Audit, Compliance and Risk Blog

Conflict Minerals in Supply Chains - SEC Aims to De-fund Combatants

Posted by Jon Elliott on Fri, Sep 07, 2012

Jon ElliottLate last month the Securities and Exchange Commission (SEC) adopted new rules (Rule 13p-1 and associated Form SD), requiring annual disclosures by public companies that manufacture any products in which “conflict minerals” are “necessary to the functionality or production.” These conflict minerals comprise a short list of important metals, when they originate in the Democratic Republic of the Congo (Congo or DRC) or an adjoining country. SEC’s rules implement a Congressional mandate contained in 2010’s massive Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Dodd-Frank is a response to growing international concern that armed groups in the eastern Congo mine and/or smuggle these minerals to fund their participation in the region’s chaotic, continuing conflicts.  These conflicts are believed to have killed 5 million people since 1998, and fed human rights violations against many millions more. International attention has focused on four specific “conflict minerals:” tantalum, tin and tungsten, used primarily in the electronics industry; and gold, used primarily in jewelry. Adapting a phrase applied to analogous activities during western Africa’s civil wars, these concerns are sometimes captioned as “Blood Cell Phones” even though a variety of products are affected.

The United Nations, individual countries including the United States, and non-governmental human rights and other organizations have all sought to reduce these activities, but with limited success. Congress intended for Dodd-Frank’s mandates to help create concrete progress:

  • SEC’s rules are to force international companies to investigate and report whether they have conflict minerals in their supply chains in the expectation the companies will take steps to avoid these supplies

  • US State Department is to map eastern Congo links between conflict minerals and armed groups, and implement a strategy for stopping these groups’ lucrative smuggling activities

New SEC Reporting Requirements

Rule 13p-1 requires an issuer to do the following:

  • determine if “conflict minerals” – tantalum, tin and tungsten (including those found in minerals known as coltan, cassiterite and wolframite), and gold – are “necessary to the functionality or production of a product it manufactures;”

  • if so, conduct a “good faith” country of origin due diligence evaluation to identify whether any of its supplies of these minerals originate in the DRC or an adjoining country

  • obtain an independent private sector audit of these activities, conforming to a “nationally or internationally recognized due diligence framework,” if one exists (none does at present, but there are a number of voluntary initiatives and Dodd-Frank directs the US Government Accountability Office (GAO) to establish US national audit standards).

  • make an annual Conflict Minerals Disclosure on Form SD, disclosing:

  • whether its supplies did not originate in DRC or came from recycling or scrap (“DRC Conflict Free”), or whether it is unable to make a determination (“DRC Conflict Undeterminable”), or whether supplies did originate in DRC;

    - including an audit certification for its third party audit; an

    - identifying steps it is taking to mitigate the risk that its supply chain includes   conflict minerals that benefit armed groups in the DRC.

  • post this information on its publicly-available internet site

Issuers must comply with Rule 13p-1 for the calendar year beginning January 1, 2013, and first reports are due May 31, 2014. Importantly, the SEC rules delay the requirement to submit an audit report covering “DRC conflict undeterminable” supplies for four years for “smaller reporting companies” (e.g., the value of its public shares is less than $75 million, or other similar criteria are met), and for two years for other issuers.

Controversies about the Rule

Dodd-Frank directed SEC to complete this rulemaking by April 2011, but the process took over a year longer after SEC extended the comment period following its December 2010 proposal. Ultimately, the five SEC commissioners voted 3:2, along party lines, to adopt the Rule.

Controversial points among SEC commissioners, and with stakeholders, include:

  • each issuer declares whether a mineral is “necessary to the functionality or production” of its product, which means products can contain non-essential conflict minerals and still be certified DRC Conflict Free. SEC guidance excludes minerals not present in the final product, even if used in production 

  • exclusion of minerals already “outside the supply chain” by January 1, 2013 – including those already smelted – are excluded in order to provide a compliance period

  • the general costs and uncertainties/meaningfulness of “due diligence” in a worldwide system with many suppliers – SEC estimates that initial compliance will cost companies $2.7 billion, plus $600 million annually

  • self-certification until recognized audit standards develop, which may delay full accountability but allows time for competing public and private initiatives to develop (including due diligence guidelines issued by the UN and the Organization for Economic Cooperation and Development, the Global e-Sustainability Initiative’s (GeSI’s) Conflict-Free Smelter Program, and others).

Implementation Checklist

Public companies must now be getting ready to comply with these new requirements, and customers should be starting to think about whether their reports will influence purchasing decisions. Questions to ask include:

  • Do I manufacture (or purchase) products that contain any of these conflict minerals, in ways necessary to their functionality or production?

    - if so, have I evaluated the supply chain to identify the country of origin of these   materials to see if any come from the DRC or an adjoining country?

  • Have supplies and suppliers of conflict minerals been evaluated according to any broadly-recognized guidelines or evaluation mechanisms?

    - if so, which one(s)?

  • Has there been an independent third party audit of the evaluation process and its underlying data?

    - if so, by whom, and following what auditing procedures?

  • If any sources are not certifiable as DRC Conflict Free, am I searching for alternatives?

    - alternative supplies and/or suppliers?

    - alternative processes or products that can be certifiable?


About the Author

Jon Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 25 years. He was involved in developing 16 existing products, including Securities Law: A Guide to the 1933 and 1934 Acts and Greenhouse Gas Auditing of Supply Chains.

Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).

Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).

You may contact Mr. Elliott directly at:



Tags: Business & Legal, SEC, International