US legislation on conflict minerals Resource Consulting Services by ixieshaofang

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SEPTEMBER 2010

US LEGISLATION
ON CONFLICT MINERALS
RCS PRIVATE SECTOR GUIDANCE ON
THE DODD-FRANK ACT SECTION 1502
    RCS GUIDANCE ON THE DODD-FRANK ACT SECTION 1502                                            SEPTEMBER 2010




    INTRODUCTION
    The following briefing note presents the view of Resource Consulting Services (RCS) on section 1502 of
    the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which affects companies
    buying ‘conflict minerals’ from the Democratic Republic of Congo (DRC) and adjoining countries. As
    the provisions of the Act have yet to be promulgated as Securities and Exchange Commission (SEC)
    regulations, this guidance is indicative only.


    In this note, we observe the similarities between the implications for the private sector of this Act and
    those of the Kimberley Process on the diamond sector. Although the Act assigns responsibilities to SEC
    registered companies only, reporting obligations may be passed on to companies further down the
    trading chain, which more readily have access to information on the origin of minerals.


    Please note that the SEC has yet to fully promulgate the regulations. As such the information in this
    paper can change at any time, should be regarded as indicative only, and represents solely the view of
    Resource Consulting Services Limited, and no other entity.




    BACKGROUND
    On 21 July 2010 the President of the United States (US) signed the Act into law. The Act, among (many)
    other things, amends section 13 of the Securities Exchange Act of 1934. This amendment requires
    companies reporting to the SEC to file periodic reports disclosing their use of ‘conflict minerals’.


    This reporting requirement applies only to SEC reporting companies; which are companies with more
    than $10 million in assets whose securities are held by more than 500 owners. As such, the new reporting
    requirements are unlikely to directly apply to smaller companies further down the supply chain, such as
    mineral traders in the DRC. However, it is likely that the regulations will apply to many end users, such as
    electronics companies, which may request the necessary information from their suppliers to be able to
    demonstrate compliance with the new reporting requirements. The standard of proof required to verify
    this information has yet to be established by the SEC.




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    RCS GUIDANCE ON THE DODD-FRANK ACT SECTION 1502                                              SEPTEMBER 2010




    KEY QUESTIONS
    TO WHICH COMPANIES DO THE NEW REPORTING REQUIREMENTS APPLY?
    The new reporting requirements apply to each SEC reporting company that uses ‘conflict minerals’ in
    the production or functionality of any product manufactured by it (each such company is referred to
    here as a Reporting Company).


    WHAT IS A ‘CONFLICT MINERAL’ WITHIN THE MEANING OF THE ACT?
    Columbite-tantalite (coltan), cassiterite, gold, wolframite and their derivatives are all ‘conflict minerals’
    within the meaning of the Act.


    Additional minerals may be deemed ‘conflict minerals’ further to a determination by the US Secretary of
    State that a particular mineral (or its derivatives) is financing conflict in the Democratic Republic of the
    Congo (DRC) or an ‘adjoining country’.


    WHAT IS AN ‘ADJOINING COUNTRY’ WITHIN THE MEANING OF THE ACT?
    Any country that shares an internationally recognized border with the DRC is an ‘adjoining country’
    within the meaning of the Act. Thus, Angola, Burundi, the Central African Republic, the Republic of
    Congo, Rwanda, Sudan, Tanzania, Uganda and Zambia are all adjoining countries.


    WHAT ARE THE NEW REPORTING REQUIREMENTS?
    • To disclose whether any ‘conflict mineral’ used in the production or functionality of any products
     originated in the DRC or an ‘adjoining country’.
    • If such ‘conflict mineral’ did originate from the DRC or an ‘adjoining country’, then SEC reporting
     companies have to submit to the SEC a report that includes:
     1. a description of the measures taken by the Reporting Company to exercise due diligence on the
     source and chain of custody of the ‘conflict minerals’;
      2. a description of the products (whether manufactured by the Reporting Company or manufactured
      for it by a contractor) that contain ‘conflict minerals’ originating from the DRC or an ‘adjoining country’;
     3. the name of the entity that conducted the audit described below;
     4. a description of the facilities used to process the ‘conflict minerals’;
     5. the country of origin of the ‘conflict minerals’; and
     6. a description of the efforts employed by the Reporting Company to determine the mine or location
     of origin of the ‘conflict minerals’ with the greatest possible specificity.


    AUDIT REQUIREMENT
    The report described above must be audited by an independent private sector auditor in accordance
    with standards established by the US Comptroller General. The audit must be certified by the Reporting
    Company and submitted to the SEC along with the report.


    REPORTING REQUIREMENTS
    • If the auditor selected has previously been deemed by the SEC to be unreliable, the report will not




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    RCS GUIDANCE ON THE DODD-FRANK ACT SECTION 1502                                               SEPTEMBER 2010




     satisfy the requirements of the Act.
    • If the due diligence measures described in the report (pursuant to point 1 above) have previously been
     deemed by the SEC to be unreliable, the report will not satisfy the requirements of the Act.
    • The Reporting Company must disclose its SEC report, or all the information contained therein, on its
     website.


