Two consulting firms, Assent Compliance and Source Intelligence, have published their studies on conflict minerals (tin, tantalum, tungsten and gold) reporting for 2015, the third year of required SEC reporting. For 2015, there were slightly over 1,200 filers, representing a decrease of about 50 filers from the prior year (reflecting business combinations, going-privates and other activity, offset in part by new filers). Both studies conclude that, while the level of transparency has increased, after three years of due diligence and reporting, the vast majority of reporting companies are still unable to determine the origin of the conflict minerals that were necessary to the functionality or production of their products, let alone whether they contributed to financing armed groups in the DRC or contiguous countries.

Assent concluded that the most widespread deficiency in reporting was the failure to report the countries of origin of the conflict minerals. According to Assent, 65% did not report this information. Second on the list was a failure to identify the smelters or refiners (SORs) that processed the company’s conflict minerals, with 43% of filers not complying with this requirement (although this percentage reflects an improvement of 15% from the prior year). SI reported slightly different data, indicating that over 50% failed to identify smelters and refiners. As Assent observes, the availability of this data depends largely on the success of organizations such as the Conflict-Free Sourcing Initiative in identifying these facilities and providing assurances about their conflict-free status. Assent reports that the CFSI is

“coming close to fully capturing the ‘SOR universe’ and accounting for the assurance accorded to each SOR. To date, 59% (83 out of 140) of the world’s gold refineries, 69% (61 out of 88) of the world’s tin smelters, 98% (47 out of 48) of the world’s tantalum smelters, and 73% (35 out of 48) of the world’s tungsten smelters are fully CFSI compliant. Many other SORs are active in the CFSI program, i.e. in the pipeline towards obtaining assurance. With other entities such as the London Bullion Market Association (LBMA) and the Responsible Jewellery Council (RJC) also providing SOR-tier assurance in concert with the CFSI through mutual recognition agreements, the non-verified SOR bottle neck is narrowing. Indeed, one can talk of a critical mass of CFSI compliant SORs.”

According to SI, about 50% of companies reported their supplier response rates. Of companies reporting that data, the average supplier response rate was 83%. However, because there is no requirement to report response rates, it is possible that companies with poor levels of response elected not to disclose that information. SI also reports that 62% of filers indicated that they were assisted in designing and implementing their due diligence inquiries by third-party service providers. Assent reports that 82% of filers used the CFSI conflict minerals reporting template to solicit the required data through their supply chains.

About 81% of filers included conflict minerals reports as exhibits to their Forms SD, which means that they concluded that the conflict minerals in their products either originated in the DRC or contiguous countries or that they had insufficient information to determine where the minerals originated. However, Assent reports that some SD-only filers should have filed a CMR; apparently, they confused a determination that their conflict minerals were processed at validated conflict-free smelters (CMR could still be required) with a determination that their conflict minerals did not originate in the covered countries (no CMR). According to SI, the average length of CMRs in 2015 almost doubled to 11 pages from an average of 6.6 for 2014, which SI believes reflects increased transparency, including more information about company policies and future actions to improve due diligence and reporting.

Interestingly, according to SI, only 9% of filers expressly reached the conclusion that their products were “DRC conflict undeterminable,” down from 29% for 2014, while 70% of filers did not state any determination. As discussed in this PubCo post, for reporting on 2015, the Corp Fin staff maintained its guidance that, in light of continuing litigation (see this PubCo post), no determination as to conflict status was required. Taking a different approach to characterizing these conclusions, Assent found that the majority of all CMR filers (63%) reported, either explicitly or implicitly, that their products were “DRC conflict undeterminable,” indicating reasons for the “undeterminable” conclusion such as incomplete or unreliable due diligence information, lack of supplier cooperation or the absence of any legal requirement (per the Corp Fin guidance) to reach a conclusion.

The number of independent private sector audits increased for 2015, but continued to be rare, as Corp Fin maintained its guidance that no IPSA was yet required unless a company voluntarily identified a product as “DRC conflict-free.” (See this PubCo post.) SI reported that 19 IPSAs were performed for 2015, up from six for 2014. However, only 11 companies voluntarily characterized a product as “DRC conflict-free,” and two of those failed to provide IPSAs. Assent reports that 12 companies characterized a product as “DRC conflict free,” but did not furnish an IPSA, and that five of the 19 companies that performed IPSAs did not identify a product as “DRC conflict-free.” Assent reports that 100 companies implied that they were “DRC conflict-free,” a practice that, unless an IPSA is included, was expressly discouraged by Corp Fin Director Keith Higgins (see this PubCo post).

According to Assent, 77% of the filers were manufacturers; SI categorizes only 47% as manufacturers, presumably reflecting different industry characterizations. Assent also reports that, for 2015, the affected industries had a combined revenue of $9.7 trillion, slightly more than half the US GDP. For those interested in industry-level data, SI provides some of its data organized by industry, specifically manufacturing, electronics, apparel and retail, biomedical, business services, telecom and oil and gas.

SideBar: Assent also observes that one unrelated result of conflict minerals due diligence and reporting is that some companies may be disclosing potential trade violations conducted indirectly through their supply chains — albeit perhaps many tiers removed — with embargoed or sanctioned countries or persons, such as North Korea and (North) Sudan. Similarly, some companies disclosed indirect interaction with “Specially Designated Nationals and Blocked Persons,” such as gold refiners in Zimbabwe funded by companies sanctioned by the Treasury’s Officer of Foreign Assets Control (OFAC).

But are these efforts having any effect? Results have been mixed, depending on your point of view. (See this PubCo post and this PubCo post.) As discussed in this Bloomberg article, most recently, a report by a UN group of experts to the UN Security Council, published June 16, indicated that “[i]nternational regulations aimed at curbing the trade in so-called conflict minerals have failed to stop rebel groups and elements of the army in eastern Democratic Republic of Congo profiting from gold mining in the region… The lack of a functioning traceability system for gold is a ‘particular area of concern,’ the panel, which monitor sanctions on the Congo, said in [the report.] ‘Gold from non-validated mining sites, and therefore possibly benefiting armed groups, is laundered into the legitimate supply chain and, subsequently, into the international market,’ it said.” Apparently, soldiers from rebel armies enforce taxes on dredge owners and on miners entering the mines and bringing out ore. The programs developed for the three Ts — tin, tantalum and tungsten — have been more effective, having “reduced opportunities for armed groups, of which at least 60 continue to operate in eastern Congo, to profit from trade in the minerals. No comparable program has been introduced for gold, which is more transportable and more valuable, leading to an increase in illegal gold mining.” As reported, UN experts found that due diligence requirements to source gold from validated mining sites are being ignored, as metal sourced from multiple sites, some of which have not been validated as conflict-free, is aggregated together with conflict-free gold. In addition, under-declaring exports is “‘enabling the laundering of illegitimate gold that is not conflict-free into the international supply chain,’ according to the report.” In 2015, gold exports were “under-declared by at least $174 million.”