compliance activities, definitions and the disclosure.

Clarifications of DRC Undeterminable

  • A product is “DRC Conflict Undeterminable” until a company determines that all applicable 3TG in that product did/did not originate in a Covered Country, or that the 3TG did/did not directly or indirectly finance or benefit armed groups in those countries.
  • If any of an issuer’s products are “DRC conflict undeterminable”, the issuer is not required to obtain an IPSA of its Conflict Minerals Report in part or in its entirety.  Our view:  This may be a surprise (or relief) to some. From our perspective, although we raised questions publicly about product-level IPSAs, we didn’t hold that view in our client engagements.

IPSA Objectives

Our view:  Further clarification was provided on the specified objectives of the IPSA.  The AICPA and The Auditing Roundtable have both published guidance that is fully consistent with the SEC positions set forth in the new Q&A.  The main points are that the two parts of the objective are independent of each other and the IPSA is not required to cover any matter beyond that objective, including the completeness or reasonableness of the due diligence measures actually performed.  There were issuers and audit professionals who had differing opinions. We feel there is little remaining ambiguity on this point.  Issuers who require an IPSA would be wise to confirm this understanding with the auditor before engaging them.

IPSA Scope

  • The IPSA is limited to specific sections of the CMR only and does not include the disclosures contained in the body of the Form SD.
  • RCOI activities are not within the scope of the IPSA.  The IPSA covers due diligence activities beginning after the country of origin determination. Our view:  We have held for some time that issuers need not consider activities related to OECD Steps 1 and 2 to be within the boundary of the due diligence framework, as those are equivalent to the RCOI process.  In our opinion, Question 18 makes it clear that this is indeed an appropriate interpretation and should help issuers develop CMR language to control the cost and effort of the IPSA.  This is not intended to imply that companies can avoid implementing Steps 1 and 2, just that those are not within the due diligence processes.

Timing of Due Diligence Activities in Relation to the Reporting Year

An issuer’s due diligence measures must apply to the conflict minerals in products manufactured during the reporting calendar year.  This requirement, however, does not imply that due diligence measures must be carried out constantly throughout that calendar year.  An issuer’s due diligence measures may begin before or extend beyond the calendar year.   Our view:  This could involve capturing data from suppliers that were used only during the last part of the year, obtaining updated information from existing suppliers, or implementing improvements to due diligence measures.

Description of the Due Diligence in the CMR

  • Where a product contains material from both a scrap/recycle source and a non-scrap/recycle source, the CMR need only address the non-scrap sources and related due diligence activities.  The Form SD must include the appropriate disclosures for scrap/recycled sources however. If an IPSA is triggered, it is only to address only the disclosure content related to non-scrap sources.
  • The rule does not require an issuer to include a full description of the design of its due diligence in the Conflict Minerals Report.  With regard to the description of the due diligence measures undertaken, the description must be in sufficient detail for the auditor to form an opinion or conclusion about whether the description in the Conflict Minerals Report is consistent with what the issuer actually did.  Our view:  In reality, the rule does not require an issuer to specifically describe its design at all.  The reference to design description is only in the IPSA objective.  However, we suggest creating specific sections of the CMR with headings clearly indicating the location of the design description and the measures undertaken.  This eliminates ambiguity and helps control the effort and cost when an IPSA is triggered.