US LEGISLATION ON CONFLICT MINERALS

US LEGISLATION ON CONFLICT MINERALS

SEPTEMBER 2010

RCS PRIVATE SECTOR GUIDANCE ON THE DODD-FRANK ACT SECTION 1502

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RCS GUIDANCE ON THE DODD-FRANK ACT SECTION 1502 SEPTEMBER 2010

(C) RESOURCE CONSULTING SERVICES LIMITED 20102

The following briefing note presents the view of Resource Consulting Services (RCS) on section 1502 of

the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which affects companies

buying ‘conflict minerals’ from the Democratic Republic of Congo (DRC) and adjoining countries. As

the provisions of the Act have yet to be promulgated as Securities and Exchange Commission (SEC)

regulations, this guidance is indicative only.

In this note, we observe the similarities between the implications for the private sector of this Act and

those of the Kimberley Process on the diamond sector. Although the Act assigns responsibilities to SEC

registered companies only, reporting obligations may be passed on to companies further down the

trading chain, which more readily have access to information on the origin of minerals.

Please note that the SEC has yet to fully promulgate the regulations. As such the information in this paper can change at any time, should be regarded as indicative only, and represents solely the view of Resource Consulting Services Limited, and no other entity.

On 21 July 2010 the President of the United States (US) signed the Act into law. The Act, among (many)

other things, amends section 13 of the Securities Exchange Act of 1934. This amendment requires

companies reporting to the SEC to file periodic reports disclosing their use of ‘conflict minerals’.

This reporting requirement applies only to SEC reporting companies; which are companies with more

than $10 million in assets whose securities are held by more than 500 owners. As such, the new reporting

requirements are unlikely to directly apply to smaller companies further down the supply chain, such as

mineral traders in the DRC. However, it is likely that the regulations will apply to many end users, such as

electronics companies, which may request the necessary information from their suppliers to be able to

demonstrate compliance with the new reporting requirements. The standard of proof required to verify

this information has yet to be established by the SEC.

INTRODUCTION

BACKGROUND

RCS GUIDANCE ON THE DODD-FRANK ACT SECTION 1502 SEPTEMBER 2010

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TO WHICH COMPANIES DO THE NEW REPORTING REQUIREMENTS APPLY?The new reporting requirements apply to each SEC reporting company that uses ‘conflict minerals’ in

the production or functionality of any product manufactured by it (each such company is referred to

here as a Reporting Company).

WHAT IS A ‘CONFLICT MINERAL’ WITHIN THE MEANING OF THE ACT?Columbite-tantalite (coltan), cassiterite, gold, wolframite and their derivatives are all ‘conflict minerals’

within the meaning of the Act.

Additional minerals may be deemed ‘conflict minerals’ further to a determination by the US Secretary of

State that a particular mineral (or its derivatives) is financing conflict in the Democratic Republic of the

Congo (DRC) or an ‘adjoining country’.

WHAT IS AN ‘ADJOINING COUNTRY’ WITHIN THE MEANING OF THE ACT?Any country that shares an internationally recognized border with the DRC is an ‘adjoining country’

within the meaning of the Act. Thus, Angola, Burundi, the Central African Republic, the Republic of

Congo, Rwanda, Sudan, Tanzania, Uganda and Zambia are all adjoining countries.

WHAT ARE THE NEW REPORTING REQUIREMENTS?• To disclose whether any ‘conflict mineral’ used in the production or functionality of any products

originated in the DRC or an ‘adjoining country’.

• If such ‘conflict mineral’ did originate from the DRC or an ‘adjoining country’, then SEC reporting

companies have to submit to the SEC a report that includes:

1. a description of the measures taken by the Reporting Company to exercise due diligence on the

source and chain of custody of the ‘conflict minerals’;

2. a description of the products (whether manufactured by the Reporting Company or manufactured

for it by a contractor) that contain ‘conflict minerals’ originating from the DRC or an ‘adjoining country’;

3. the name of the entity that conducted the audit described below;

4. a description of the facilities used to process the ‘conflict minerals’;

5. the country of origin of the ‘conflict minerals’; and

6. a description of the efforts employed by the Reporting Company to determine the mine or location

of origin of the ‘conflict minerals’ with the greatest possible specificity.

AUDIT REQUIREMENTThe report described above must be audited by an independent private sector auditor in accordance

with standards established by the US Comptroller General. The audit must be certified by the Reporting

Company and submitted to the SEC along with the report.

REPORTING REQUIREMENTS• If the auditor selected has previously been deemed by the SEC to be unreliable, the report will not

KEY QUESTIONS

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satisfy the requirements of the Act.

