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Conflict minerals law presents administrative challenge

Keywords: Tags  Conflict Minerals Act, tin, tantalum, tungsten, gold, Randy Daugharthy, Bureau Veritas Certification, Richard Goods Ernst & Young

Prior to mid-April, it was about to come down to the wire for publicly traded companies to file initial disclosures with the Securities and Exchange Commission (SEC) on the use of conflict minerals from east Congo.

But on April 15, a panel of three U.S. judges ruled that the section of the Dodd-Frank Wall Street Reform and Consumer Protection Act that requires companies to report their use of “conflict minerals” to the SEC is unconstitutional. 

The U.S. Court of Appeals for the District of Columbia found that the rule compels a reporting company to “confess blood on its hands” and violates free-speech rights under the First Amendment, and has remanded the case back to the U.S. District Court. An SEC spokeswoman said the commission is reviewing the court’s decision.  

The disclosure requirements were sparked by concerns that warlords in the Democratic Republic of Congo (DRC)—and neighboring countries such as Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia—are using the proceeds from the sale of certain metals, especially tin, tantalum, tungsten and gold (referred to as 3TG), to escalate conflict in the region.

In an effort to proactively manage the supply chain of conflict minerals and prevent them from getting into U.S.-manufactured goods, Congress passed the Conflict Minerals Act which requires certain publicly traded companies to file a Form SD disclosure annually starting May 31 stating how much exposure they have to conflict minerals, as well as a conflict minerals report outlining what they plan to do to limit the use of these metals in both their products and in those of their customers and suppliers. Companies also are required to display the reports on their websites, much as they do for financial reporting.

These reports won’t have to be validated this year, although certification by a third-party auditor will be required next year.

“All last year companies were starting the process of understanding this reporting requirement,” said Randy Daugharthy, director of business development at Bureau Veritas Certification North America Inc., Houston. The legislative aim of the conflict minerals regulation is to bring transparency to the supply chain so that financial links to armed groups can be identified, according to a Bureau Veritas report. “With requirements for due diligence, reporting and public disclosure, the legislation has been designed to ensure accountability and discourage companies from doing business in ways that ultimately support exploitation and conflict.”

“The best time to start on this was last year. The second best is today. So if you haven’t done anything, get on it and pull together some rapid action team to help you get on a path to compliance,” said Richard Goode, senior manager of Ernst & Young LLP’s climate change and sustainability practice.

The matter is complicated by the fact that the SEC’s oversight doesn’t apply to all publicly traded companies in the 3TG supply chain. Mining companies, for example, are exempt from the reporting obligation, although Goode said that they might be queried by companies that purchase from them to determine the source of their metals or minerals. Likewise, Daugharthy said that the recycled content of a finished product also is exempt from the reporting requirement, even if the recycled metal originated in a conflict region. 

In addition, the 3TG metal must be intentionally added and has to be necessary for the functionality of the product. This eliminates many carbon steel products, Goode said, noting that tin is a naturally occurring contaminant in steel, although it is definitely not necessary for its functionality.

However, it behooves companies not officially affected by the law—even those privately held—to do some due diligence on whether their products potentially contain conflict minerals, especially if they do business with public companies, Goode said.

Metal smelters and refiners are the real pinch point when it comes to the Conflict Minerals Act, as they are the companies that buy raw materials from any number of sources and sell them in a form that downstream end-users turn into finished products, Goode said.

By far the largest end-use market for 3TG metals is consumer electronics, with automotive, aerospace and other transportation industries not far behind. 

But tin also is used in cans and containers as well as construction; tungsten is used in cemented carbide parts for cutting wear-resistant materials, and alloys for the construction, metalworking, mining and oil and natural gas drilling industries; tantalum is mainly used for capacitors, but also is found in certain alloys, compounds and metal powders; and gold also is used in jewelry, official coins and dental applications.   

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