Tag Archives: due diligence

UPDATED ALERT: Piwowar Issues New Statement on Conflict Minerals Rule in Response to Closure of NAM v. SEC Lawsuit, Stein Pushes Back

SEC Acting Chairman Michael Piwowar and the SEC Division of Corporation Finance Staff both issued statements today (April 7, 2017) on the conflict minerals rule in light of the final Court action in NAM v. SEC.

The statements from both Staff and Acting Chairman Piwowar clarify that the Commission does not intend to recommend enforcement against any issuer that does not file a CMR or conduct due diligence of its smelters/refiners.  The statements do not amend the language of the rule itself to eliminate the CMR and due diligence requirement – they only clarify that no enforcement action will be taken if an issuer triggers the CMR/due diligence mandate, but files only the basic Form SD.

Reuters reported that the only other currently-sitting Commissioner, Kara Stein, took issue with Piwowar’s unilateral action :

The move sparked backlash from SEC Democratic Commissioner Kara Stein, who accused Piwowar of acting beyond his authority to gut the meat of a rule mandated by Congress, adopted by the SEC and reviewed by the courts.

“It is unprecedented for one commissioner, acting alone and without official notice and comment, to engage in de facto rulemaking,” she said.  “It represents a troubling attack not only on the Commission process, but also on the restraints of government power.”

We will continue to monitor new developments and keep you informed.  In the meantime, please do not hesitate to contact us with any questions.

DRC Conflict Free Mining – Now on Sale!

It seems we have spent more time than ever before “swimming upstream”.  But not in a negative way.

It started in May when we participated in the OECD Forum in Paris.  Then, in the last month, we attended the CFSI Conference in California and chaired a conference in Berlin on conflict minerals and responsible sourcing.  The CFSI conference this year focused more on upstream initiatives and developments than in the past, and the Berlin meeting was wide-ranging, including practical information on upstream initiatives.

We typically serve downstream industries and clients, and are not as aware as we should be about the goings-on upstream.  This year has been quite valuable in that regard.  The most obvious theme: in-region initiatives are showing potential, but are significantly constrained by a lack of funding.  But there are also few opportunities for downstream companies to contribute – and most of those opportunities have price tags that are difficult to justify internally.

As a result, Elm is currently evaluating solutions to this need that would allow any company or organization a way of providing direct financial support with contribution levels beginning at US$500.  Our three goals are:

  • Provide a low cost option for companies to directly finance valid and confirmed upstream initiatives in the DRC and Covered Countries.
  • Create a mechanism with no overhead charges/expenses.  Elm will not take any fees out of the contributions except those required for bank charges and if necessary – legal fees.  We hope to be able to send at least 90% of every contribution to the region.
  • Allow another way for SEC filers to expand their due diligence activities and related descriptions in their Conflict Minerals Report.

But in order to better quantify interest, solidify appropriate options and establish the mechanism(s), we are seeking expressions of interest.  At the present time, we expect the contribution range to start at US$500 with no upper limit.

If you are interested, please email us directly or via the “Contact Us” function of our website, and indicate the contribution amount you are willing to provide.  We are not asking for funds now, nor are we step up to receive them – this is simply a request for expressions of interest.  The plan is to have the solution in place no later than the end of January 2017, with the first disbursement made after a critical funding amount has been achieved.

We look forward to hearing from you and will post periodic updates.

For Conflict Minerals, It’s Spring in October

In past years, most companies really geared up their conflict minerals supplier engagement activities after the first of each year.  This allowed companies to fully capture the complete calendar year of manufacturing and generally provided adequate time to meet the SEC filing deadline of May 31.

This year is different.  There are a significant number of companies who began their reasonable country of origin processes in earnest last month.  They are facing a new and earlier deadline for their conflict minerals information – from their customers.  A deadline that is 7 months sooner than the regulatory filing date presents its own challenges.  Among other things, it is now more critical that the RCOI and due diligence programs be efficient and that risk mitigation strategies are used and function as they should.

