July 6, 2018

Blog: GAO issues annual report on conflict minerals filings in 2017

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Under Dodd-Frank, the GAO is required to assess annually the effectiveness of the SEC’s conflict minerals rules in promoting peace and security and to report on the rate of sexual violence in the DRC and adjoining countries. The GAO has released its annual study on conflict mineral disclosures filed with the SEC in 2017. The report is based on a random sample of 100 Forms SD, interviews with company representatives and other stakeholders.

The GAO found that, generally, the disclosures filed in 2017 were similar to those filed in the prior two years. The GAO estimated that, out of 1,165 companies that filed conflict minerals disclosures, almost all companies reported in 2017 that they performed country-of-origin inquiries. As a result of those inquiries, an estimated 53% reported whether the conflict minerals in their products came from the DRC or one of the adjoining countries, up from estimated 49% in 2016 and 2015—which you could characterize as an increase that crosses a significant “majority“ threshold except that the estimates have a margin of error of plus or minus 10 percentage points at the 95-percent confidence level. The percentage is 2017 was, however, significantly higher than the estimate of 30% in 2014.

In their 2017 disclosure reports, many companies described actions they took to improve data collection processes, “such as gathering missing information about their supply chains and working with suppliers to encourage conflict-free sourcing. In interviews, representatives of selected companies that filed conflict minerals disclosures in 2017 and other industry participants noted that (1) awareness among suppliers about the use of conflict minerals had continued to increase and (2) the process for collecting data on supply chains had become more routine and standardized.” However, the GAO reports, “most companies reported challenges in determining the country of origin of conflict minerals, in part due to lack of access to suppliers and complex supply chains involving many suppliers and processing facilities.”

Of the companies that reported the types of minerals used, an estimated 69% reported using tin, 54% tantalum, 59% tungsten, and 63% reported using gold, similar to the percentages reported in 2016.

SideBar

Gold has turned out to be the most problematic mineral in terms of supply chain transparency and responsible sourcing. According to a 2017 GAO report, gold is a significant driver of the DRC’s economy. There are reportedly more than 1,000 mining sites for artisanal and small-scale mined (ASM) gold in the DRC, typically employing groups of 30 to 300 miners. The way the gold mining process is supposed to work is that the supply chain participants are required to obtain DRC government authorization, such as official mining cards, or register with the provincial or national government to trade or export ASM gold in or from the DRC. They are also required to pay provincial or national taxes to mine, trade or export ASM gold. In reality, however, “almost all DRC-sourced ASM gold is produced and traded unofficially and smuggled from the country…. Further, elements of the Congolese army as well as illegal armed groups, frequently exploit ASM gold, often through illegal taxes on its production and transport, according to reports and stakeholders.” Some of the factors cited in the report that facilitate smuggling include “limited government control over the remote areas where ASM gold is primarily produced, inadequate infrastructure, and corruption,” as well as weak border enforcement. The report observes that, while progress has been made recently “in reducing the presence of armed groups at tantalum, tin, and tungsten mine sites,…the widespread availability of gold in remote, difficult-to-access areas of the eastern DRC and the lack of a functioning traceability system allow armed groups to operate at gold mine sites with minimal government and international oversight.” The report observes that, while progress has been made recently “in reducing the presence of armed groups at tantalum, tin, and tungsten mine sites,…the widespread availability of gold in remote, difficult-to-access areas of the eastern DRC and the lack of a functioning traceability system allow armed groups to operate at gold mine sites with minimal government and international oversight.” (See this PubCo post.)

Similar to the prior two years, the GAO found that 96% of companies that were required to conduct due diligence as a result of their country-of-origin inquiries reported doing so, notwithstanding the issuance by Corp Fin of a statement, discussed below, indicating that it would not recommend enforcement action if companies did not file conflict minerals reports. Approximately 87% of companies reported using the OECD due diligence framework (with the remaining 13% not specifying the framework used), compared with an estimated 92% in 2016 and 95% in 2015.

After conducting due diligence to determine the source and chain of custody of conflict minerals used, an estimated 37% reported in 2017 that they were able to determine that their conflict minerals came from one of the covered countries or from scrap or recycled sources, compared with 39% in 2016 and 23% in 2015; by comparison, 47% reported that they could not confirm the source, compared with 55% in 2016 and 67% in 2015.

But, as in prior years, almost all companies reported that, after conducting due diligence, they could not determine whether their conflict minerals financed or benefited armed groups. Four companies in the GAO sample declared one or more of their products to be “DRC conflict-free,” but only three of those companies included the required Independent Private Sector Audit. In 2017, the GAO reports, 16 companies filed an IPSA compared with 19 in 2016.

In the GAO sample, only three companies cited Corp Fin’s Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule, as a rationale for not filing a conflict minerals report. The Updated Statement advised that Corp Fin would not recommend that companies face enforcement if they filed only a Form SD with disclosure under only paragraphs (a) and (b) and did not prepare and file a conflict minerals report (Item 1.01(c) of Form SD)—even if they would otherwise be required to do so under the rule. (See this PubCo post.) (Note, however, that, as indicated in footnote 23 to the GAO report, the staff has subsequently advised that companies that do file conflict minerals reports remain subject to the 2014 staff guidance. See this PubCo post.) In interviews, some company representatives and other industry participants told the GAO “that even though the revised guidance and other statements made by the SEC raised some uncertainty about the filing process, generally, companies plan to continue to report similar conflict minerals disclosure information.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.