Similar to last year, Apple Computers filed its SEC conflict minerals disclosure early. This is the conflict minerals parallel to Warren Buffet’s annual letter to shareholders. Admittedly, the “Oracle of Cupertino” doesn’t have the same alliterative allure as the “Oracle of Omaha.” But Apple’s conflict minerals report is scrutinized almost as much. This year’s report from the computer giant contained more detail than it has in past years, most likely a reflection that much of their efforts through the years are bearing fruit.
We took a detailed look at the report, carefully considering and evaluating the language in an attempt to divine subtle insights that may exist. A number of topics caught our attention.
- Apple stated: 100% of the identified smelters and refiners in Apple’s supply chain for current products were participating in an independent third party conflict minerals audit (“Third Party Audit”) program. Comment – Although it has been widely reported that all of Apple’s smelters/refiners have been audited, “participating” is not the same as “audited”. Participation also includes being on the CFSI’s verified smelter/refiner list, beginning the audit process (e.g., contract negotiations or making time commitments) toward becoming audited in the future and publicly acknowledging that. Apple later stated “Of these 242 participating smelters and refiners, 86% had already completed a Third Party Audit by the end of 2015, while the other 14% were in the process of undergoing such a Third Party Audit as of December 31, 2015.” Further, Apple defined “participating smelters and refiners” as “those that have agreed to participate in, or have been found compliant with, the CFSP or cross-recognized independent third party conflict minerals audit programs confirming their conflict mineral sourcing practices.”
- Apple stated: Apple does not believe that Third Party Audit program participation alone is sufficient to label products “conflict free.” Apple believes it has more work to do. In 2016, Apple is turning its attention to two key areas: enhancing due diligence in the gold supply chain and helping improve local incident reporting and issue resolution. Comment – Given their leadership position, the company may disrupt current expectations that are reliant on smelter/refiner auditing alone. Their focus on gold reflects “allegations of illicit trade of gold” made in publicly-available incident reports and refinery due diligence audits such as the delisting of Al Kaloti Jewelers Factory Limited in April 2015 from the Dubai Good Delivery list.
- Apple stated: Apple plans to continue to review in detail credible reports of incidents in the Democratic Republic of the Congo (the “DRC”) and adjoining countries (collectively, the “Region”) that may potentially connect to Apple’s supply chain and confirm the transparent reporting and resolution of any incidents related to armed groups where these incidents may reasonably relate to its supply chain. Comment – The company is looking deeper into local incident reporting “[c]onsidering reports from numerous groups and organizations related to traceability gaps, stolen minerals, and fraudulent use of tags, … to determine if local systems are effectively able to capture and remediate incidents when they arise, and if any incidents of concern may be associated with Apple’s supply chain”. This references iTCSi incident reports that are publicly available to members and nonmembers. These reports, governance assessments, company audits and other vital information are publicly available here.
- Apple stated: Apple will continue to remove from its supply chain those smelters or refiners that do not comply. Comment – The company has been actively pushing suppliers to remove non-conforming smelters and refiners from their supply chain as part of Apple’s risk management processes, meaning that suppliers sometimes have to terminate relationships with some of their suppliers.
- Apple stated: Apple reviewed more than 700 iTSCi reports for 2015 relating to incidents, potentially associated with mine sites connected to various smelters in Apple’s supply chain… Based on its review, Apple found that in a few cases individuals associated or potentially associated with armed groups, in particular the police in the DRC and the DRC national army, were alleged to be involved in incidents linked to smelters in Apple’s supply chain. While, to date, Apple does not have reason to believe that these incidents resulted in associated specified minerals being included in Apple’s products, Apple remains concerned about a number of reported incidents. Accordingly, Apple is actively engaged with appropriate stakeholders to better understand incident reports and how they are addressed and, in the case of three specific incidents, continues to actively investigate the follow-up actions that have been taken to address these incidents. Comment – As we noted above, Apple’s direct review of publicly-available iTSCi reports supplements their use of smelter/refiner audit information. At the same time, Apple “remains concerned” about incident reporting and corrective action processes. There may also be an implicit questioning of whether/how the various audit mechanisms capture incidents. This level of work may not be feasible for all companies, which underlines why audits should ensure this review is included at each level of the supply chain. To our knowledge, there has been no third party assessment or review of any of the audit programs, although the London Bullion Market Association (LBMA) had plans to conduct a review 4Q15. The upcoming OECD conformance assessment (the scope of which is described here) may not include an efficacy review.