More than ever, additional and knowledgable support is needed for many of these companies facing customer-required early deadlines.  We can help.  Give us a call to discuss.

SEC’s Latest Update on Conflict Minerals Rule

This is the latest in our on-going efforts to provide updates on the US conflict minerals rule.  We haven’t sent any news in some time and many companies are asking us for a status report.

To sum it up, there is nothing new.  The official statement from the SEC Staff is that updates are “forthcoming”.  That is the same word they have used since 2014, and given the upcoming elections, “forthcoming” may be quite a way down the road.

So to be clear:

  • The rule as a whole, including Reasonable Country of Origin and Due Diligence efforts, remains in place and required for those SEC issuers subject to the rule.
  • There remains no mandate to use any specific product classification/determination wording.  Because of that, the original 4-year deferral of IPSAs for smaller companies is essentially moot since ALL companies are free to use wording other than the “magic words”, or to use no product determination wording at all.
  • Conversely, there is no prohibition on using any specific product classification/determination wording either.
  • Should a company choose to voluntarily use the words “DRC Conflict Free” or “not DRC Conflict Free” an IPSA is required.  Dr. Chris Bayer’s report on the CY15 filings found a number of filers using these words but did not conduct an IPSA.  We are curious to see how – or if – the SEC Enforcement staff react to such a public call-out of noncompliance.  We caution against using language that strongly implies the “DRC Conflict Free” determination unless an IPSA will also be conducted.

Other related matters of interest:

  • One bill is pending in Washington to repeal Section 1502 and another is pending to eliminate funding for SEC to enforce Section 1502.  Neither of these have moved past the initial filing stage and are generally seen as symbolic by Beltline insiders we have spoken with.  Don’t get your hopes up.
  • Regardless of the recent publicity and outcry concerning cobalt mining, it is not a conflict mineral within the rule, nor must cobalt be included in Form SD or Conflict Minerals Reports.
  • The technical content of the EU Conflict Minerals Directive is still not finalized, but some sources expect movement on that by the end of 2016.
  • The draft OECD Alignment Assessment Methodology and Tool have been published.  These are to be used in evaluating the various industry programs with regard to their conformance to/alignment the OECD Due Diligence Guidance Framework.  Elm has been selected as a key external stakeholder to provide input to the Methodology, Tool and the industry programs.

Kaloti Precious Metals Offers Direct Support to US Corporate Conflict Minerals Due Diligence Efforts

Last month, a senior representative of Kaloti Precious Metals reached out to Elm asking if we would be willing to publish a public statement and update concerning their situation relative to a past refinery audit under the Dubai Multi-Commodities Center (DMCC) gold audit program.  We have no relationship of any kind with Kaloti and objectively believe this information is appropriate, reasonable and valuable to a wide range of stakeholders.  If you have any questions or concerns, please contact Kaloti directly using the email address they provide in the statement below.

Kaloti Precious Metals Statement

Going forward with the new refinery there will be changes to our processes. We have added a tab to our sustainability page called Conflict Minerals (http://www.kalotipm.com/Sustainability) that openly invites US Corporates to engage with Kaloti to assist in their SEC and any other reporting functions.

Responsible Conflict Minerals Reporting

As the regulatory change around the gold industry continues to be adapted (namely 1502(d)(3)(C) of the Dodd-Frank Wall Street Reform and Consumer Protection Act Dodd-Frank Act) the Governing bodies such as the Department of Commerce and the SEC are requiring US Corporations to report on Responsible Sourcing of Conflict Gold and other named minerals. The Act defines “conflict minerals” to mean “columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives” or any other mineral determined by the Secretary of State to be financing conflict in the Democratic Republic of Congo or adjoining country. From a commercial standpoint, tin, tantalum, tungsten, and gold are equivalent to the minerals set forth in the statute and are more commonly used terms in commerce, and therefore these are the terms used in the listing.

