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Conflict Mineral Disclosures Showing More Success in Revealing Origin, GAO Says

Friday, April 07, 2017
Sandler, Travis & Rosenberg Trade Report

Nearly half of companies investigating the origin of their conflict minerals in 2015 were successful, up significantly from the year before, according to a recent report from the Government Accountability Office. The findings come as the SEC considers whether conflict minerals disclosure requirements should be scaled back.

Background. Under the 2010 Dodd-Frank Act and the SEC’s implementing regulations, companies that file reports with the SEC under the Securities and Exchange Act of 1934, whether foreign or domestic, must file by May 31 each year a specialized report (form SD) disclosing their use of tantalum, tin, gold, or tungsten originating in the Democratic Republic of the Congo or an adjoining country if those minerals are necessary to the functionality or production of a product they manufacture or contract to manufacture. The minerals at issue are used to make a wide range of goods such as cell phones, computers and video game systems, medical equipment, high-speed tools, machine parts, glass, and lamps.

Among other things, SEC regulations require companies that use any of these conflict minerals to conduct a reasonable inquiry to determine whether they originated in the covered countries. If the inquiry determines that the company knows or has reason to believe that the minerals may have originated in those countries, the company must undertake due diligence on the source and chain of custody of its conflict minerals, file a conflict minerals report with the SEC, and make that report publicly available on its Web site.

In light of ongoing litigation, the SEC has stayed a requirement for companies to list in these reports any products they manufacture or contract to manufacture that are not found to be “DRC conflict free” (i.e., they contain minerals that may have directly or indirectly financed or benefitted armed groups in the covered countries). In addition, acting SEC Chairman Michael Piwowar directed SEC staff earlier this year to consider whether additional relief from the statutory or regulatory requirements is needed.

GAO Report. The GAO’s analysis of a sample of conflict minerals disclosures filed in 2015 found that while similar estimated percentages of companies in 2014 and 2015 reported performing reasonable country of origin inquiries, an estimated 49 percent of those who did said in 2015 that these inquiries revealed the origin of the conflict minerals in their products (i.e., covered countries, other countries, or scrap or recycle sources), up from 30 percent in 2014. More than a quarter (29 percent) said their conflict minerals came from covered countries, up from just four percent in 2014, while 19 percent said their conflict minerals came from other countries, down from 24 percent.

The reports also enumerated a range of actions companies have taken or planned to take to build on or improve their due diligence efforts, such as shifting operations or encouraging those in their supply chains to shift from current suppliers to suppliers certified as conflict-free.

At the same time, the GAO said, the Department of Commerce is behind on evaluating companies’ due diligence efforts. The DOC is required by law to submit an annual report containing a listing of all known conflict minerals processing facilities worldwide, an assessment of the accuracy of companies’ independent private sector audits and other due diligence efforts, and recommendations for IPSA processes, including for improving their accuracy. The DOC’s 2014 and 2015 reports listed known conflict minerals processing facilities but as of July 2016 the department had not met the other requirements or developed a plan for doing so. DOC officials said they established a team to manage IPSA-related responsibilities in March 2016 but did not have the internal knowledge or skills to review IPSAs or establish best practices.

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