Conflict Minerals

Conflict Minerals
Dodd-Frank Wall Street Reform and Consumer
Protection Act, Section 1502
Resh J. Reese
2nd Vice President Accounting Policy
 Section 1502 of Dodd-Frank
 SEC issued final rules on
August 22, 2012
 Calendar year reporting
period (regardless of fiscal
 First report on Form SD due
May 31, 2014
What are Conflict Minerals?
 Cassiterite
 Columbite-tantalite (coltan)
 Wolframite
 Derivatives of the above (the “3Ts”):
 Tin
 Tantalum
 Tungsten
 Gold
What are Conflict Minerals?
 Regardless of origin
 No de minimus exception
 Example: Dyes with infinitesimal amounts of tungsten?
 Exclusions for:
 Minerals outside supply chain prior to 1/1/13
 Minerals from recycled or scrap sources
Who Must Comply?
 Reporting companies (Exchange Act Sections 13(a) and 15(d))
 SEC estimates approximately 6,000 reporting companies impacted
 Legal challenge by NAM
Compliance Process
 SEC’s three-step process:
 Step 1: Does the company use conflict minerals?
 Applicability assessment and supply chain readiness
 Step 2: Determine country of origin of the minerals
 Reasonable country of origin inquiry (RCOI) and due diligence
 Step 3: Conduct supply chain due diligence
 Reporting: Form SD
Step 1: Use of Conflict Minerals
 Does the company manufacture or contract to manufacture products?
 Assembling the product out of components not in raw material form
 “Contract to manufacture” – degree of influence over the materials, parts,
ingredients or components
 “Product” – the soft drink or the soft drink including the can?
 Are conflict minerals necessary to the functionality or production of the
 “Primary purpose” - Gold pendant hanging from a necklace vs. gold buckle
on pair of shoes
 Trace amounts of tin in steel
 Computers and power lines
Step 1: Compliance enterprise-wide effort
Cross-Functional Team:
 Procurement/supply chain/sourcing
 Product design/engineering
 Compliance/legal
 Sustainability/environmental
 Finance/CFO/controller
 IT back office support
 Internal Audit
 Marketing/communications and investor relations
Step 1: Assessment of supply chain
Key activities:
 Form cross-functional team and empower the team leader
 Set up governance structure, develop a charter, work plan, timeline, budgets
 Send internal communication and conduct training sessions
 Identify data sources, software tools and resources
 Engage management to assess targets and timelines
 Draft conflict minerals policy
 Agree to supplier engagement strategy
 Perform risk prioritization
 Develop risk management and corrective action plan
Step 2: Country of Origin
 Reasonable Country of Origin Inquiry (RCOI)
 DRC and adjoining countries
 Supplier representations
 Conflict Minerals Policy
Step 2: Reasonable country of origin inquiry (RCOI)
Key activities:
 Determine if RCOI only is possible, or move to due diligence
 Conduct data mining to identify supplier base
 Prioritize tier 1 suppliers based on risk
 Engage suppliers with conflict minerals reporting template
 Validate supplier responses
 Implement supplier risk management plan
 Monitor and track performance of supplier and risk mitigation efforts
Step 3: SC Due Diligence
 Based on RCOI, company knows (or has reason to believe) that its
conflict minerals originated in a covered country and did not come
from recycled sources
 Due diligence on the source using recognized due diligence framework
 Based on due diligence, if company determines conflict minerals did not
originate from covered country or did come from recycled or scrap
sources, then:
 File Form SD
 Disclose information on company website
Step 3 (cont.)
 If any other conclusion, include with Form SD:
 Conflict Minerals Report
 Independent private sector audit
 Exception from audit requirement (2 years for large companies): Include description
of products “DRC conflict undeterminable” in Conflict Minerals Report
Step 3 Reporting
Key activities:
 Summarize results of RCOI/Due Diligence
 Engage independent auditor (if applicable)
 Prepare Form SD and Conflict Minerals Report as an attachment to
Form SD (filed annually)
 Conduct independent audit of conflict minerals report in accordance
with the criteria set forth in the rule
 File forms with SEC by reporting deadline
Step 3: Independent Audit
Companies need to keep the audit in mind throughout the process
While the rule does not require reviewable business records, maintenance of appropriate records may be useful
in demonstrating compliance with the final rule
Companies that expect to have completed Due Diligence for a portion of their products will undertake an
audit as soon as the 2013 reporting year
Must be in accordance with Government Auditing Standards
The audit will assess whether the design of the due diligence activities conforms in all material aspects to the
due diligence framework selected by the organization, as well as whether the description of the due diligence
measures is consistent with the process undertaken
Will not assess effectiveness of the due diligence or the appropriateness of the conclusions whether products
are DRC conflict free
Step 3 (cont) Independent Audit
The audit does not opine on your
conclusions regarding conflict minerals. or
the effectiveness of your due diligence
Attest examination with an opinion (must
be a CPA) or a performance audit with a
conclusion (may be performed by a CPA or
a non CPA)
Audit may be performed by financial
statement auditor, subject to audit
committee pre approval and reporting
related fees in “Other”
Due diligence work plans include
performing an audit readiness assessment
Does issuer
file reports
with the SEC?
Does issuer
manufacture, or
contract to
the product?
Are conflict
necessary to the
functionality or
Were the conflict
minerals outside
the supply chain
prior to 1/31/2013?
Rule does not
Steps 2-3
File SEC Form
Key Take-Aways
Public Relations:
 Results of this filing will ultimately affect public opinion
 Corporate responsibility initiatives and green initiative analysts ratings
 Ranking of suppliers
 If entity does not file a Form SD and the SEC determines that we were incorrect in
analysis could risk losing S-3 eligibility.
 Being S-3 eligible means that we have special privileges with the SEC when it comes to
raising debt (i.e. outstanding shelf registration statement on file and can very quickly
raise debt by filing a supplement).
 It could also lead to issues regarding currently outstanding debt, securities offered under
employee benefit plans and a potential delinquency notice from the NYSE.
Example of policy
Philips’ position on responsible sourcing in relation to Conflict Minerals
“The proceeds from harmful social and environmental practices in mines, especially in the eastern provinces of the
Democratic Republic of Congo (DRC), have been used to fuel armed conflict in the region. This is a major concern to
the electronics industry, among others. The recently enacted Dodd Frank law in the United States defines conflict
minerals as Tin, Tungsten, Tantalum and Gold (3TG) and any derivatives thereof.
Our commitment to sustainable development compels us to address this concern, even though Philips does not directly
source minerals from the DRC and the mines are typically seven or more tiers removed from our direct suppliers.
Philips has committed not to purchase raw materials, subassemblies, or supplies which we know contain conflict
minerals that directly or indirectly finance or benefit armed groups in the DRC or an adjoining country.
We have requested our relevant suppliers to confirm that they provide only conflict-free minerals to Philips. While those
suppliers have stated that indeed, to their knowledge, they have provided us with conflict-free minerals, we nevertheless
recognize that our suppliers may have too limited insight into their supply chains to fully understand the origin of the
minerals. Due to the size of our supply chain as well as the complexity of the routes by which these conflict minerals are
traded, smelted, recycled, and sold (including the common practice of mixing ores and recycled scrap from many
different sources), Philips and its suppliers face a huge challenge to obtain – for all minerals - full traceability to exact
origin with a high degree of certainty.”
Industry Responses
 Regulation is final. Manufacturers have begun determining the
impact and issues
 Law suits have been filed:
 American Petroleum Institute
 National Association of Manufacturers, US Chamber of Commerce and
Business Roundtable

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