The ruling by the U.S. Securities and Exchange Commission is an outgrowth of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. It applies to products manufactured as of January 1, 2013, although the first reports for this calendar year don't have to be filed with SEC until May 31, 2014. (Smaller companies have even longer to comply - four years from enactment of the rule.)
At issue are four commonly used minerals - tantalum, tin, tungsten and gold - that are mined in the DRC. U.S. lawmakers' intent was to stop the flow of those materials from mines that are controlled by armed gangs, which engage in slavery, rape and murder.
While the goal is praiseworthy, industry groups such as the U.S. Chamber of Commerce and National Retail Federation have criticized the SEC rule as impractical and ultimately ineffective. Nevertheless, it's here to stay, and companies will have to adjust.
The rule applies only to publicly traded manufacturing companies, although that class of business isn't so cut and dried as one would like. In the age of outsourcing, who is the actual manufacturer? What about privately held companies that supply public original equipment manufacturers? Won't they have to disclose their product content to satisfy the reporting requirements of their downstream customers? And just what is a "product," anyway? SEC's final rule doesn't define the term. Does it include packaging? For a CD or DVD, is the product the content of the disk, or the disk itself?
Questions aside, companies need to be taking some basic steps to comply with the rule. First, they must figure out whether they're subject to it, says Rick McDonald, leader of the SEC practice at the Dykema law firm. Does the product that you're manufacturing (or contracting to manufacture) contain any of the four conflict minerals? If so, are they necessary to the functionality of the end product?
If the answer to the second question is yes, then the affected company needs to conduct a "good-faith, reasonable" country-of-origin inquiry, to determine whether the minerals originated in the DRC or adjoining countries, or whether they are from recycled or scrap sources. The information then needs to be electronically filed with SEC on a Form SD (for "specialized disclosure"), in addition to being made available on a public website. The form should detail the company's due-diligence efforts to determine the source of any conflict minerals. Also required is an independent private-sector audit of the conflict minerals report.
McDonald says private manufacturing companies will be affected by the rule, "because many if not most have a public company somewhere up the supply chain." While they are not obligated to report on conflict minerals content, most will comply in order to maintain good relations with their customers.
Complicating matters is the fact that the mere tracing of a product to the DRC doesn't automatically mean it should be classified as a conflict mineral. Not all mines in the region are gang-controlled. Unfortunately, the controversy threatens to tar all operations in the DRC with the same brush, with the potential of destroying the country's entire mining industry.
To keep that from happening, minerals need to be traced back to the individual mine. "That's the real challenge of the rule at the moment," says McDonald. So how can this be achieved? The best place for determining origin is at the smelter stage, through which mined minerals must pass on their way to the manufacturer. One potentially valuable instrument is a smelter validation program set up by the Electronic Industry Citizenship Coalition (EICC).
In addition, the Organization for Economic Cooperation and Development (OECD) has developed a framework for determining what constitutes "due diligence" by manufacturers - another term that isn't defined by SEC. OECD's process includes detailed steps that companies can take to identify and assess risks in their manufacturing supply chains.
Private companies are also stepping up to provide assistance on meeting SEC's requirements. MetricStream, Inc. offers a structure by which companies can organize their supplier data, and apply it to tasks such as conflict minerals reporting. It helps clients in creation of the Form SD, as well as carrying out due diligence in line with the OECD framework.
Keri Dawson, vice president of industry solutions and advisory services for MetricStream, says the process is similar to that applied to a broad range of governance, risk and compliance (GRC) activities. "Dodd-Frank requires companies to become increasingly transparent," she says. "Consumers want to know if a good or service was actually sourced, manufactured and delivered in an environmentally and socially responsible way."
For guidance, MetricStream draws on the joint work of the EICC and Global e-Sustainability Initiative (GeSI). Still, says Dawson, efforts to comply with the rule can get "murky," especially where contract manufacturers and multiple tiers of suppliers are involved. "There's still a lot of debate on how to interpret that under the law," she says.
Dawson recalls the confusion surrounding country-of-origin determination during the debate over the Sarbanes-Oxley Act of 2002. "One of the challenges was that the law was left open to interpretation, and in some cases was a bit of a moving target," she says. "It's the same with Dodd-Frank."
So, with all of the effort and resources required of manufacturers to comply with the conflict minerals rule, what's the penalty for non-compliance? Not much, it seems - at least for now. There are no fines to be imposed by SEC or other government body. Such penalties could materialize in the future, but in the meantime the biggest price appears to be damage to a company's brand reputation. "The consequences are a negative impression in public opinion regarding [its] social responsibility as a corporate citizen," says McDonald.
Which raises the ultimate question: Does the public care? More on that next.
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Keywords: supply chain, supply chain management, international trade, conflict minerals, Democratic Republic of the Congo, supply chain planning, sourcing solutions, supply chain risk management
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