Kaloti Precious Metals has always adhered to the highest industry standards by following the guidelines of the of OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, LBMA Responsible Gold Guidance as well as that of our own regulator the DMCC, whose Guidelines can be found here Responsible Sourcing of Gold and Precious Metals.

Kaloti Precious Metals has already been engaging with number of US corporations on this subject for their own SEC reporting and would like to extend the offer out to invite other US Corporations to contact us directly using a personalised email address sec.enquiries@kalotipm.com that is sent directly to an officer who will handle all SEC reporting enquiries that will allow you to fulfill your SEC reporting obligations, so feel free to contact us directly.


What You Can Learn from Our CY15 Conflict Minerals IPSAs and Auditability Reviews

We have completed Independent Private Sector Audits (IPSAs) for CY2015 filings of three clients and auditability reviews for numerous others.  Each demonstrated good practices as well as provided opportunities for others to learn from.  We have long communicated information to help issuers create a foundation for a cost-effective IPSA, and in light of that offer the following tips to consider.

Documenting due diligence activities efficiently pays off.  This seems self-evident, but it can be forgotten in the midst of the RCOI and due diligence complexities.  One client saved more than a half-day of effort by virtue of how they documented their manual smelter/refiner list comparisons.

Having all documentation immediately available also pays off.  Another point that seems intuitive, but audit evidence associated with the different objectives and the auditable CMR language may not necessarily be centralized.  One client had all audit evidence available at our fingertips in less than a minute.

Ensure you have a thorough understanding of what third party service providers do in conducting due diligence on your behalf.  There are numerous conflict minerals service providers in the market who provide substantial support to their clients.  While it is appropriate to rely on those third parties to do their job, we recommend that you spend time learning in detail about the various criteria they use in evaluating supplier answers and in flagging or tagging responses, suppliers and smelters/refiners.  From a systematic and controls perspective, it isn’t acceptable to  wholly defer to a third party as if they are a black box.

Pay attention to the wording of the description of your due diligence framework.  Many companies are describing their due diligence framework by outlining the OECD steps along with the specifics of how their program conforms.  This is positive in that more information is communicated and the various CMR scorings/rankings reward this level of disclosure.  However, it may lead to unintended consequences regarding the IPSA.  In our auditability reviews as well as the IPSAs themselves, we have seen framework description language that crosses over into describing due diligence activities performed.  The consequence is that an auditor must audit that language in accordance with the second audit objective concerning the due diligence measures undertaken.  This may not be a concern to some, but it does impact the IPSA effort and cost.  It can be tricky to identify where the line is crossed; an auditability review helps identify that language.

What Did Apple Really Say in its CMR? Maybe Not What You Think

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.



Why Your Conflict Minerals Policy Isn’t Good Enough for 2016

The conflict minerals landscape will change dramatically in 2016, and your company is likely unprepared. The problem begins with the conflict minerals/procurement policy and infects the entire due diligence process.

To begin with, important stakeholders – including major global brands – are beginning to take a wider view of the geographic scope of “conflict minerals”.   Dodd-Frank applicability is limited to the DRC and adjoining country ore sourcing, but there will be pressure this year on ore sourcing from Indonesia, Peru, Columbia and possibly Mexico.  We understand that key industry-wide infrastructure elements are being modified to include countries of origin beyond the original ten Covered Countries.

Next, Amnesty International may see some success in its efforts to bring cobalt into the mix after their report on mining the ore in the DRC. Cobalt is not a conflict mineral under the US Dodd-Frank requirements or the OECD Supplements. Amnesty’s report focuses on accusations of child labor and environmental degradation at the mines, rather than the involvement of armed groups – further differentiating cobalt from conflict minerals.

Existing conflict minerals policies don’t typically capture these emerging developments or the internal program adjustments that would be necessary. We suggest you begin evaluating and considering these issues for calendar year 2016. Before you find yourself too far behind.

