Tag Archives: Global Witness

Top 10 Falsehoods in the New Global Witness/Amnesty International Report

In an update to our previous post on the recent Global Witness/Amnesty International report blasting US corporate implementation of the US Securities and Exchange Commission (SEC) conflict minerals disclosure requirements, we take a page from David Letterman.  Below is our Top 10 list of inaccurate and erroneous accusations made by the organizations.

Claim #1: Seventy-nine percent of the company reports we analyzed did not meet the minimum requirements of the U.S. conflict minerals legislation.

 The Truth: This claim is completely erroneous. Certain reporting elements not actually mandated are portrayed by Global Witness/Amnesty International (GW/AI) as being required by the SEC. In reality, only three of the twelve criteria used by GW/AI are mandated by the SEC requirements without discretionary implementation. GW/AI acknowledged for those three reporting elements, they found 99% compliance. There is a sharp drop in the “compliance” percentages for those elements that are based on discretionary implementation.

Claim #2: Only fifteen percent of companies reported that they had contacted, or attempted to contact the facilities that process the minerals in their products (smelters or refiners). Most companies limited their due diligence efforts to their direct suppliers.

The Truth: The SEC regulation specifically allows issuers to focus their efforts on direct suppliers and rely on industry initiatives such as the CFSI. OECD’s Final downstream report on one-year pilot implementation of the Supplement on Tin, Tantalum, and Tungsten (January 2013) also clarifies that downstream companies should focus their efforts on direct suppliers. The purpose of the CFSI program is to eliminate the need for every filer (or their suppliers) to contact the smelters/refiners directly. The CFSI program significantly reduces redundant efforts by the filers and prevents the smelters/refiners from being completely overwhelmed by responding to thousands of identical information requests.

Claim #3: Forty-one percent of companies failed to show that they had a policy to identify risks in their supply chain 


The Truth: There is no requirement for issuers to have a policy to identify risks. Instead, companies operationalize risk identification through their RCOI processes, operating procedures and data review. Filers described their RCOI procedures either directly, or stated that their framework is consistent with the OECD Framework, which includes risk identification. Finally, as described below, the basic fact that the 100 companies filed a Conflict Minerals Report demonstrates that risk identification processes were developed and implemented.

Claim #4: No companies in our sample disclosed an example of a risk in their supply chain. This is despite some companies disclosing to the SEC that gold from North Korea may have entered their supply chain, which is a possible violation of U.S. law. Many others stated that they could not rule out the minerals they were sourcing were benefitting armed groups. 


The Truth: This claim is completely erroneous. Although U.S. trade with North Korea is prohibited, North Korea is not a covered country under Dodd-Frank Section 1502 and is outside of SEC conflict minerals reporting. Under the Section 1502 disclosure requirements, the Reasonable Country of Origin Inquiry (RCOI) is the risk identification/assessment step that precedes due diligence – due diligence is only needed when a risk is identified. Given that all 100 of the companies sampled by GW/AI conducted due diligence, they inherently identified a risk for which due diligence was conducted. Further, in a spot check of 20 of the 100 companies, we found 15 that disclosed the presence of covered country sourcing – by definition “high risk areas” and therefore a “risk” under SEC and OECD.

Claim #5: Companies should follow the SEC rule and OECD guidance in full to be in compliance with Section 1502 of the Dodd-Frank Act.

The Truth: There is no requirement for any entity to follow the OECD guidance “in full”. The SEC final release, the OECD Guidance and the OECD Final downstream report on one-year pilot implementation of the Supplement on Tin, Tantalum, and Tungsten (January 2013) all state multiple times that companies are expected to implement the framework in a way that is appropriate and relevant to their own circumstances and position in the supply chain. The Guidance document contains numerous suggested or desirable tasks, activities and attributes for each of the five steps. The Guidance document recommendations for implementation are themselves split into those applicable to upstream and downstream supply chain actors. Further, the first audit objective for the Independent Private Sector Audit (IPSA) states that the auditor is to offer an opinion as to whether the due diligence framework used by the issuer is in conformity with, in all material respects, the OECD Guidance – not full conformance.

Claim #6: Only forty-seven of the companies we analyzed provided any information about the number of suppliers they surveyed.

The Truth: There is no legal requirement to provide any numbers, percentages or statistics concerning suppliers surveyed or those who responded. Global Witness actually recognizes this, but still punishes filers who chose not to provide numerical supplier information: “Although it is not a legal requirement of Section 1502, companies should give information on the number of suppliers surveyed, and responses received…” Based on the Elm/Georgetown Law School review of the 1300 filings, 530 provided some form of numerical supplier information – roughly 40%.

Claim #7: Forty-five percent of the companies reported having a policy in place to address suppliers that submit inadequate survey responses. Over half of companies we analyzed did not report having any such policies in place.

The Truth: This is essentially the same as Claims #3 and #4. There is no requirement for issuers to have a “policy” in place concerning inadequate responses. Companies address inadequate responses through their RCOI and operating procedures.

Claim #8: Another approach was highlighted by
the U.S. retail giant Target which stated in its Conflict Minerals Report that it reserved the right to “conduct unannounced spot-checks of vendors” who may have produced products that contain the four minerals covered by Section 1502 and “have access to their documentation.”

The Truth: While issuers may not have stated this specifically in their CMRs, reservation of audit/site inspection rights by customers is a common condition of supplier contracts.

Claim #9: Twenty-eight percent of companies analyzed built clauses related to conflict minerals into their renewed, new and/ or existing supply contracts.  

