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Conflict minerals - moving beyond compliance

Bureau Veritas : 03 July, 2014  (Special Report)
Certain minerals originating in the Democratic Republic of Congo (DRC) and adjoining countries have been a major source of international concern. Armed groups in the region are accused of severe human rights abuses and of using proceeds from the sales of these minerals to fuel regional conflicts. A broad range of public, private, and civil society groups have been working to bring light to this issue and, in recent years, legislation has been passed to address this problem. Bureau Veritas, in partnership with Estelle Levin Ltd. (ELL), offers public training to issuer and non-issuer manufacturers, suppliers, and vendors to educate them on conflict minerals regulations and to present the solutions available to address their challenges and build capacity for action.
In 2010, Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act was put forth in the US Congress to address the problem of conflict minerals by requiring publicly listed companies to disclose their use of specific minerals originating in the DRC and adjoining countries. In 2012, the US Securities and Exchange Commission (SEC) issued its final rule to implement the requirements in the Dodd-Frank Act. This was the first legislation of its kind in the United States. Canada and the European Union are taking similar steps to address conflict minerals through legislation and it should be expected that many other countries will follow.
The legislative aim of the current conflict minerals regulation is to bring transparency to the supply chain so that financial links to armed groups can be identified. Indeed, with requirements for due diligence, reporting, and public disclosure, the legislation has been designed to ensure accountability and discourage companies from doing business in ways that ultimately support exploitation and conflict.
There is also potential for unintended consequences to arise from this legislation. In aiming first and foremost to ensure conflict-free supply chains, many companies are deciding to source from outside of the DRC and its adjoining countries altogether. A mass disengagement from these economies is having clear impacts on local poverty and, as highlighted in comments to the SEC proposed rule, this could even create drivers for conflict.
Thus, it is important to highlight that constructive engagement with mineral supply chains originating in conflict areas is the most effective solution to the difficult problem of conflict minerals.
Commonly referred to as ´3TG´, tantalum (columbite-tantalite), tin (cassiterite), tungsten (wolframite), and gold make up the class of conflict minerals for which the legislation presently applies. The US State Department and Section 1502 of the Dodd-Frank define it as such, as does the Organisation for Economic Co-operation and Development (OECD) in their Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. Of course, other minerals can be included in this distinction on a voluntary basis in accordance with a company´s sourcing practices and identified risks related to sourcing from politically unstable countries. It is also conceivable that other minerals may be classified as ´conflict minerals´ under US or other legislation in the future.
Covered countries of origin
Minerals mined in the DRC may pass through numerous locations in neighbouring countries as they are shipped to processing facilities. Thus, the Dodd-Frank Act applies to minerals that originate in the DRC as well as its adjoining countries.
All US-based and foreign issuers to the SEC under Sections 13(a) and 15(d) of the Exchange Act that manufacture or contract to manufacture products for which "conflict minerals are necessary to the functionality or production" fall under the scope of Section 1502 of the Dodd-Frank Act. An issuer that only services, maintains, or repairs a product containing conflict minerals is not affected.
Points to consider when determining if conflict minerals are necessary to "functionality or production" include the following:
• If it is intentionally added to the product or any component of the product
• If it is necessary to the product´s generally expected function, use, or purpose
• If it is incorporated for purposes of ornamentation, decoration or embellishment
Potential impact
This legislation will likely affect a range of industries, including electronics, aerospace, medical devices, jewellery and apparel. The SEC estimates that approximately 6000 issuers will be directly affected and that many others will be indirectly affected, including issuer and non-issuer suppliers, with an estimate of initial compliance costs between $3 billion and $4 billion, and an estimate of subsequent annual costs in the range of $200 million and $600 million.
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