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Preparing for the Conflict Mineral Rule

In its history, The Democratic Republic of the Congo has been known, chronologically, as Congo Free State, Belgian Congo, Republic of the Congo, and Zaire. Located in Central Africa, the DRC, with a population of about 70 million people, is vastly rich in natural resources, including cobalt, copper, cadmium, diamonds, gold, silver, uranium, tin, tungsten and more.

Estimates of its mineral value are as high as $24 trillion, yet the country is poor—its gross national income is $190, the world’s lowest—and for almost two decades has been torn by civil war as rebel group after rebel group has tried to establish control. More than 5 million people have died since 1998 as a result of the wars, and countless women have been raped. Indeed, control of the mineral wealth is behind some of the most violent atrocities.

And that’s where many conflict minerals come from, and that’s why supply chain professionals—actually, anyone in business who relies on these minerals to produce their products—is well aware of the Securities and Exchange Commission conflict minerals rule. That rule now requires publicly traded companies and their suppliers to disclose whether they manufacture products that contain conflict minerals as required by Section 1502 of Dodd-Frank. And they must disclose what actions they are taking to ensure that their use of these minerals does not contribute to the atrocities in the DRC. The filing date is May 31.

“My under-standing is that the rule is really about cutting off the funds going to militant groups in DRC, the warlords controlling the mines,” says Howard Heppelmann, Senior General Manager Supply Chain at PTC. “The intent is to direct the sourcing activities to legitimate mines and building the economy, not rogue militias.”

Four metals—all vital to the global economy—are covered in the ruling: cassiterite (the chief ore to make tin), columbine-tantalite (the ore from which tantalum is extracted), wolframite (used in tungsten) and gold. Often, they are referred to as 3TG.

Tantalum is used primarily for the production of electronics, capacitors, hearing aids and pacemakers, airbags, GPS, ignition systems and anti-lock braking systems in automobiles. Tin is essential for the production of tin cans and solder on the circuit boards of electronic equipment. It also is a component of biocides, fungicides and, in another form, polyvinyl chloride (PVC) and high performance paint manufacturing.

Tungsten is used in fishing weights, dart tips and golf club heads. Like tantalum carbide, tungsten carbide possesses hardness and wear-resistance properties and is frequently used in applications like metalworking tools, drill bits and milling.

Gold is used, of course, in jewelry, electronics, and dental products. It is also present in some chemical compounds used in certain semiconductor manufacturing processes.

Dodd-Frank was originally passed in 2010 and the SEC approved the conflict minerals rule in 2012. Unfortunately, some companies decided to wait for legal challenges to the ruling before embarking on the complex reporting procedure. Now, time is running out.

“The rules were passed, and then the National Association of Manufacturers (NAM) filed a lawsuit, so people waited to see what happened,” Heppelmann says. “Then the District Court in Washington, D.C., said the law stands. Then a big wave dove in. Later this year, a CEO has to say, ‘yes, we are’ or ‘no, we’re not’ [conflict free].”

Clearly, those companies that waited to begin work are behind the proverbial eight ball. It sounds so simple: conduct due diligence, determine status, report (see sidebar). But it’s not. And those that are behind need to move quickly.

“There is a lag between requesting information from suppliers and receiving it,” says Scott Wilson, Compliance and Supply Strategist at IHS Technology—Parts Intelligence. “It takes time to review and assess the information; it takes time to follow-up with suppliers who didn’t provide complete information or provided inconsistent information. It takes time to use all the information to generate the appropriate reports. There’s not much time [left].

“The most daunting task,” he adds, “is collecting, vetting, managing and using Conflict Mineral and Conflict Free information from their supply chains. Most of our clients have been through RoHS [The Restriction of Hazardous Substances Directive adopted in 2003 by the European Union] or are going through it now, but conflict minerals are fundamentally different.”

With RoHS, manufacturers had to understand whether any of the four heavy metals (lead, chromium VI, cadmium or mercury) or two classes of brominated flame retardants was present. With conflict minerals reporting they need to know not only if the minerals are present, but if they came from a DRC conflict-free source. “They need to understand the ultimate source of the minerals they use,” Wilson says.

