The European Union’s proposed conflict-minerals legislation is likely to cast a much wider net than the Dodd-Frank Act in the U.S., experts say. Not only may the EU requirement add elements to the list—such as cobalt—but it may encompass any country or region that is perceived to be violating human rights.
“The European conflict minerals regulation is aligned in many ways with the U.S. regulation but actually extends the geographic scope to consider all areas of conflict and high risk where conflict minerals are sourced,” said Scott Wilson, content solution strategist for the Electronics & Media Group at IHS, a panelist on the IHS/iPoint webinar “Conflict Minerals Compliance: Mistakes, Lessons Learned & Best Practices.” “It no longer pays special attention just to the [Democratic Republic of the Congo (DRC)].”
That’s not the only adjustment the EU may make: instead of a voluntary self-certification program for conflict minerals disclosure, the EU may mandate measures such as third-party audits, he said. In May members of the European Parliament requested mandatory certification for EU importers of conflict minerals to ensure they do not fuel conflict and human rights abuses. Their position includes compulsory independent and third-party audits of smelters and refiners to check due diligence. Members further proposed that the 880,000 downstream European companies that use conflict minerals in manufacturing consumer products provide information on the steps they take to identify and address conflict mineral risk in their supply chains.
The Dodd-Frank conflict minerals rule requires publicly traded U.S. companies to disclose whether their products contain certain metals (tin, tantalum, tungsten, or gold) and whether these metals originate from rebel-held mines which are funding armed conflict in the DRC. The measure is intended to discourage companies from sourcing these materials from regions in which human rights are routinely violated.
The EU developments are especially significant in light of where many U.S. companies stand today. The number of companies – less than 20 percent of issuers--that filed conflict minerals compliance documents in 2014 to the Securities and Exchange Commission (SEC), which oversees the U.S. regulation, was significantly lower than expected. It could be that fewer companies were actually impacted by the regulation or, since the provision is still being challenged in U.S. courts, some companies are holding off on filing. However, the past year was a transitional period, said Marc Church, president of U.S. Sales & Operations for iPoint Inc. This year “the training wheels come off.”
It’s become abundantly clear, said Jared Connors, technical sales manager for material compliance, sustainability and conflict minerals for iPoint, that the compliance process is impacting companies that don’t have to file with the SEC. “The information [regarding conflict minerals] comes from the supply chain, yet the majority of supply chain companies have no direct connection to the law and therefore have no obligation the be familiar with the requirements.” A lot of disparate data ends up with the filers, he said. “This is an annual audit you have to do each year—and you have to show improvement year after year. In 2015 you are going to have to demonstrate you know more about your sources than you did in 2014.”
The quality of the data flowing to the SEC filers is a matter of ongoing concern. For example, iPoint panelists said, many OEMs push their audits down to their partners but the data comes back incomplete, not up to date, or incorrect. Although an audit may contain a smelter’s name, demonstrating the smelter is conflict-free is difficult. Many companies that don’t actually mine or process conflict minerals are included because they do some kind of metal smelting. However, as the intent of the Dodd-Frank Act is transparency, said Connors, partners should send any and all information to the filer. “Provide the information no matter who the smelter is—no matter how odd it seems,” he said.
The distribution channel in particular is a concern for some filers. As distributors do not manufacture the components they sell, many refer OEM customers to data their suppliers have filed or have provided online. “This represents a misalignment between the physical supply chain and the information chain,” said Wilson. “The regulation really addresses suppliers, but in the case of electronics in particular, distributors are selling products on behalf of [original component manufacturers] and don’t collect [conflict minerals] information. Distributors may not have a system to address specific questions and they have to pass those on to the OCM. We have had more success going directly to OCMs. Assuming you have the part number you will get responses more quickly and you will get an opportunity for follow-up.”
Although the SEC has not yet made its position clear on the consequences of noncompliance, the agency has a history of enforcing its rules, panelists agreed. “The SEC has a history of ‘if you don’t file we will come after you,’” said Joe Mont, staff writer for Compliance Week.
If there was one takeaway from the webinar, panelists concluded, it’s that data and data-quality are going to play an increasingly important role as global conflict minerals efforts evolve. In addition to regulations such as those in the U.S. and EU, public perception is playing a role in sourcing decisions. Companies are going to have to demonstrate they are not sourcing from troubled areas and if they are, provide steps to correct the situation.
The panel recommends companies use a systematic approach to their conflict minerals compliance efforts. Both IHS and iPoint provide conflict minerals consulting services and iPoint provides an integrated reporting platform. A number of components to compliance efforts, such as the Conflict-Free Smelter Program and the Conflict Minerals Reporting Template, have been established by the Conflict-Free Sourcing Initiative. Both elements are included in the iPoint platform. The Organization for Economic Co-operation and Development also provides guidelines and tools for reporting requirements. "If you follow these, you should be well aligned," panelists concluded.
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