By Ilana R. Morady and Meagan Newman

In August 2012 the SEC enacted a rule as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203, in an attempt to curtail human rights abuses in Africa.  77 FR 56274 (September 12, 2012). The new rule requires affected companies to file annual Conflict Minerals Reports. The first reports are due to the SEC on May 31, 2014, to report on the 2013 calendar year.

What are Conflict Minerals?

Conflict minerals are minerals mined in conditions of armed conflict and human rights abuses by various armed rebel groups in a handful of African countries. The profits from the sale of these minerals sustain violent wars, and control over the mines is also a significant source of conflict.

Who is Affected?

The rule requires companies, that are subject to SEC filing rules and who manufacture or contract to manufacture products that contain tin, tungsten, tantalum, or gold (sometimes referred to as “3TG”), to obtain information from their suppliers on conflict minerals.  It does not ban the use of conflict minerals.

The rule survived a federal court challenge earlier this year.  Thus, potentially affected companies should not delay in determining whether the rule applies and, if so, conducting the necessary due diligence to meet the reporting requirements.  Tracing these minerals down the supply chain can be especially daunting.

The SEC estimates that 6,000 U.S. issuers will be directly affected by the new requirement to trace the conflict minerals in their supply chains. The agency estimated initial compliance costs of $3 billion to $4 billion as end users of the four conflict minerals attempt to find out whether their raw materials originated at mines run by warlords in the Democratic Republic of the Congo (DRC) or its nine adjoining neighbors (Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia).

Summary of the Compliance Process:

  1. Determine whether tin, tungsten, tantalum, or gold is present in or critical to the functionality of your products. If these minerals are not present, the company does not need to do anything more with respect to the regulation.
  2. If you find conflict minerals present, conduct a reasonable country of origin inquiry (RCOI) to determine whether its minerals originate in the DRC or its neighboring countries. If the company determines that those materials did not originate in those countries, the company must disclose that information and describe its RCOI process to the SEC on a new Form SD.
  3. If your RCOI process reveals minerals that originated in the DRC or its neighboring countries, then you must undergo a due-diligence process to determine whether the minerals directly or indirectly benefited armed groups in the neighboring countries. You must file a Conflict Minerals Report as an exhibit to Form SD, describing the materials’ origin and efforts to determine their exact location of origin. Minerals that are not conflict free must be listed in the Conflict Minerals Report, which must be audited by an independent auditor.

Anti-Conflict Mineral Claims

It is also worth noting that a number of companies have chosen to go beyond the minimum compliance and reporting requirements and have opted for anti-conflict minerals statements or commitments.  While there are certainly reputational and good will benefits to be had in making this choice, companies should take care to ensure than any such statements are not misleading.  Multi-disciplinary teams that include legal counsel, C-suite, procurement and supply chain personnel, IT, engineering, design, auditors, sustainability, and communications, are advisable for any company executing such a strategy.  As with any public claim regarding sustainability efforts and/or environmental benefits, anti-conflict mineral statements may face challenges from customers, competitors and regulators.