In addition to the DRC, countries that fall under the law include Tanzania, Republic of Congo, Zambia, Central African Republic, Uganda, Angola, Rwanda, Burundi and South Sudan.

 

Visibility

No matter when companies began work, the key will be gaining visibility into their supply chains. Because mines, exporters, smelters refiners and others can be involved in the metal processing, the complexity can be staggering.

“This is a problem most OEM companies at the end of the supply chain can’t solve on their own,” Wilson notes. “Most companies will need to leverage cross-industry tools such as the EICC-GeSI Conflict Minerals Reporting Template [Electronic Industry Citizenship Coalition and the Global e-Sustainability Initiative] that supports the Conflict Free Smelter (CFS) Program. The CFS essentially short circuits the process of requiring manufacturers to go all the way back to the mining operations. Instead, if manufacturers follow their supply chains back to certified CF smelters, the can be assured of using CF materials and parts.”

The SEC has instructed companies to use a nationally or internationally recognized due diligence framework, such as the Guidance for Responsible Supply Chains from the Organization of Economic Co-operation and Development (OECD).

“The OECD guidance outlines a five-step program for due diligence,” Wilson explains. In abbreviated form, they are:

  • Management Systems: Define conflict mineral policies, deploying a team to implement and oversee policy, and develop systems and processes to engage relevant tier one suppliers.
  • Identify and Assess Risk: Identify high-risk parts and suppliers (parts that are likely to contain any of the four conflict metals), source information on CM and DRC conflict free metals from these suppliers using standard tools, and assess the use of conflict free minerals.
  • Respond to Risks: Further engage suppliers who failed to meet expectations, build a supply chain information capability to improve performance, adopt a risk-management plan and track supplier performance.
  • Audit Smelters: For most companies, this means using the EICC-GeSI template noted above.
  • Publically Report: Document and communicate the companies due diligence, report on risk assessment and mitigation, respond to customer request for DRC CF information.

For most companies there are numerous reports that must be created. In addition to the SEC reports, most companies with downstream supply chain clients also need to satisfy their business obligations by responding to conflict mineral and DRC conflict free inquiries from their own clients. “And,” adds Wilson, “non-SEC reporting companies face similar issues as they need to fulfill their downstream business obligations to provide this information.”

One issue to keep in mind is when the product using the mineral was produced. For example, if your company possesses the conflict minerals, but did not produce the product in a calendar year, then there is no need to audit or report that year.

 

Why Not Leave the DRC?

On a global basis, the DRC is a fairly minor contributor of these metals. According to the U.S. Geological Survey, the DRC provides about 17 percent of the world’s tantalum, 4 percent of cassiterite, 3 percent of wolframite and 2 percent of gold. So, why stick around?

“Yes, these minerals can be found elsewhere,” Wilson says, “however the intent of the legislation is to curtail the funding of conflict and abuses from these illegal mining operations, not to be a de facto boycott of the DRC. Interestingly, the EU is considering and will likely propose conflict minerals regulations this year. Indications are that the legislation will cover the same four metals, but will not limit the scope to the DRC and adjoining countries.”

 

What if You Don’t File?

“Companies are going to file ‘indeterminate’ status,” PTC’s Heppelmann says. “They can claim it for 2013, (2014 report) and 2015 (for the 2014 year), but they can’t do indeterminate for their 2016 report (covering 2015).”

However, adds, IHS’s Wilson, “that doesn’t let them off the hook. They still need to show they are executing appropriate due diligence. The two-year timeframe for indeterminate filing is to allow the conflict minerals information chain to catch up with the supply chain. Companies should not put off this important work.”

There is no restriction on the use of conflict minerals that are not DRC conflict free, so there’s no penalty for that. However, there are penalties for not complying with the reporting requirements outlined in the SEC rules.

In the filing date and deadlines, the SEC does provide a lot of flexibility on how companies will report. However, even if there are no penalties for using DRC minerals, there’s another risk that could be even more damaging to a business—shame.

“The ‘Name in Shame’ public environment shows consumers, Wall Street and investors when potential conflict minerals show up,” Heppelmann says. “Nobody wants this associated with their brands. Most CEOs, when they heard about this, their point of view was ‘I want to be conflict free.’”

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