In August 2012, a new set of federal regulations was issued that could affect all companies involved in the manufacturing of everyday consumer products, including cell phones, computers, canned goods, electrical equipment, solder, and jewelry. The regulations address the use of “conflict minerals” in these products, and will have far reaching consequences on all companies—large and small, public and private—involved in these industries.
Like the conflict diamonds laws previously enacted, the new conflict minerals rules have humanitarian goals. The Democratic Republic of the Congo (DRC) and surrounding areas in Africa have long been plagued by civil wars and conflict leading to numerous human rights violations. Through the use of terror, rebel groups in the region have killed, enslaved and displaced millions of people.
In the 1990s, atrocities taking place in the region were primarily financed by the sale of rough diamonds mined by slave labor. Human rights groups brought public awareness to the situation which ultimately led to the passage of laws prohibiting the purchase of uncertified rough diamonds. The results curtailed human rights abuses in a number of areas surrounding the DRC.
These human rights groups continued to monitor the situation in the region and discovered that the mining and sale of rare earth and other valuable minerals are now financing conflict. These minerals include gold, tantalum, tin and tungsten.
Because these minerals, unlike diamonds, are used in everyday consumer goods, often in small quantities, the method employed to curtail their use is different. Rather than banning conflict minerals, the new regulations require publicly traded companies to file another yearly report on their use of conflict minerals with the Securities and Exchange Commission (SEC). The regulations require companies to certify whether the products they manufacture, import or sell contain any of these minerals sourced from conflict mines in the DRC and surrounding areas.
To comply, companies will have to review their supply chains to determine whether any of the consumer products they manufacture and sell contain even a tiny fraction of the conflict minerals. The actual mine from which the minerals are sourced also must be disclosed. Plus, an independent audit of the company’s conflict minerals report is required, and the report must be published on the company’s website.
If the minerals used are not sourced from the DRC, the inquiries made must still be briefly described, and the term “Conflict-Free” may be stated on the company’s website. The first disclosure report is due in May 2014 (for the 2013 calendar year) and annually every year thereafter.
Public companies who fail to properly report are subject to the full range of SEC reporting penalties, including injunctive, and civil and criminal penalties. Moreover, the regulations may influence consumer purchasing decisions that could provide even greater incentives for businesses to comply and entirely eliminate conflict minerals from their supply chains.
The pressure to source conflict-free also will be placed on smaller private firms acting as suppliers to publicly traded companies. Very likely, these private companies will be pressured by their customers to review their supply chains to determine the source of any minerals they use or supply to others.
The language used in supplier contracts may be altered to closely mirror the language of the regulations, and customers may want their suppliers to certify that the components they provide do not contain conflict minerals. In these circumstances, private companies also may need to audit their own supply chains, and change their sources.
Many businesses believe it will be difficult and costly to track minerals back to their origins. In fact, studies indicate that the costs of compliance could be as high as $16 billion. To share some of these expenses, a number of companies have joined forces to develop solutions to more easily comply with the regulations.
Since companies had advanced notice that these regulations would be implemented (the SEC regulations provide specific rules for a conflict minerals law Congress passed in 2010), many have already begun implementing conflict-free corporate policies. In addition, many large electronics companies have actively participated in the development of a smelter auditing program, an aid project for under-producing smelters, tracing projects for supply chains, and projects to help the DRC develop a clean minerals trade.
The smelter auditing program, developed by an electronics manufacturing association, seeks to certify mining operations, and in turn, promote business activity for the legitimate miners, as well as to improve the economic welfare of the African people. Thus, within the last year and a half, the Conflict-Free Smelter Program has certified 20 tantalum, tin and gold smelters.
Some have suggested that for the smelter auditing program to be successful, companies should require their suppliers to only purchase from conflict-free smelters. Some companies have put such requirements in place, but have not yet begun enforcing them. Now that the SEC regulations have finally come out, many more companies may consider requiring their suppliers to source only from audited smelters.
Manufacturers and suppliers of both products or components that embody conflict minerals can no longer ignore the need to trace the minerals used. They also face a real possibility that they will be required to source minerals conflict-free. If your company uses these conflict minerals in any way, you would be wise to review your supply chain, and immediately address this issue.
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