- Apple stated: Apple has also been conducting spot audits since 2013 to assess suppliers’ understanding of due diligence requirements. Comments – As we have discussed in past articles, Apple is conducting supplier audits that not only confirm the technical data provided to Apple, but also assess that suppliers have an understanding of due diligence requirements. Apple suppliers should ensure that they have thorough internal knowledge of the requirements and their associated systems.
- Apple stated: Apple’s review identified incidents of varying nature and concern, including, among others, incidents involving theft of, and/or fraud in connection with, tags and minerals and military and police levies or payments at or near mine sites. As of the date of this report, not all 2015 incidents have been publicly reported, fully traced to minerals associated with smelters, resolved or remediated. Comment – This reinforces our comments that Apple “remains concerned” about incident reporting, corrective action processes and audit processes.
- Apple stated: Apple has received confirmation that three incidents linked to smelters reported in Apple’s supply chain have occurred in which individuals identified as members or potential members of organizations within the meaning of “armed groups,” as defined in Item 1.01(d)(2) of Form SD, in particular the police in the DRC and the DRC national army, were alleged to be involved. Each incident appears to have involved no more than a few individuals in isolated theft, illegal tax or similar criminal activity, potentially for personal gain, and, based on information received to date, the alleged perpetrators have been sanctioned or the specific incident has otherwise received some level of official redress by the local authorities. Comment – iTSCi published a response and notes “the amount of mineral that could be linked to these incidents was around 0.1% of that tracked from mines by iTSCi in 2015, with the potential financial gain of up to around US$425 in total which appeared to be for personal gain of the individuals”. Among several systemic points iTSCi brings forth, they clarify that there remains a relevant question as to “how to interpret the actions of rogue individuals as opposed to actions of ‘armed groups’”.
- Apple stated: Apple believes there is little doubt that there is a need to enhance gold trading due diligence, to increase local stakeholder involvement, and to ensure that Third Party Audit programs reinforce requirements for smelter and refiners to be aware of and follow-up on the resolution of incidents. Comment – This statement indicates that Apple may see gold refiner audit programs as facing specific challenges that require additional/more detailed checks than currently exist. To our knowledge, there has been no third party assessment or review of any of the audit programs, although LBMA had plans to conduct a review 4Q15.
- Apple stated: Apple’s reasonable country of origin inquiry is based on Third Party Audit information and, to the extent that country of origin information has not been audited, additional information collected by it and others. To the extent reasonably possible, Apple has documented the country of origin of identified smelters and refiners based on information received through the CFSP, surveys of smelters and refiners, and/or third party reviews of publicly available information. However, some country of origin information has not been audited by a third party because, among other reasons, applicable smelters and refiners have gone out of operation before completing a Third Party Audit, smelters and refiners have not gone through a Third Party Audit, or the Third Party Audit does not yet include reporting of country of origin information. Comment – Specific to gold, prior to the LBMA’s Responsible Gold Guidance (RGG) v.6 (published August 2015, effective January 1, 2016), refiners that conducted third-party audits based on ISO 19011:2002 were not required to issue a Refiner Compliance Report or to publicly disclose countries of origin of mined gold. However, for assurance engagements based on ISAE 3000, country of origin information was required. Since Apple has indicated they have RCOI information for every smelter and refiner, they apparently supplemented LBMA audits with “additional information” and “third party reviews of publicly available information” given that LBMA ISO audits conducted under the previous RGG versions in place for CY15 lack the country of origin information.