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Transcript of Conflict Materials
US LEGISLATION ON CONFLICT MINERALS
US LEGISLATION ON CONFLICT MINERALS
SEPTEMBER 2010
RCS PRIVATE SECTOR GUIDANCE ON THE DODD-FRANK ACT SECTION 1502
www.resourceglobal.co.uk
RCS GUIDANCE ON THE DODD-FRANK ACT SECTION 1502 SEPTEMBER 2010
(C) RESOURCE CONSULTING SERVICES LIMITED 20102
The following briefing note presents the view of Resource Consulting Services (RCS) on section 1502 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which affects companies
buying ‘conflict minerals’ from the Democratic Republic of Congo (DRC) and adjoining countries. As
the provisions of the Act have yet to be promulgated as Securities and Exchange Commission (SEC)
regulations, this guidance is indicative only.
In this note, we observe the similarities between the implications for the private sector of this Act and
those of the Kimberley Process on the diamond sector. Although the Act assigns responsibilities to SEC
registered companies only, reporting obligations may be passed on to companies further down the
trading chain, which more readily have access to information on the origin of minerals.
Please note that the SEC has yet to fully promulgate the regulations. As such the information in this paper can change at any time, should be regarded as indicative only, and represents solely the view of Resource Consulting Services Limited, and no other entity.
On 21 July 2010 the President of the United States (US) signed the Act into law. The Act, among (many)
other things, amends section 13 of the Securities Exchange Act of 1934. This amendment requires
companies reporting to the SEC to file periodic reports disclosing their use of ‘conflict minerals’.
This reporting requirement applies only to SEC reporting companies; which are companies with more
than $10 million in assets whose securities are held by more than 500 owners. As such, the new reporting
requirements are unlikely to directly apply to smaller companies further down the supply chain, such as
mineral traders in the DRC. However, it is likely that the regulations will apply to many end users, such as
electronics companies, which may request the necessary information from their suppliers to be able to
demonstrate compliance with the new reporting requirements. The standard of proof required to verify
this information has yet to be established by the SEC.
INTRODUCTION
BACKGROUND
RCS GUIDANCE ON THE DODD-FRANK ACT SECTION 1502 SEPTEMBER 2010
(C) RESOURCE CONSULTING SERVICES LIMITED 20103
TO WHICH COMPANIES DO THE NEW REPORTING REQUIREMENTS APPLY?The new reporting requirements apply to each SEC reporting company that uses ‘conflict minerals’ in
the production or functionality of any product manufactured by it (each such company is referred to
here as a Reporting Company).
WHAT IS A ‘CONFLICT MINERAL’ WITHIN THE MEANING OF THE ACT?Columbite-tantalite (coltan), cassiterite, gold, wolframite and their derivatives are all ‘conflict minerals’
within the meaning of the Act.
Additional minerals may be deemed ‘conflict minerals’ further to a determination by the US Secretary of
State that a particular mineral (or its derivatives) is financing conflict in the Democratic Republic of the
Congo (DRC) or an ‘adjoining country’.
WHAT IS AN ‘ADJOINING COUNTRY’ WITHIN THE MEANING OF THE ACT?Any country that shares an internationally recognized border with the DRC is an ‘adjoining country’
within the meaning of the Act. Thus, Angola, Burundi, the Central African Republic, the Republic of
Congo, Rwanda, Sudan, Tanzania, Uganda and Zambia are all adjoining countries.
WHAT ARE THE NEW REPORTING REQUIREMENTS?• To disclose whether any ‘conflict mineral’ used in the production or functionality of any products
originated in the DRC or an ‘adjoining country’.
• If such ‘conflict mineral’ did originate from the DRC or an ‘adjoining country’, then SEC reporting
companies have to submit to the SEC a report that includes:
1. a description of the measures taken by the Reporting Company to exercise due diligence on the
source and chain of custody of the ‘conflict minerals’;
2. a description of the products (whether manufactured by the Reporting Company or manufactured
for it by a contractor) that contain ‘conflict minerals’ originating from the DRC or an ‘adjoining country’;
3. the name of the entity that conducted the audit described below;
4. a description of the facilities used to process the ‘conflict minerals’;
5. the country of origin of the ‘conflict minerals’; and
6. a description of the efforts employed by the Reporting Company to determine the mine or location
of origin of the ‘conflict minerals’ with the greatest possible specificity.
AUDIT REQUIREMENTThe report described above must be audited by an independent private sector auditor in accordance
with standards established by the US Comptroller General. The audit must be certified by the Reporting
Company and submitted to the SEC along with the report.
REPORTING REQUIREMENTS• If the auditor selected has previously been deemed by the SEC to be unreliable, the report will not
KEY QUESTIONS
RCS GUIDANCE ON THE DODD-FRANK ACT SECTION 1502 SEPTEMBER 2010
(C) RESOURCE CONSULTING SERVICES LIMITED 20104
satisfy the requirements of the Act.