China, OECD Post Conflict Minerals Supply Chain Guidance for Comment

Fern Abrams from IPC notified us that “the China Chamber of Commerce of Metals, Minerals and Chemicals Importers & Exporters (CCCMC) and the OECD have posted, for public comment, guidelines for responsible mineral supply chains in China. CCCMC has cooperated closely with the OECD in preparing the draft Chinese Due Diligence Guidelines for Responsible Mineral Supply Chains, the deadline for comment is October 31, 2015.”

Fern provided the following summary of the guideline:

The objective of the Guidelines are designed to align Chinese company due diligence with international standards and allow for mutual recognition with existing international initiatives and legislations. The Guidelines will apply to all companies owned, partially owned, registered in, or operating in China, which are using or are engaged at any point in the supply chain of minerals and related products. Companies using or engaged in the supply chain of other natural resources are also encouraged to use the Guidelines as a reference.

The guidelines, which are based on the OECD guidelines, detail five steps: establish sound risk management systems, identify and assess risk in the supply chain, design and implement a strategy to respond to identified risks, carry out independent third-party audit at identified risk points in the supply chain, and report on process and results of supply chain risk management. The guidelines define two levels of risk:

  • Type 1 Risks are those contributing to conflict and serious human rights abuses, as they are defined in the OECD Due Diligence Guidance. The OECD Due Diligence Guidance is the major reference point for international standards and regulations, and therefore crucial for compliance with legal requirements for trading with the markets where they apply, including e.g. with US-listed companies, in the African Great Lakes Region, and in EU countries (potentially in the future). See pages 7-9 of the guidelines for more details.
  • Type 2 Risks go beyond the risks outlined in the OECD Due Diligence Guidance. They include those risks relating to serious misconduct, as defined in the Chinese Responsible Mining Guidelines. The Chinese Responsible Mining Guidelines in Clause 2.3.1 demand from Chinese mining companies to “issue a code of conduct which requires suppliers to fulfil [all] relevant requirements of the [Chinese Responsible Mining] Guidelines and encourage suppliers to sign this document”. See pages 10-12 of the guidelines for more details.

The guideline also set up a program for certification of company due diligence efforts. The certification program is discussed on pgs. 17 – 20.

A model supply chain policy is provided in Annex I, pgs. 21-25.

The implementation of the Guidelines will initially be voluntary.

In addition to these Guidelines, CCCMC will release resource-specific audit protocols and supplementary materials which will provide detailed guidance for companies on how to carry out due diligence in the respective sectors.

Clarity on Distinguishing Conflict Minerals RCOI and Due Diligence

Confusion is still widespread about the distinction between RCOI and due diligence. This is not simply an academic discussion – the SEC has noted this and blurring the lines between the two will almost certainly result in higher IPSA costs. As a long-time advocate of minimizing IPSA costs, we offer the following thoughts on how to practically separate the two.

What is RCOI?

At its core, RCOI revolves around the process of identifying and communicating with suppliers. This is the initial information gathering stage, which includes ensuring that  information meets the issuer’s completion, consistency and reasonableness criteria – equivalent to OECD Step 2 – Identifying and Assessing Risks in the Supply Chain.  On pages 150 and 271 of the final release of the conflict minerals rule, the SEC stated:

“The reasonable country of origin inquiry is consistent with the supplier engagement approach in the OECD guidance where issuers use a range of tools and methods to engage with their suppliers. The results of the inquiry may not trigger due diligence. This is the first step issuers take under the OECD guidance to determine if further work outlined in the OECD guidance – due diligence – is necessary”.