The Truth: This doesn’t capture the approach that other companies took. Because obstacles can exist in changing contract language, a popular way achieving the same end was for issuers to amend their Supplier Codes of Conduct, which are already referenced in existing supplier contracts. Among the benefits of this approach are the CM requirements are immediately applicable and enforceable without the delays that come with modifying contract language.

Claim #10: Only forty-six percent of the surveyed companies provided information to the SEC about what they had done to follow each of the five steps in the guidance. Responsible companies should describe their supply chain checks in detail. Corporations that simply state that their supply chain checks meet a standard such as that of the OECD guidance, without providing further explanation, will likely leave interested parties, such as investors and consumers, with more questions than answers about their efforts.

The Truth: This is essentially the same as Claim #5. Regardless of GW/AI’s desires, there is no legal requirement for issuers to provide specific details about how they implemented all five steps of the OECD Guidance.

 

 

 

Global Witness, Amnesty International Claim 80% Noncompliance with SEC Conflict Minerals Requirements

Today, Global Witness and Amnesty International (“GW/AI”) published Digging for Transparency:  How U.S. companies are only scratching the surface of conflict minerals reporting.  The report was also covered in Bloomberg news, Reuters, BBC and reflected in the OpEd section of the New York Times.  In the report, the two groups claim that

… almost eighty percent of companies in the sample, many of which are household names, failed, in our assessment, to meet the minimum requirements of the law.

This is surprising to say the least, given that we completed a comprehensive analysis of all 1300 filings and came to a dramatically different conclusion1.  We took a detailed look into the GW/AI report to understand the data and conclusions.

Perhaps not surprisingly, their numbers and methodology develop misleading findings to support their sensational headline. Several contradictions were identified between the text, the numbers and facts.  Although the text sometimes (but not always) clarified that certain reporting elements are not actually mandated by the SEC requirements, the statistics portray the elements as being required.  This theme runs through the entire report – the statistics reflect GW’s and AI’s preferences for the content/detail of conflict minerals reports, but not noncompliance with the legal requirements.

One example of this inconsistency on page 7 of the report states that “Awareness by companies of the need to follow OECD guidance was extremely high, with ninety-six percent of the companies we analyzed stating that their reports conformed to the standard“, yet the following statement is made later:

Only forty-six percent of the surveyed companies provided information to the SEC about what they had done to follow each of the five steps in the guidance. Responsible companies should describe their supply chain checks in detail.2

The word “should” is correct.  How companies describe their due diligence framework and measures is not prescribed by the SEC rule.

Another example is the basis for how they arrived at their figure of 80% noncompliance3 .  The groups used twelve criteria against which their sampling of reports was assessed (see page 6).  Figure 3 on page 15 shows the percentage of the sampled reports that meet these criteria.  Interestingly, only three of those criteria are legally mandated without discretionary implementation (“Do RCOI”, “Submit report”, and “Report on website”), and the report shows close to 100% compliance on those elements.  Filers have significant discretion on how they report on eight of the elements (for which the report shows a much lower level of conformance) and are based on data sources the filers have limited control over.  Where filers’ discretionary approach to reporting differs from GW/AI’s desires, the groups considered that to be a noncompliance, and the reported percent “compliance” drops off significantly.

The remaining element (“Determine if under the law”) is a bit baffling.  Filers are not required to affirmatively file or otherwise state that they are not covered by the law, so by definition all filers are covered by the law.  Specifically stating that they are covered is neither mandated nor sensical.

The report further states that “for the companies who filed Conflict Minerals Reports, doing due diligence in conformity with the OECD guidance is a legal requirement of Section 1502.4    While this is correct, one can argue about whether it is legally mandated to address all components of the OECD Guidance.  The ambiguity comes from the fact that the rule takes a voluntary framework – written in terms of “should” and allowing companies to implement it based on their own circumstances and position in the supply chain – and incorporates it by reference into a legal mandate.  So we are faced with a requirement that allows discretionary implementation.  This is the same conundrum faced by EPA in the early 1990s when it considered mandating the use of the voluntary ISO 14001 environmental management standard.

GW/AI criticized the Conflict Free Sourcing Initiative’s (CFSI’s) smelter/refiner auditing program, stating that

… the audit protocols do not require all of its participating metal processors to undertake supply chain due diligence in accordance with the OECD guidance.5

In reality, the protocols and procedures do guide the CFS auditor to review documentation from industry associations such as ITSCi, Certified Trading Chains and the ICGLR Regional Certification Mechanism for supply chain due diligence activities conducted by or for the smelter/refiner.  In fairness to GW/AI, the extent to which this is done by the CFS auditors is unclear.

These are only a few examples from the report.

It is our view that the report and its conclusions take liberties with facts and interpretations of the legal mandate.  While Global Witness and Amnesty International may have certain desires for the content of the SEC filings, that does not make for noncompliance with the legal mandates.

____________________

 The GW/AI report states that 1321 reports were filed with SEC, which we think double counts for amended filings by also including the original filing superseded by the amendment.  They selected only 100 companies (less than 8% of the total filers) to review and assess, some of which are our clients.

2 Page 19.

3  “The main finding of our analysis is that only twenty- one percent of companies in our sample met all twelve of the criteria that constitute the minimum requirements of Section 1502 (see Methodology section above). While these criteria do not represent an exhaustive list of steps companies should take, this demonstrates that seventy-nine percent of companies we analyzed did not meet the minimum requirements of the law.”   Page 15.

4   Page 12.

5  Page 26.