Written by Jörg Walden, CEO, iPoint Systems
Awakening Awareness
Every morning, I am woken up by my cellphone’s alarm clock, I turn on the light and laptop on my way to the bathroom, and having tuned in to the latest radio news, clean my teeth with my electric toothbrush. Even before my vitalizing morning shower, I routinely will have used various products possibly containing so-called conflict minerals—rare natural resources such as tantalum, tin, tungsten and gold (3TG), the mining and trade of which may finance violent conflicts in the Democratic Republic of the Congo (DRC) or adjoining countries.
The growing public awareness of these critical resources in consumer electronics and various other devices is accompanied by increasing regulatory awareness of companies affected by the Dodd-Frank Act and its conflict minerals-related Section 1502, signed into law in July 2010. The long-awaited final rule regarding conflict minerals, which was adopted by the Securities and Exchange Commission (SEC) this August after a protracted rule-making process, poses a range of concerns and challenges across the manufacturing industries.
Ambiguous Areas
Like many other compliance-related laws and regulations such as REACh or RoHS, the SEC’s Conflict Minerals Rule is highly complex, at the same time leaving core concepts intentionally undefined or ambiguously worded. Take, for example, the term “product”. Although the 356-page document containing the SEC’s Conflict Minerals Rule clearly addresses every publicly traded company under SEC jurisdiction “with conflict minerals necessary to the functionality or production of a product it manufactures or contracts to be manufactured”, the term “product” is left undefined. If a GPS navigation system using a tantalum capacitor is installed into a vehicle, what is the product – the GPS system or the entire vehicle? If tin is used to solder a circuit board which is then installed into medical equipment such as an ECG machine, is the circuit board or the entire machine subject to the rule? If tungsten is used as a component for an airplane rudder, is the whole plane or just the rudder the product? And if gold plating is used in an electrical connector which is built into an audio power amplifier, is just the electrical connector or the whole amplifier affected by the rule? Several other areas and terms of the Conflict Mineral Rule remain intentionally vague, causing confusion and requiring affected companies from every 3TG-related industry to make ad hoc interpretations and decisions.
International Impact
But is my company actually subject to the Conflict Minerals Rule? This question has also caused a lot of head-scratching among compliance officers worldwide. Legally, the regulation only applies to publicly traded companies under SEC jurisdiction required to file annual reports in the United States. However, since these so-called issuers will need to ask their suppliers for collaboration on providing declarations, the requirements will trickle down to suppliers around the globe, including privately-held as well as foreign-owned companies. That is why the rule is expected to have a significant international impact, affecting more than 280,000 companies worldwide.
Compliance Challenges, Costs, and Court Cases
Tracing conflict minerals through the entire supply chain will be a cumbersome process. The more complex a product and the larger a company’s product lines, the more difficult it will be to trace the source of the material used in their products. Getting thousands of suppliers across several tiers to collaborate is a huge and costly challenge. Those that are contemplating a manual approach should consider that this could be time-consuming, expensive, error-prone and thus impractical for most companies. The compliance costs as one of the primary ongoing concerns are expected to be very significant—estimated at $3-$4 billion by the SEC, projections from outside the SEC have been as high as $16 billion.
A recent lawsuit filed by two influential organizations, the National Association of Manufacturers (NAM) and the U.S. chamber of commerce, has challenged the SEC’s final rule, requesting that it “be modified or set aside in whole or in part”. But even if the lawsuit is successful in changing or delaying the ruling, conflict minerals reporting is here to stay.
Strategies and Solutions
With the first reporting period under this final ruling beginning on January 1, 2013, affected companies are under a lot of pressure. They need to take action now and develop strategies for complying with the rule. However, a recent study released by IHS has revealed that almost 90 per cent of electronic component manufacturers—one of the industries most affected by the new rule—are not yet ready for reporting their usage of conflict minerals.
What kind of strategy is suitable for efficient conflict mineral compliance? Some companies plan on using Excel spreadsheets to track their products, suppliers and supply chain. But as already mentioned, this manual approach can be very time-consuming and costly. Outsourcing the whole reporting to a compliance service provider is another strategy which doesn’t come without drawbacks: It is costly, a third party gains access to sensitive data about business relationships, you have limited control and insight into your own supply chain, there are no economies of scale, and integration with in-house systems is not possible. Working with a compliance software company specifically equipped to handle the Conflict Minerals Rule provision is another option which enables companies to fulfill the challenge of collecting, managing, aggregating and reporting conflict minerals information, and meet the requirements of their customers and the regulatory authorities. Regardless of the chosen strategy, there are already a few valuable frameworks which affected companies can use to support them in their ongoing compliance efforts.
To assist manufacturing companies, two industry associations, the Electronic Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI), have taken the lead on developing a reporting framework. And fortunately, compliance software companies are already stepping in with solutions that allow companies to scale up reporting and extend features under the EICC-GeSI framework.
Action Items for Affected Companies
The framework developed by the OECD, which is currently the only available guidance on conflict minerals supply chain due diligence, also offers valuable assistance for efficient Conflict Minerals Rule compliance:
1. Determine if Your Company is Subject to the Rule.
Be sure to understand the ramifications to your company even if you are not under the SEC jurisdiction—you may still be impacted.
2. Identify and Assess Risk in the Supply Chain
Conduct a RCOI (Reasonable Country of Origin Inquiry) to determine whether Conflict Minerals originated in the DRC or other covered countries; and the significance of the risk this imposes.
3. Establish Strong Company Management Systems
Align internal policies with the SEC ruling requirements including them in your Supplier Code of Conduct. Determine how the information will be tracked.
4. Design and Implement Strategy to Respond to Identified Risks
Conduct supplier trainings and make sure your requirements are clearly communicated and agreed upon.
5. Conduct Independent Third-Party Audit of Smelters/Refiners Practices
This should be a data and process review of supply chain efforts specifically looking for their due diligence actions disclosure.
6. Report Annually on Supply Chain Due Diligence
Adapt your process to accommodate new suppliers and greater detail on reporting as gray areas are better defined.
The road for conflict minerals reporting will not be easy, but no company has to do this entirely on its own. Numerous resources are available, and with a properly planned and thoughtful approach you can optimize the burden of both time and human resources to achieve compliance with SEC’s Conflict Minerals Rule and mitigate its impact on your business.