Additional text on pages 148-150 continues discussing RCOI in the context of receiving representations from suppliers. The following excerpts from CFSI Five Practical Steps to Support SEC Conflict Minerals Disclosure (version 2.0, Feb. 2015) are also helpful:

The RCOI involves determining if the company has reason to believe that SORs in its supply chain are sourcing minerals from a [Covered Country]… the completeness of that list of smelters is advanced through the RCOI process and is not considered a part of risk management as contemplated by the OECD Guidance…

Lastly, Question #18 of the SEC FAQ:

The IPSA does not need to include the reasonable country of origin inquiry because, under the rule, that inquiry is a distinct step separate from the due diligence process.    As a result, the independent private sector auditor need only opine on whether the design of the issuer’s due diligence framework is in accordance with the portion of the nationally or internationally recognized due diligence framework beginning after the country of origin determination.  With regard to the second part of the IPSA objective, the issuer’s conflict minerals report is required to describe the due diligence measures it undertook.  As such, the independent private sector auditor need only opine on whether the issuer actually performed the due diligence measures described in the report after the issuer determined it had reason to believe its conflict minerals may have originated in the DRC or an adjoining country.

What is Due Diligence?

Clearly, SEC’s view is that due diligence occurs after supplier engagement and an issuer uses the suppliers’ final answers from the RCOI as the basis for determining whether additional efforts – due diligence – are needed.

“The conflict minerals statutory provision specifically contemplates due diligence, which goes beyond inquiry and involves further steps to establish the truth or accuracy of relevant information…”

Page 271 of the Final Release.  It is notable that “completeness” of the relevant information is not included, as mentioned above in the CFSI document.

In contrast to RCOI, in due diligence the issuer is not communicating with the supplier at this point, but is conducting its own internal verification activities on information that was provided by suppliers’ final answers.

Due diligence comprises two broad activities that take place after communication with the suppliers concludes. The first is verifying “the truth or accuracy” of smelter/refiner information provided by suppliers – specifically, the smelter/refiner status and country(ies) of origin.  Think of this as confirming or denying whether there is  “reason to believe” that materials originated from Covered Countries.  As further illustration, recall that the final release contains a provision whereby if the outcome of RCOI indicated an issuer had reason to believe a supplier sourced from Covered Countries, but the further due diligence proved otherwise, that issuer does not have to file a CMR or conduct an IPSA.  Or at least does not have to include that supplier in a CMR they would otherwise have to file.   See Filing Instructions, Item 1.01 (c)(1)(vi) (pages 350 – 351).

Generally, this information verification involves the issuer comparing the identified smelters/refiners to various lists and conducting additional efforts where necessary to determine the sources of the ores processed by those facilities. It is not uncommon for a supplier’s final answer to be missing this information; therefore it is up to the issuer to make efforts on its own to fill in the blanks, or confirm information that was presented.

The second element of due diligence is making internal decisions based on the smelter/refiner and country of origin information. Will business relationships continue with suppliers that have materials confirmed as originating in the Covered Countries? Will business relationships continue with suppliers that have materials sourced from smelters/refiners that have not been audited? What action plan will be put in place to encourage these non-conforming suppliers to meet expectations about smelters/refiners and countries of origin? This also includes deciding what to do about suppliers who are nonresponsive.

In our view, these activities are aligned with OECD Step 4 – Independent Third Party Audits of Supply Chain Due Diligence at Identified Points in the Supply Chain and OECD Step 3 – Design and Implement a Strategy to Respond to Identified Risks (respectively). While it may not be readily apparent, an issuer’s use of, reliance on and encouragement of third party audits of smelters/refiners is aligned with Step 4 for downstream companies. This was outlined in OECD’s January 2013 Final downstream report on one-year pilot implementation of the Supplement on Tin, Tantalum, and Tungsten.

Keeping it straight

Hopefully, these thoughts help.  Consider that RCOI is where all supplier engagement activities occur.  In due diligence, an issuer is no longer communicating with suppliers, but is using that information for internal purposes.

Be mindful that confusion still exists, even in the ranks of those considered to be experts. Just last week, Deloitte issued a newsletter with some very good information, including a discussion on separating RCOI from due diligence. Unfortunately, their example of how an auditor may approach the description of due diligence measures undertaken used text describing RCOI activities. <Sigh>.

Contact us if you’d like to discuss this further. We are happy to take the time to help.