By Jacquelyn Lumb
The U.S. Government Accountability Office has issued a new report on companies’ conflict minerals disclosure as required by the Dodd-Frank Act which covers disclosures in 2016 and compares them to disclosures in the prior two years. The GAO randomly sampled 100 of the 1,230 Forms SD, the specialized disclosure report for companies’ use of conflict minerals, and created estimates for the population of companies that file under the rules. In addition to the sampling of filings with the SEC, the GAO interviewed company representatives who attended a conflict minerals conference and representatives of various stakeholders. The margin of error for the estimates is plus or minus 10 percentage points.
Conflict minerals rule. The conflict minerals disclosure rule requires companies to determine whether they manufacture or contract to manufacture products with the four conflict minerals named in the Act. They must conduct a reasonable country of origin inquiry about the source of the conflict minerals and exercise due diligence to determine both the source and the chain of custody of the conflict minerals. Companies that disclose that their products are Democratic Republic of the Congo conflict free, meaning that they did not finance or benefit armed groups in the covered countries, must obtain an independent audit and include the audit report in their conflict minerals reports.
GAO report. The GAO found that the disclosures in 2016 were similar to those filed in prior years. A similar number of companies filed the disclosures in 2014 and 2015. Almost all of the companies in the sample reported that they had performed inquiries about the conflict minerals’ country of origin. Almost all reported that they had conducted due diligence on the source and chain of custody. However, after conducting due diligence, the GAO reported that an estimated 55 percent of the companies reported that they were unable to confirm the source of the conflict minerals in their products and about 99 percent said they could not determine whether the conflict minerals financed or benefited armed groups.
The number of companies that filed conflict minerals disclosures was down slightly from the prior two years, which SEC officials suggested may be the result of mergers and acquisitions. From the sample the GAO examined, it found that about 81 percent of the companies that filed disclosures in 2016 were domestic and the remainder were foreign companies, which was similar to the past two years.
Not all of the companies reported the minerals used, but of those that did, 61 percent reported using tin, 54 percent tantalum, and 55 percent gold, which was similar to the percentages in 2014 and 2015. The percentage reporting the use of tungsten, 58 percent, reflected a significant increase over that reported in 2015 (37 percent) and 2014 (39 percent).
The GAO noted that, as in previous years, many companies reported difficulties in determining the country of origin of the conflict minerals due to complex supply chains. Some companies have improved their data collection processes. The process for collecting the data also has become more standardized. A number of company representatives also reported that the SEC’s rule has increased their understanding of their supply chains and the awareness of their suppliers that use conflict minerals.
Almost all of the companies used the Organization for Economic Cooperation and Development framework to conduct their due diligence, but some did not follow that guidance in all respects. The OECD framework includes five steps in performing due diligence and some companies did not include all of the components when performing their due diligence.
Of the 1,230 companies that filed Form SD in 2016, 19 filed an independent private sector audit report, compared with six of 1,281 in 2015 and four of 1,321 in 2014.