New Conflicts in Minerals Trade

Long-awaited conflict minerals regulations issued by the Securities and Exchange Commission in September will take effect on Nov. 13 for products including tantalum, tin, gold and tungsten. The goal is to end human rights abuses in the Democratic Republic of the Congo by governing the trade in so-called conflict minerals. 

Affected countries also include Angola, Burundi, the Central African Republic, Rwanda, South Sudan, Tanzania, Uganda and Zambia, all countries with some internationally recognized border with the DRC. Recognizing the disruption these changes will cause, the SEC is allowing a temporary provision for the first two reporting years for all issuers and a total of four years for small companies. The regulations apply to all companies filing with the SEC, whether foreign or domestic. 

The SEC began by creating a new reporting form, Form SD, the taxonomy forms for which are available here. Form SD is to be filed starting in 2014 to cover 2013, and will be due each year on May 31, regardless of the company’s fiscal year. 

Perhaps to be expected given the controversy the process garnered, the SEC published regulations that are more general in places than industry might have liked. The starting point for any publicly traded company is to determine if it is covered by these regulations. So, does your company manufacture or contract to manufacture goods containing conflict minerals? 

This is one area where the SEC was very general, leaving the analysis to turn on the facts of a given company’s situation. The SEC defined “contracting to manufacture” as based on whether the company has some influence over the manufacturing of the given product. The SEC was quick to add that a company is deemed not to have influence over manufacturing if it only affixes its brand, marks, logo or label to a generic product made by a third party; or services, maintains or repairs a product made by a third party; or specifies or negotiates contractual terms with the maker that do not directly relate to the manufacturing of the product. 

Companies now must conduct a “reasonable” country-of-origin inquiry, performed in good faith and reasonably designed to determine whether any of the minerals originate in the covered countries or are from scrap or recycled sources. 

So, if a company knows the minerals did not originate in a covered country, if the minerals are scrap or recycled sources, or if it has no reason to believe the minerals originated in a covered country or may not be from scrap or recycled sources, it must disclose its determination, provide a brief description of the inquiry it performed and the results, and report these details on Form SD. The company also must make the description publicly available on its Web site and provide the link on its Form SD. 

But if the inquiry determines the company knows or has reason to believe the minerals may have originated in a covered country, and if the company knows or has reason to believe the minerals may not be from scrap or recycled sources, it must undertake a reasonable due diligence to determine the country of origin and chain of custody of the minerals and file a Conflict Minerals Report as an exhibit to Form SD. Likewise, it must make the report available on its Web site and provide a link on the Form SD filing. 

The outcome of the due diligence could be that the minerals are “DRC Conflict Free,” which could mean they originate from a covered country but did not finance or benefit armed groups. In this case, the company must obtain an independent private sector audit of its Conflict Minerals Report, certify it obtained such an audit, include the audit report as part of its Conflict Minerals Report and identify the author.

Another outcome could be a “not found to be DRC Conflict Free” determination. In such a case, in addition to the audit and certification requirements, the company also must describe on its Conflict Minerals Report the products manufactured or contracted to be manufactured and covered by the finding, the facilities used to process the conflict minerals in those products, and the specific efforts to determine the mine or location of origin. 

The temporary provision mentioned above relates to an outcome where the finding is “DRC Conflict Undeterminable.” Companies will be given two years to get their supply chains in order (small companies will have four years). During this period, if the company is unable to determine the origin of the minerals or determines they’re from a covered country, whether or not the minerals financed or benefited armed groups in those countries, the products are considered “DRC Conflict Undeterminable.”

In such a case, the company must describe the following in its Conflict Minerals Report: its finding the products it manufactures or contracts to manufacture are DRC Conflict Undeterminable; the facilities where they are produced, if known; the origin of the conflict minerals, if known; the specific efforts undertaken to determine the mine or location of origin; the steps taken or that will be taken to mitigate the risk that its necessary conflict minerals benefit armed groups; and any steps to improve due diligence since the end of the period covered by the most recent Conflict Minerals Report.

Regarding recycled or scrap minerals, if the company’s conflict minerals are from these sources rather than from mined sources, the company’s products containing such minerals are considered “DRC Conflict Free,” even if originating from covered countries. Only in the case of recycled or scrap sources is a company not required to obtain an independent private-sector audit.

Besides not providing a clear definition of what “contracting to manufacture” means, the SEC was equally unclear on its due diligence requirement, saying only the due diligence measures must conform to a nationally or internationally recognized framework such as that developed by the Organization for Economic Cooperation and Development.

At this juncture, the OECD has only issued a due diligence program for gold. As a result, the SEC says, until a due diligence framework is developed for the other minerals, companies are required to describe the due diligence measures they exercise in determining the source of their conflict minerals. 

This leaves us to be guided by the OECD gold supplement. It makes the following recommendations:

— Adopt and commit to a supply chain policy for identifying and managing risks for gold potentially from conflict-affected and high-risk areas.

— Structure internal management systems to support supply chain due diligence.

— Establish a system of transparency, information collection and control over the gold supply chain.

— Strengthen company engagement with suppliers.

— Establish a company and/or mine-level grievance mechanism. 

There are additional specific recommendations for each entity in the supply chain. For exporters, the OECD recommends:

— Assign a unique internal reference number to all inputs and outputs, by bar, ingot and/or batch of gold accepted and produced, and affix and/or imprint that reference number on all outputs in such a manner that tampering or removal will be evident.

— Coordinate and support physical security practices used by other upstream companies. Promptly report any indications of tampering with shipments and unseal and open shipments only by authorized personnel.

— Preliminarily inspect all shipments for conformity to the information provided by the supplier on the types of gold … Verify weight and quality information provided by the gold producer and/or shipper, and make a business record of such verification. Report any inconsistency between initial inspection of a shipment and information provided by the shipper promptly to internal security and those responsible in the company for due diligence, with no further action until the inconsistency is resolved.

— Physically segregate and secure any shipment for which there is an unresolved inconsistency.

— Seek to deal directly with legitimate artisanal and small-scale gold producers or their representatives where possible in order to exclude gold offered by persons that exploit them. 

For downstream companies, the OECD recommends:

— Request suppliers provide the identification of the upstream gold refiner(s) for gold-bearing materials and products, either by direct sourcing or via marks imprinted on a refined gold product if available, or from information provided by other downstream product suppliers on bullion banks.

— If gold refiner(s) are identified, request verification that they have conducted due diligence in accordance with this supplement. Where possible, seek reference to recognized audits by industry programs or institutionalized mechanisms that incorporate in their auditing protocols the standards and processes contained in the Guidance.

— Pass on information on the identification of the upstream gold refiner/s for gold-bearing materials and products to downstream customers. 

It seems reasonable to expect that companies will be governed by these guidelines regardless of the conflict mineral in question, but at the same time, these recommendations seem to be commonsense security protocols that companies would have in place to better manage their supply chains and lower the risk of pilferage. 

The SEC admits it may cost billions of dollars for companies to comply, so it’s reasonable to expect that any company touting itself as concerned about human rights can expect to draw attention. 

And so we are left to ask: Could these conflict minerals regulations lead to more shareholder derivative, class action or other types of lawsuits? At a minimum, they could lead to damage to reputation. And there’s no doubt they will be very expensive for companies to comply. Perhaps this is why supplier changes began even before the final regulations were published.


Susan Kohn Ross is an international trade attorney with Mitchell Silberberg & Knupp in Los Angeles. Contact her at

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