Monday, August 29, 2016

GAO examines conflict minerals reports, cites Commerce’s failure to fulfill Dodd-Frank responsibilities

By Jacquelyn Lumb

The Government Accountability Office, in its annual report to Congress on the effectiveness of the SEC’s conflict minerals rules, found that companies continue to experience difficulties in fulfilling their disclosure responsibilities. In addition, the Department of Commerce, which is required under the Dodd-Frank Act to assess the accuracy of the independent private sector audits that accompany the conflict minerals disclosure, has not filed any reports and has not developed any plans for conducting the assessments. Commerce advised that it has no knowledge, skills, or expertise to conduct the reviews of the audits or to establish best practices. The GAO recommended that Commerce develop the necessary expertise and establish a plan and a timeframe for conducting the required assessments.

Conflict minerals rules. The SEC adopted the conflict mineral disclosure rules in 2012 to require companies to report on the use of conflict minerals from the Democratic Republic of the Congo and adjoining countries. Congress intended that the rules would inhibit the ability of armed groups in the DRC and adjoining countries to fund their activities by trading in conflict minerals. The first filings were due by June 2, 2014 and annually thereafter on May 31.

The rules require companies to determine whether they manufacture or contract to have manufactured any products that contain conflict minerals; to conduct a country of origin inquiry about the source of the conflict minerals used; and to exercise due diligence to determine the source and chain of custody of the conflict minerals that are used. Companies that disclose that their products are DRC conflict-free must include documentation based on an independent private sector audit.

The GAO noted that the four conflict minerals enumerated in the Act are used by various industries in a wide variety of products. It examined 100 reports filed in 2015 out of 1,281 in the EDGAR database to determine the challenges that companies faced in their due diligence efforts with respect to the processing facilities in conflict minerals supply chains, efforts to mitigate those challenges, and Commerce’s actions with respect to its requirements under the Dodd-Frank Act.

Challenges to reporting. The GAO found that a number of sourcing initiatives have been developed to assist companies with their reporting obligations. However, a majority of companies reported that they were unable to determine the country of origin of the conflict minerals used in their products. About 19 percent more of the companies reviewed were able to make the determination in 2015 than in 2014. In some cases, companies advised that suppliers did not respond to their inquiries. Many supply chains involve multiple tiers which can delay a response. In addition, some processing companies purchase from multiple suppliers and commingle the products.

New approaches. The GAO reported that some companies plan to take certain actions to improve their due diligence efforts, including shifting their operations to supply chains that are certified conflict-free; inserting language in new contracts about their expectations relating to conflict minerals; continuing to seek information from suppliers whose responses were inadequate; and providing training to suppliers on conflict minerals due diligence.

Commerce initiatives. The GAO noted that Commerce produced annual reports in 2014 and 2015 which listed the known conflict minerals processing facilities worldwide in accordance with its responsibilities under the Act, but as of July 2016 had not submitted a report on its assessment of the accuracy of the independent private sector audits or other due diligence efforts by reporting companies. Six companies filed audit reports in 2015 and four did so in 2014. Commerce advised that it has now established a team to manage its assessment responsibility and that it would conduct a review of the 19 reports filed in 2016. It is exploring the use of the private sector to assess other due diligence processes. Until Commerce acts, the GAO said filing companies lack information about best practices for responding to the conflict minerals rule.