• If the due diligence measures described in the report (pursuant to point 1 above) have previously been

deemed by the SEC to be unreliable, the report will not satisfy the requirements of the Act.

• The Reporting Company must disclose its SEC report, or all the information contained therein, on its

website.

IS THERE ANY COMMERCIAL BENEFIT? If, after undertaking the due diligence underlying the new reporting requirements, the Reporting

Company concludes that its product does not contain ‘conflict minerals’ that directly or indirectly

finance or benefit armed groups in the DRC or an ‘adjoining country’, such product may be labelled

‘DRC conflict free’.

WHEN MUST A REPORTING COMPANY SUBMIT ITS FIRST REPORT?• The reporting requirement is annual, meaning that a report must be filed for each of the Reporting

Company’s fiscal years.

• Regulations mandating the new reporting requirements created by the Act will be promulgated by the

SEC within 270 days (approximately nine months) of 10 July 2010, the date on which the Act became

law. Thus, such regulations will be promulgated by April 2011 at the latest.

• The new reporting requirements apply to the Reporting Company’s first fiscal year after the promulgation

of the regulations, and to each fiscal year thereafter (unless the reporting requirement is subsequently

revised, waived or terminated by the US President). For example, if the Reporting Company has a

fiscal year running from July, the first fiscal year subject to the new reporting requirements will be that

commencing in July 2011.

THE CURRENT SUPPLY CHAINA typical supply chain for minerals originating from the DRC or adjoining countries can pass through

more than eight hands before reaching the consumer. Here is an example of a simple supply chain:

ARTISANAL MINER/MINE

DOMESTIC BUYER (MAY BE MORE THAN ONE)

DOMESTIC TRADER/EXPORTER

SMELTER

DOWNSTREAM MANUFACTURER

(E.G. SOLDER MANUFACTURER)

UPSTREAM MANUFACTURER

(E.G. COMPONENT MANUFACTURER)

UPSTREAM MANUFACTURER

(E.G. DEVICE MANUFACTURER)

SELLER

CONSUMER

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POSSIBLE ACTIONS: A SYSTEM OF WARRANTIESOne possibility to ensure that the requirements under the Act do not become too burdensome to

companies is to create a system akin to the System of Warranties (SoW) put in place by the diamond

sector to meet their obligations under the Kimberley Process. While the Act would still require auditing

(something which the SoW does not), the SoW relies upon the seller of the goods to provide sufficient

information so that the final buyer can provide an affirmative statement on its invoices to customers.

For example: A major brand of electronics ‘A’ uses a particular processor in its electronic devices made

by ‘B’. Company A will request that Company B provide it with a guarantee that their product will be

‘conflict free’. Company B will in turn request this information from C, D, E etc, until the origin of the

mine is verified.

It is unclear whether this level of proof will be sufficient to satisfy the requirements of the Act. The specific

requirement to audit the supply chain may mean in practice that companies must have knowledge of

the entire chain of custody. Should a SoW be put in place, companies will need to put in place internal

policies to ensure purchasing departments have received evidence of a certificate verifying the origin

of the product or evidence that the company purchased with an affirmative statement of ‘conflict free’

on the invoice.

Within the jewellery industry, the SoW was made a contractual obligation by major companies on their

own suppliers. In the early 2000s, a leading jewellery manufacturer changed a clause in their supply

contract and gave suppliers a certain number of days to comply with the need for a SoW clause in the

new contract. Likewise for the mineral sector, affected industries may need to set up internal systems to

ensure that certification meets a reasonable standard that will pass an audit.

ABOUT RESOURCE CONSULTING SERVICES Resource Consulting Services (RCS) is a research, analysis, implementation and evaluation consultancy,

which has a reputation for excellence in advising the private and public sector on issues related to

‘conflict minerals’, including compliance, traceability and certification. RCS staff are recognised global

experts on the DRC and many of its neighbouring countries. We frequently visit the region and have

exceptional knowledge of the local environment and key decision makers.

Simon Gilbert, Resource Consulting Services’ communications director and former external relations

manager for De Beers writes on his experience implementing a system of warranties for diamonds.

“At De Beers I was responsible for ensuring all the Southern African diamond centres were compliant

when the KP came in. I employed an auditing company to come in and we did a mammoth tour of all

the operations to identify where the gaps might be and to set the individual departments on the path

of producing measures to ensure they would meet the KP. Consequently De Beers would then be in a

position to put the affirmative statement on all invoices stating that all our diamonds were ‘conflict free.”

To find out more how RCS can help you reach compliance targets email us at

contact@resourceglobal.co.uk. or visit our website at www.resourceglobal.co.uk

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