SEC proposed regulations implementing the Dodd-Frank Act conflict minerals provisions reference the due diligence guidelines issued by the OECD, which set forth a flexible five-step risk-based approach. The proposed regulations would require companies for which conflict minerals are necessary to the functionality or production of a product manufactured by the company to disclose in its annual report whether its conflict minerals originated in the Democratic Republic of the Congo or an adjoining country. If so, the company would be required to furnish a separate report as an exhibit to its annual report that includes a description of the measures taken to exercise due diligence on the source and chain of custody of the conflict minerals. These due diligence measures would include an independent outside audit of the company’s report.
While Dodd-Frank contemplates that companies must use due diligence in their supply chain determinations, the SEC declined to prescribe any particular due diligence guidance because the conduct undertaken by a reasonably prudent person may vary and evolve over time. That said, the SEC believes that due diligence must be performed and that information about what conduct a company performed in its due diligence regarding its supply chain determinations is relevant.
In particular, the SEC expects that a company whose conduct conformed to a nationally or internationally recognized guidance for due diligence regarding conflict minerals supply chain would provide evidence that it used due diligence in making its supply chain determinations, and here the Commission cited the Organization for Economic Cooperation and Development due diligence guidance for conflict mineral supply chains.
The OECD Due Diligence Guidance for responsible supply chains of conflict minerals is a five step risk-based due diligence regime for use by any company potentially sourcing minerals or metals from conflict-affected areas. The final version of the Guidance was approved by the OECD Investment and Development Assistance committees n December 2010.
Broadly, the Guidance recognizes that, while specific due diligence requirements and processes will differ depending on the mineral and the position of the company in the supply chain, companies should review their choice of suppliers and sourcing decisions and integrate into their management systems a five-step framework for risk-based due diligence for responsible supply chains of minerals from conflict areas.
The first step is to establish strong management systems under which companies can adopt and communicate to suppliers a policy for the supply chain of minerals originating from conflict areas, a policy incorporating the standards against which due diligence is to be conducted. The company must also structure internal management to support supply chain due diligence and establish a system of controls over the mineral supply chain, including a chain if custody. The supply chain policy should also be incorporated into contracts with suppliers. The company should establish a company-level, or industry-wide, grievance mechanism as an early-warning risk-awareness system.
The second and third steps are to identify and assess risk in the supply chain of adverse impacts in light of the standards of the company’s supply chain policy and implement a strategy to respond to identified risks. A risk management plan should be implemented and monitored and the performance of risk mitigation efforts tracked.
The fourth step is to carry out an independent third-party audit of due diligence at identified points in the supply chain. The fifth step is to publicly report on the company’s supply chain due diligence policies and practices.
The OECD Guidelines also contain a Model Supply Chain Policy for a Responsible Global Supply Chain of Minerals from Conflict-Affected Areas, which is intended to provide a common reference for all actors throughout the entire mineral supply chain. The OECD encourages companies to incorporate the model policy into their existing policies on corporate social responsibility, sustainability, or other alternative equivalent.