When the SEC proposed rules on the conflict minerals requirements of the Dodd-Frank Act, it indicated that the statutory provision contemplates that issuers must use due diligence in their supply chain determinations. It also indicated at that time that it would not be appropriate for the SEC to prescribe any particular guidance for conducting due diligence because the conduct undertaken by a reasonably prudent person may vary and evolve over time. The SEC stated however that that an issuer whose conduct conformed to a nationally or internationally recognized set of standards of, or guidance for, due diligence regarding conflict minerals supply chains would provide evidence that the issuer used due diligence in making its supply chain determinations. The SEC also noted that the Organisation for Economic Cooperation and Development, or OECD, is developing due diligence guidance for conflict mineral supply chains. The US State Department subsequently endorsed the OECD framework.
The OECD recently issued a report the objective of which was to establish a baseline of current due-diligence practices of downstream companies, meaning the smelter to the final product. A separate report was issued on “upstream companies,” meaning the mine to smelter supply chain which is not discussed here. It is anticipated that this is the first of three reports that will be issued over the next ten months as part of the pilot implementation of the OECD’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas and the Supplement on Tin, Tantalum, and Tungsten (the three metals are referred to as the 3Ts in the report).
The pilot implementation of the OECD Guidance focuses on how companies implement due diligence in the supply chains of tin, tantalum, and tungsten, especially as the due diligence relates to minerals potentially sourced from Africa‘s Great Lakes Region. The pilot is intended to test and assist with the implementation of the Guidance’s 3T Supplement, share information, and discern best practices, tools, and methodologies for implementing the Guidance. The following companies have allowed their names to be publicly disclosed as participating in the pilot program to some extent or another: Alcatel Lucent, Alpha (Cookson), Boeing Company, Circuit Connect, Epic Technologies, Flextronics, Ford Motor Company, Foxconn, Freescale, General Electric Company, Lighting Division, Hewlett Packard, KEMET, Lockheed Martin Corporation, Nokia, Oracle, Panasonic Corporation, Royal Philips Electronics, Siemens, Texas Instruments, TriQuint and UNISEM.
The report notes that since the SEC rules on Section 1502 of the Dodd-Frank Act are still pending, many companies participating in the pilot who are subject to Dodd-Frank Act requirements are taking risk-averse approaches that fall roughly into two categories:
- One set of companies are moving aggressively to verify their supply chain as conflict-free as soon as possible.
- The other approach is to wait before making any significant investments in due diligence until U.S. Dodd-Frank legal requirements are clarified in the SEC rules.
The report speaks to the complexity of company mineral supply chains (in some instances up to nine layers deep from the company to the smelter), which makes obtaining information a challenge. Most companies only have visibility into their immediate (Tier 1) supply base, with some having visibility into Tier 2.
Not surprisingly, participants are having difficulty in receiving information from suppliers. One participant noted “Suppliers indicate to us that they estimate the quality of the data received from their (sub-tier) suppliers as limited, and that they have no means to validate that the provided information is correct and complete. We do receive reporting templates filled out by suppliers for which we have our doubts whether the data is correct. Sometimes there are obvious contradictions in their statements . . . An unexpectedly large part of the suppliers are declaring that they are not using any of the 3Ts in their products/components. Suppliers might want to give (us) as the customer the “right/correct” reply, and they might not always be willing to share all the information and feel the risk of losing business when their answers are not in line with what they think (we) want to hear.”
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