Friday, August 21, 2015

GAO Reports on Company Digs to Disclose Conflict Minerals

By Jay Fishman, J.D.

The U.S. Government Accountability Office (GAO) reported on its September 2014—August 2015 audit of companies required make disclosures about their products that are sourced from conflict minerals.

Background. The Dodd-Frank Act (Act) Section 1502 addressed these “conflict minerals” —tantalum, tin, tungsten and gold—by directing the SEC, the Department of State (State), the U.S. Agency for International Development (USAID) and the Department of Commerce (Commerce) to take actions implementing the Act’s conflict mineral provisions. Among these actions, Section 1502(b) mandated the SEC, in consultation with State, to set forth disclosure and reporting regulations for companies whose products use conflict minerals from the Democratic Republic of the Congo (DRC) and adjoining countries. The SEC’s rule, adopted in August 2012, requires companies whose products use conflict minerals to make certain inquiries potentially leading to public disclosures about their minerals supply chains on new Form SD or in a conflict minerals report.

The Act also required State, in consultation with USAID, to submit to appropriate congressional committees a conflict minerals strategy to address the connections between human rights abuses, armed groups, mining of conflict minerals, and commercial products. Lastly, the Act required the GAO to report, beginning in 2012, and annually thereafter, on the effectiveness of the SEC rule’s ability to promote peace and security in the DRC and adjoining countries, and to report annually, beginning in 2011, on the rate of sexual violence in war-torn areas of the DRC and adjoining countries.

Audit findings. The GAO reported that respecting SEC-filed company disclosures submitted for the first time in 2014, most companies were unable to determine the source of their conflict minerals. Reported characteristics of these disclosures were as follows:
  • The companies’ filing disclosures comprised one or more of the four conflict minerals (tantalum, tin, tungsten and/or gold);
  • Most of the companies (87 percent) were based in the United States;
  • Almost all of the companies (99 percent) reported performing country-of-origin inquiries for the conflict minerals used;
  • Companies the GAO spoke to cited difficulty obtaining the necessary information from suppliers because of delays and other communication challenges;
  • Most of the companies (94 percent) reported exercising due diligence on the source and chain of custody of conflict minerals used but many (67 percent) were unable to determine whether those minerals came from the DRC or adjoining countries, and none could determine whether the minerals financed or benefitted armed groups in those countries; and
  • Companies disclosing that conflict minerals used in their products came from the DRC or adjoining countries indicated that they are or will be taking action to address the risks associated with the use and source of conflict minerals in their supply chains.
Conflict minerals case. On August 18, 2015, the date this audit report was issued, a two-judge majority of a D.C. Circuit panel upheld an earlier decision finding that the SEC’s conflict minerals rule violated the First Amendment. The earlier decision found the Dodd-Frank Act provision and the SEC’s implementing rule unconstitutional to the extent they require regulated entities to report to the SEC and to state on their websites that any of their products have “not been found to be ‘DRC conflict free.’” A lengthy dissent, however, objected to the majority ruling (National Association of Manufacturers v. SEC, August 18, 2015, Randolph, A.).

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