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Compliance Due Soon With New SEC Rule On Mining Conflict Minerals

Merrill Disclosure Solutions | July 16, 2013

Ensuring warlords' campaigns do not pan out. The SEC's conflict minerals rule, issued in August 2012 under the Dodd-Frank Act, aims to prevent African warlords from committing atrocities financed by the profits of their gold, tantalum, tin, and tungsten mines in 10 African nations: the Democratic Republic of the Congo (DRC) and its nine neighbors (Angola, Burundi, Central African Republic, Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia). The rule requires US manufacturing companies to trace and report the sources of these conflict minerals up the supply chain. The first reports-for calendar year 2013-are due May 31, 2014, Ken Tysiac writes. By the SEC's calculations, about 6,000 companies will have to comply with the intricate, wide- ranging rule at an initial cost ranging from $3 billion to $4 billion. Hewlett-Packard, for example, estimates that 1,000 of its suppliers might make products from conflict minerals.

Doing more than just learning the drill. The SEC hopes that companies will want to project an image of good corporate citizenship, not just reporting under the new rule but also making sure that they do not accept any conflict minerals. To match competitors, some companies are trying to meet that higher standard, despite the resultant rise in the cost of materials. Intel's 2013 goal is to make the world's first microprocessor that is verifiably free of conflict minerals, the author reports; Philips has asked its suppliers to prove they provide none; and Samsung has asked its suppliers to enter into agreements banning the use of conflict minerals. After a company has chosen a strategy, the managers and directors should ascertain whether it is being followed. Ernst & Young has advised companies to employ an implementation team comprising attorneys, the chief financial and accounting officers, procurement and supply-chain employees, information-technology workers, internal auditors, engineers, and communications staffers. R&D personnel and audit-committee members could also participate.

Trying to avoid the regulatory shaft. The conflict minerals rule is being contested in court, but an SEC expert advises against postponing compliance, since Dodd-Frank would compel the SEC to revise it if it is struck down. Noncompliance could lead to the humiliation of a mandatory reporting amendment or a cease-and-desist order. Compliance entails several steps, the author suggests. Ascertain whether any of the rule's four minerals are in the company's products or are crucial to their functionality. (The latter condition provokes many disputes.) If so, perform a reasonable inquiry to ascertain whether those minerals come from any of the 10 nations listed in the rule. If the inquiry concludes that the minerals do not come from any of the listed nations, the company will eventually need to file a new Form SD revealing that conclusion and explaining the inquiry process. If the inquiry shows otherwise, conduct due diligence to find out if those minerals benefitted armed factions in those nations, either directly or indirectly. As an SD exhibit, file an independently audited Conflict Minerals Report that reveals the minerals' sources, explains how the sources were established, and lists minerals that are not conflict-free. In the reports for 2013 and 2014 only, companies may categorize minerals as “conflict-undeterminable.”

Keeping smelters off the geopolitical slag heap. Hewlett-Packard's coordinator of conflict-minerals compliance recommends focusing on the 400 or so smelters that extract the rule's four minerals from ore. When able to verify that minerals starting up supply chains at smelters are conflict-free, the company needs no further assurance of trustworthy sourcing. Trade associations are seeking a standardized method by which all suppliers can describe their mineral sourcing to end users, instead of responding to an onerous hodgepodge of compliance requests. To be certified as conflict-free, smelters can undergo a yearly audit of their intake of the four minerals. Materials originating within any of the rule's 10 nations must come with documentation of conflict-free status satisfying the Organisation for Economic Co-operation and Development's due-diligence requirements. The SEC says 15% to 20% of the world's tantalum, but much less of the other three minerals, originate in the 10 nations. Companies could cut expenses by shunning all four minerals from all 10 locals, but doing so would deprive and harm trustworthy mine owners and their employees.

The referenced working paper, Conflict Minerals Rule Poses Compliance Challenge By: Ken Tysiac, published by Journal of Accountancy, AICPA, Harborside Financial Center, 201 Plaza Three, Jersey City NJ 07311-3881. To subscribe, call (888) 777-7077; or visit

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