The GAO has just issued its 2022 Report on Conflict Minerals, which examines companies’ conflict minerals compliance in 2022. As you probably know, the SEC’s conflict minerals rules were originally mandated by Congress in an attempt to limit the use of revenue from the trade in conflict minerals to fund the operations of armed groups in the DRC and adjoining countries. Under Dodd-Frank,  the GAO is required to assess periodically the effectiveness of the SEC’s conflict minerals rules in promoting peace and security in the DRC region. Are the SEC’s rules having any impact? Based on this report, it seems that the violence in the DRC has not abated: “overall peace and security in the eastern DRC has not improved since 2014 because of persistent, interdependent factors that fuel violence by non-state armed groups.” In 2020, the GAO reports, about 122 armed groups operated in the region, using revenue from the trade in conflict minerals as one source of funding. Experts view corruption as a contributing factor. The GAO observes that, in 2022, “armed groups continue to raise revenue from various sources, such as illegal taxation on citizens and the exploitation of natural resources,” such as conflict minerals.

To prepare its report on conflict minerals compliance, the GAO selected a random sample of 100 filings (from a total of 1,005) to “create estimates generalizable to the population of all companies that filed in 2022.” The GAO  reviewed relevant documentation and prior data reliability assessments, and interviewed “SEC officials and a non-generalizable sample of 13 industry stakeholders—including representatives from filing companies, business organizations, and non-governmental organizations—to obtain additional perspectives on meeting disclosure requirements,”

In 2022, only 1,005 companies filed Forms SD, reflecting a substantial decrease from the 1,321 companies that filed in 2014.  SEC officials suggested that the 24% decrease may be due to M&A activity or “changes in business practices by companies that previously filed disclosures.” However, some industry stakeholders told the GAO that the decrease may also reflect in part the perception of some companies “that they are unlikely to face enforcement action by the SEC if they do not comply with the conflict minerals disclosure requirements.” (SEC staff advised the GAO that companies that are subject to the rule but choose not to file a Form SD are subject to potential enforcement.)

RCOI.  Similar to 2020 and 2021, the GAO found that about 99% of companies that submitted conflict minerals filings in 2022 indicated that they had conducted reasonable country-of-origin inquiries. In addition, the GAO found that, following their RCOIs, about 51% of companies were able to report preliminary determinations regarding the sources of their conflict minerals.  That’s down from the high water mark of 66% in 2021, but generally consistent with the percentage reported from 2015 to 2020. (The GAO suggested that the difference could be “sampling variability.”)

Similar to the data reported for 2020 and 2021, the GAO found that, for 2022:

• An estimated 35% of filing companies disclosed they had “determined preliminarily that some or all of their conflict minerals may have originated in covered countries,”  and were therefore required to conduct due diligence to further investigate the source of their minerals.
• Approximately 41% reported that they were unable to determine whether any of their conflict minerals may have originated in covered countries and were therefore required to conduct due diligence to further investigate the source of their minerals.
• An estimated 8% did not report a clear RCOI determination (but SEC staff advised the GAO that companies that report conducting due diligence are not required to report an RCOI determination.) Of the companies in the GAO sample, five of eight conducted due diligence. 
• About 12% reported that, after their RCOIs, they had determined that none of their conflict minerals originated in covered countries or that they had no reason to believe that their minerals originated in covered countries. In these cases, no due diligence was required.
• About 3% reported that they had determined that their conflict minerals were from scrap or recycled sources. In these cases, no due diligence was required.

Due diligence.  According to the GAO, about 89% percent of companies that submitted Form SD filings in 2022 reported conducting due diligence, a not statistically significant increase from 2021 (81%) and 2020 (78%). Almost all of these companies (96%) conducted due diligence using the OECD framework. The GAO found that, after conducting due diligence, for 2022,

• About 3% of companies reported that their conflict minerals did not originate in covered countries or they had no reason to believe that their minerals originated in covered countries.
• Approximately 35% reported that their minerals may have originated in covered countries.
• An estimated 53% reported that they “ultimately could not determine whether any of the conflict minerals used in their products may have originated in covered countries.” 
• About 9% did not clearly report what that they had determined about country of origin, if anything.
• No companies reported that their minerals were from scrap or recycled sources.

Consistent with prior GAO reports, only an estimated 3% of companies reported, post-due diligence, that they had determined that their conflict minerals did not finance or benefit armed groups in the covered countries. The remaining companies did not provide a determination. According to industry stakeholders, “companies are hesitant to claim that their minerals are not financing armed groups without full certainty….[W]hile some companies are increasing their responsible sourcing practices in response to end user and industry pressure, many companies lack the resources to conduct due diligence. [The GAO] also learned that some companies are cautious about sharing information related to due diligence for fear of potential intellectual property concerns or retaliation from consumers if they disclose risks in their supply chain.”

