The GAO has recently issued its third annual report on conflict minerals. The GAO is required by Dodd-Frank to report annually on the effectiveness of the SEC’s conflict minerals rule in promoting peace and security in the DRC and adjoining countries (the “covered countries”) as well as on the rate of sexual violence in war-torn areas of the covered countries. (To read about last year’s report, see this PubCo post.) One sentence in the report says it all: “Our review of companies’ conflict minerals disclosures filed with SEC in 2016 found that, in general, they were similar to disclosures filed in prior years.” In light of the provision in the Financial CHOICE Act of 2017 that would repeal the Dodd-Frank conflict minerals mandate, you have to wonder if this will be the GAO’s last report on the topic? (See this PubCo post.)

The GAO found that a similar number of companies (1,230) filed conflict minerals disclosures in 2016 as in 2015 (1,281) and 2014 (1,321), with the small decreases likely attributable to acquisitions. About 97% of companies performed a reasonable country-of-origin inquiry, which was comparable to 2015 and 2014. Approximately 49% reported in 2016 whether the conflict minerals in their products came from the covered countries —the same as in 2015, but an increase from 30% in 2014.

In 2016, about 96% companies reported conducting due diligence, compared with 97% in 2015, with an overwhelming majority using the OECD framework.

SideBar: The GAO report noted that companies varied in the amount of information they provided in describing their due diligence efforts, leading the GAO to question whether some had actually failed to follow all the steps of the OECD guidance. The report cites as an example, the absence in some cases of discussion of all aspects of step 5, such as “steps taken to manage risks and efforts to monitor and track performance for risk mitigation.” An OECD official advised the GAO “that if a company is not able to complete a specific step, its public disclosure should indicate planned future action to complete the step.” However, SEC officials, while agreeing that companies must conform to all material aspects of the due diligence framework, “explained that some aspects of the framework’s requirements may not be material to company facts and circumstances for the purposes of their SEC filings. Under those circumstances, a company may not be required to provide an explanation of how its efforts conformed to the framework or why it did not complete any aspect of the framework, according to SEC officials.”

Not surprisingly, some company representatives and industry participants reported that the OECD guidance did not exactly dovetail with the requirements of the SEC rule, leading to “confusion about using the OECD framework to fulfill some of the SEC rule’s requirements and about the need to perform due diligence in addition to the RCOI. For example, they noted that the OECD framework includes a country-of-origin inquiry as part of due diligence, while the SEC rule presents the RCOI and due diligence as two distinct steps.” Perhaps, if the rule survives and nothing else is done, the SEC could at least clarify its rules to conform more closely to the guidance that has been almost universally adopted.

According to the GAO report, after conducting due diligence, about 55% of companies were unable to confirm the source of the conflict minerals in their products, compared with 67% in 2015. About 39% of companies indicated in 2016 that they were able to determine that their conflict minerals came from the covered countries or from scrap or recycled sources, compared with 23% in 2015.

Most significantly, just as in prior years, almost all of the companies that conducted due diligence reported in 2016 that they could not determine whether their conflict minerals financed or benefited armed groups in the covered countries. In the GAO’s sample, only one company stated that its conflict minerals did not finance or benefit armed groups in the covered countries and declared its products to be DRC conflict free. This company also filed an independent private-sector audit as required.

SideBar: Of course, under recent court decisions holding that, to the extent that the conflict minerals rule required companies to state publicly that any of their products have not been found to be “DRC conflict free,” it violated the First Amendment, as well as related statements from Corp Fin, companies have not been required to state that conclusion. (See this PubCo post, this PubCo post and this PubCo post.)

Of the companies that filed Form SD in 2016, only 19 companies included an IPSA, compared with six in 2015 and four in 2014.

The GAO also reported that, to improve their due diligence efforts, companies indicated that they were planning to:

  • “examine products and supply chain for additional risks, such as by gathering missing information;
  • contact suppliers to encourage conflict-free sourcing, such as by sharing a conflict-free sourcing policy or encouraging participation in conflict-free certification programs; and
  • work directly with suppliers to help support their conflict-free sourcing, such as by providing hands-on training.”

According to the GAO, although companies continued to experience the same challenges as in prior years related to the complexity of their supply chains, some improvements in standardization of data collection processes were reported. In addition, some company representatives noted that the process had the benefit of increasing awareness both internally at their companies and among their suppliers of the use of conflict minerals.