    IS THERE ANY COMMERCIAL BENEFIT?
    If, after undertaking the due diligence underlying the new reporting requirements, the Reporting
    Company concludes that its product does not contain ‘conflict minerals’ that directly or indirectly
    finance or benefit armed groups in the DRC or an ‘adjoining country’, such product may be labelled
    ‘DRC conflict free’.


    WHEN MUST A REPORTING COMPANY SUBMIT ITS FIRST REPORT?
    • The reporting requirement is annual, meaning that a report must be filed for each of the Reporting
     Company’s fiscal years.
    • Regulations mandating the new reporting requirements created by the Act will be promulgated by the
     SEC within 270 days (approximately nine months) of 10 July 2010, the date on which the Act became
     law. Thus, such regulations will be promulgated by April 2011 at the latest.
    • The new reporting requirements apply to the Reporting Company’s first fiscal year after the promulgation
     of the regulations, and to each fiscal year thereafter (unless the reporting requirement is subsequently
     revised, waived or terminated by the US President). For example, if the Reporting Company has a
     fiscal year running from July, the first fiscal year subject to the new reporting requirements will be that
     commencing in July 2011.


    THE CURRENT SUPPLY CHAIN
    A typical supply chain for minerals originating from the DRC or adjoining countries can pass through
    more than eight hands before reaching the consumer. Here is an example of a simple supply chain:



                                                                                             UPSTREAM
          ARTISANAL
                                                    SMELTER                                MANUFACTURER
          MINER/MINE
                                                                                         (E.G. DEVICE MANUFACTURER)




                                                DOWNSTREAM
       DOMESTIC BUYER                                                                            SELLER
                                               MANUFACTURER
     (MAY BE MORE THAN ONE)
                                            (E.G. SOLDER MANUFACTURER)




         DOMESTIC                                UPSTREAM
                                                                                              CONSUMER
      TRADER/EXPORTER                          MANUFACTURER
                                            (E.G. COMPONENT MANUFACTURER)




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    RCS GUIDANCE ON THE DODD-FRANK ACT SECTION 1502                                                SEPTEMBER 2010




    POSSIBLE ACTIONS: A SYSTEM OF WARRANTIES
    One possibility to ensure that the requirements under the Act do not become too burdensome to
    companies is to create a system akin to the System of Warranties (SoW) put in place by the diamond
    sector to meet their obligations under the Kimberley Process. While the Act would still require auditing
    (something which the SoW does not), the SoW relies upon the seller of the goods to provide sufficient
    information so that the final buyer can provide an affirmative statement on its invoices to customers.


    For example: A major brand of electronics ‘A’ uses a particular processor in its electronic devices made
    by ‘B’. Company A will request that Company B provide it with a guarantee that their product will be
    ‘conflict free’. Company B will in turn request this information from C, D, E etc, until the origin of the
    mine is verified.


    It is unclear whether this level of proof will be sufficient to satisfy the requirements of the Act. The specific
    requirement to audit the supply chain may mean in practice that companies must have knowledge of
    the entire chain of custody. Should a SoW be put in place, companies will need to put in place internal
    policies to ensure purchasing departments have received evidence of a certificate verifying the origin
    of the product or evidence that the company purchased with an affirmative statement of ‘conflict free’
    on the invoice.


    Within the jewellery industry, the SoW was made a contractual obligation by major companies on their
    own suppliers. In the early 2000s, a leading jewellery manufacturer changed a clause in their supply
    contract and gave suppliers a certain number of days to comply with the need for a SoW clause in the
    new contract. Likewise for the mineral sector, affected industries may need to set up internal systems to
    ensure that certification meets a reasonable standard that will pass an audit.



    ABOUT RESOURCE CONSULTING SERVICES
    Resource Consulting Services (RCS) is a research, analysis, implementation and evaluation consultancy,
    which has a reputation for excellence in advising the private and public sector on issues related to
    ‘conflict minerals’, including compliance, traceability and certification. RCS staff are recognised global
    experts on the DRC and many of its neighbouring countries. We frequently visit the region and have
    exceptional knowledge of the local environment and key decision makers.


    Simon Gilbert, Resource Consulting Services’ communications director and former external relations
    manager for De Beers writes on his experience implementing a system of warranties for diamonds.
    “At De Beers I was responsible for ensuring all the Southern African diamond centres were compliant
                                                                                                                        Image Copyright Mark Cramer




    when the KP came in. I employed an auditing company to come in and we did a mammoth tour of all
    the operations to identify where the gaps might be and to set the individual departments on the path
    of producing measures to ensure they would meet the KP. Consequently De Beers would then be in a
    position to put the affirmative statement on all invoices stating that all our diamonds were ‘conflict free.”


    To find out more how RCS can help you reach compliance targets email us at
    contact@resourceglobal.co.uk. or visit our website at www.resourceglobal.co.uk




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