To determine whether conflict minerals may have originated in covered countries, an estimated 89% of companies surveyed suppliers and, to conduct their surveys, about 78% used the Conflict Minerals Reporting Template from the Responsible Minerals Initiative.  But, as anyone knows who has worked with companies on this process, there are many challenges, confirmed by the GAO through review of filings and conversations with stakeholders: supply chains are typically very complex, often with hundreds of suppliers, and “companies may struggle with access to suppliers and may have difficulty obtaining data on the specific mine from which their minerals originated.”  The GAO reports that about 43% of 2022 filings alluded to “lack of access to suppliers and complex supply chains as a challenge,” and about 56% reported that that some suppliers “provided incomplete or inaccurate information in their surveys”; about 48% of filings “stated that not all of the suppliers had responded to the company’s survey requests.”

Companies also rely on smelter and refiner audit programs to obtain “reasonable assurance that the conflict minerals supplied by that smelter or refiner did not finance or benefit armed groups,” as well as for country-of-origin data. Often, however, the GAO reports, that data will “include all of the countries that a particular smelter or refiner sources from, regardless of whether all of those countries are in a particular company’s supply chain,” with the result that it is not always possible for the company to determine the sources of the minerals used in its particular products. (Note that the same is often the case with respect to identification by suppliers of smelters and refiners in the supplier surveys.) While obtaining disaggregated data would be helpful, the GAO advises that smelters and refiners might “view these data as sensitive business information.” According to industry stakeholders, companies might be able to obtain better information through direct outreach to smelters and refiners in their supply chains, a step that few companies take. Industry stakeholders emphasized to the GAO “that this type of direct outreach is part of the due diligence process outlined in the OECD guidance.”

The GAO also reports that, although “downstream companies do not directly participate in this process,” companies’ due diligence processes involve the use of upstream traceability schemes, which monitor minerals as they travel from conflict-free mines to smelters or refiners and report activity by armed groups at mine sites. Concerns with the reliability of these traceability schemes have arisen as fraud, corruption and smuggling persist.  Instead, some companies are attempting to use blockchain for tracing.  Tracing programs for gold are particularly problematic given the economic, infrastructure and other pressures that lead miners to turn to illegal markets to trade their gold, where it is smuggled across borders.   “According to one industry stakeholder,” the GAO reports, “it is nearly impossible for upstream companies to determine the origins of gold without massive investments in traceability efforts.”      

Reporting. Stakeholders interviewed by the GAO advised that some companies may have chosen to limit the information in their filings (i.e., omit the conflict minerals report or omit the independent private-sector audit), or have even chosen not to file at all, as a result of 2014 and 2017 Corp Fin staff guidance.  The GAO reports that “[s]everal companies stated that the SEC staff guidance had an effect on their company’s filings,” but, unfortunately, does not provide data regarding the percentage of companies that omitted to include a CMR.                                                                           

The GAO reports that, in 2022, 13% of filings (132 of 1,005) indicated that, “pursuant to the SEC staff guidance, the companies did not file an IPSA of their due diligence activities.”  Only one company in the GAO’s sample of 100 filings filed an IPSA, and one company claimed that its products were  “DRC conflict free” but did not file an IPSA. In 2022, only seven (out of 1,005) companies submitted an IPSA.

Driven by international regulation and increased consumer and industry pressures, some companies have expanded the scope of their minerals due diligence and reporting efforts beyond the requirements—including cobalt, for example. However, industry stakeholders told the GAO that “there is a perception among some companies that the SEC is not reviewing filings and that companies will therefore face no consequence for limiting the information in their filing or for not filing at all. Additionally, some industry stakeholders shared that companies may view the conflict minerals disclosures as a bureaucratic exercise, rather than an opportunity to meaningfully investigate the origins of minerals in their supply chains.” Nevertheless, the GAO reports advice from the SEC staff that “companies are responsible for determining whether the conflict minerals rule applies to them and for the accuracy and adequacy of their disclosure. A company that determines that the rule applies to it, but chooses to either limit the information in its filing, except as permitted by the 2017 staff guidance, or not file a Form SD, may be subject to a potential enforcement action, according to SEC staff. The 2017 staff guidance does not discuss companies that are required, but fail, to file a Form SD.”

In case you thought that the conflict minerals rules could use a revisit, that does not appear to be in the cards: the SEC has bumped any reconsideration of the rules to its long-term (maybe never) agenda, with an indication that the next action on this rulemaking is “undetermined.”

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