• If the due diligence measures described in the report (pursuant to point 1 above) have previously been
deemed by the SEC to be unreliable, the report will not satisfy the requirements of the Act.
• The Reporting Company must disclose its SEC report, or all the information contained therein, on its
website.
IS THERE ANY COMMERCIAL BENEFIT? If, after undertaking the due diligence underlying the new reporting requirements, the Reporting
Company concludes that its product does not contain ‘conflict minerals’ that directly or indirectly
finance or benefit armed groups in the DRC or an ‘adjoining country’, such product may be labelled
‘DRC conflict free’.
WHEN MUST A REPORTING COMPANY SUBMIT ITS FIRST REPORT?• The reporting requirement is annual, meaning that a report must be filed for each of the Reporting
Company’s fiscal years.
• Regulations mandating the new reporting requirements created by the Act will be promulgated by the
SEC within 270 days (approximately nine months) of 10 July 2010, the date on which the Act became
law. Thus, such regulations will be promulgated by April 2011 at the latest.
• The new reporting requirements apply to the Reporting Company’s first fiscal year after the promulgation
of the regulations, and to each fiscal year thereafter (unless the reporting requirement is subsequently
revised, waived or terminated by the US President). For example, if the Reporting Company has a
fiscal year running from July, the first fiscal year subject to the new reporting requirements will be that
commencing in July 2011.
THE CURRENT SUPPLY CHAINA typical supply chain for minerals originating from the DRC or adjoining countries can pass through
more than eight hands before reaching the consumer. Here is an example of a simple supply chain:
ARTISANAL MINER/MINE
DOMESTIC BUYER (MAY BE MORE THAN ONE)
DOMESTIC TRADER/EXPORTER
SMELTER
DOWNSTREAM MANUFACTURER
(E.G. SOLDER MANUFACTURER)
UPSTREAM MANUFACTURER
(E.G. COMPONENT MANUFACTURER)
UPSTREAM MANUFACTURER
(E.G. DEVICE MANUFACTURER)
SELLER
CONSUMER
RCS GUIDANCE ON THE DODD-FRANK ACT SECTION 1502 SEPTEMBER 2010
(C) RESOURCE CONSULTING SERVICES LIMITED 20105
POSSIBLE ACTIONS: A SYSTEM OF WARRANTIESOne possibility to ensure that the requirements under the Act do not become too burdensome to
companies is to create a system akin to the System of Warranties (SoW) put in place by the diamond
sector to meet their obligations under the Kimberley Process. While the Act would still require auditing
(something which the SoW does not), the SoW relies upon the seller of the goods to provide sufficient
information so that the final buyer can provide an affirmative statement on its invoices to customers.
For example: A major brand of electronics ‘A’ uses a particular processor in its electronic devices made
by ‘B’. Company A will request that Company B provide it with a guarantee that their product will be
‘conflict free’. Company B will in turn request this information from C, D, E etc, until the origin of the
mine is verified.
It is unclear whether this level of proof will be sufficient to satisfy the requirements of the Act. The specific
requirement to audit the supply chain may mean in practice that companies must have knowledge of
the entire chain of custody. Should a SoW be put in place, companies will need to put in place internal
policies to ensure purchasing departments have received evidence of a certificate verifying the origin
of the product or evidence that the company purchased with an affirmative statement of ‘conflict free’
on the invoice.
Within the jewellery industry, the SoW was made a contractual obligation by major companies on their
own suppliers. In the early 2000s, a leading jewellery manufacturer changed a clause in their supply
contract and gave suppliers a certain number of days to comply with the need for a SoW clause in the
new contract. Likewise for the mineral sector, affected industries may need to set up internal systems to
ensure that certification meets a reasonable standard that will pass an audit.
ABOUT RESOURCE CONSULTING SERVICES Resource Consulting Services (RCS) is a research, analysis, implementation and evaluation consultancy,
which has a reputation for excellence in advising the private and public sector on issues related to
‘conflict minerals’, including compliance, traceability and certification. RCS staff are recognised global
experts on the DRC and many of its neighbouring countries. We frequently visit the region and have
exceptional knowledge of the local environment and key decision makers.
Simon Gilbert, Resource Consulting Services’ communications director and former external relations
manager for De Beers writes on his experience implementing a system of warranties for diamonds.
“At De Beers I was responsible for ensuring all the Southern African diamond centres were compliant
when the KP came in. I employed an auditing company to come in and we did a mammoth tour of all
the operations to identify where the gaps might be and to set the individual departments on the path
of producing measures to ensure they would meet the KP. Consequently De Beers would then be in a
position to put the affirmative statement on all invoices stating that all our diamonds were ‘conflict free.”
To find out more how RCS can help you reach compliance targets email us at
[email protected]. or visit our website at www.resourceglobal.co.uk
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