Development International has posted its most recent Conflict Minerals Benchmarking Study, analyzing the results of filings for the 2016 filing period. The study looked at filings submitted by the 1,153 issuers that had filed conflict minerals disclosures as of July 10, 2017. The number of issuers filing disclosures for 2016 reflected a decline of 5.6% compared to 2015. Most interesting, however, is that, notwithstanding statements from Corp Fin, echoed by the Acting SEC Chair at the time, advising companies that they would not face enforcement if they filed only a Form SD and did not include a conflict minerals report, the vast majority of companies continued to file conflict minerals reports.
Compared with last year, only 125 companies did not file a CMR and, of those, 95 did not file anything at all and just 30 filed only a Form SD (which may or may not have been in response to the Corp Fin guidance). In addition, while, according to the criteria established by the study, companies appear to have improved their technical compliance with the reporting requirements, only a handful of companies were able/willing to expressly conclude that any of their products were conflict-free, and the level of reporting of key information—in particular, identification of the applicable smelters or refiners and the countries of origin of the conflict minerals—did not improve appreciably over the prior year.
On April 7, 2017, Corp Fin issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule, which provided substantial relief to companies subject to the rule. You may recall that, in that case, the Court held that a part of the conflict minerals rule violated the First Amendment. Corp Fin’s Updated Statement advised that companies would not face enforcement if they performed only a reasonable country-of-origin inquiry and filed only a Form SD and did not conduct detailed supply-chain due diligence or prepare and file a conflict minerals report (Item 1.01(c) of Form SD) or have an audit performed—even if they would otherwise be required to do so under the rule. In a separate Statement, Acting SEC Chair Michael Piwowar commented that the “primary function of the extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals set forth in paragraph (c) of Item 1.01 of Form SD is to enable companies to make the disclosure found to be unconstitutional. In light of the foregoing regulatory uncertainties, until these issues are resolved, it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.” (See this PubCo post.) In addition, Corp Fin’s Updated Statement noted that, in response to the invitation of the Acting Chair (see this PubCo post), the SEC had received a number of public comments requesting additional relief and further guidance on the rule. Piwowar indicated in his Statement that he had instructed the staff to work on a recommendation for future action, taking into account the public comments received. He also noted that “the Department of State has recently requested comment on how best to support the responsible sourcing of conflict minerals.” The action by the State Department could portend a serious reworking of the rule from a different perspective. (See this PubCo post.) In addition, the future of conflict minerals reporting could be entirely in jeopardy: the Financial Choice Act of 2017 would repeal the applicable Dodd-Frank mandate, although its prospects of passage in the Senate are, at this point, dim. (See this PubCo post and this PubCo post.)
There was, however, progress made in validating as conflict-free smelters and refiners of 3TG. As of June 30, 2017, the report indicates that 100% of identified worldwide tantalum smelters were participating in the Conflict-Free Smelter Program of the Conflict-Free Sourcing Initiative, with tungsten smelters at 93.5% and tin at 90.4%. The laggard appears to be the gold industry, significantly behind at 70.7%. The report attributes the low levels of participation by gold refiners to many causes, including the vast and diversified web of buyers and middlemen in the gold sector, many of whom obscure the true origin of the metal, the delay in introduction of initiatives to trace gold from DRC mine sites to the point of export, and the ease of refining gold (relative to the 3Ts), making it more difficult to tag through chemical analysis and more susceptible of being characterized as recycled gold. operations. Also, 3T ore can be “fingerprinted” before smelting, whereas gold cannot. In addition, several significant jurisdictions that govern buyers/sellers of gold do not have due diligence frameworks in place, and gold smuggling “is politically tolerated or effectively incentivized through price differences.”
According to the study, the largest compliance obstacle continued to be the disclosure of smelter/refiner facilities and country-of-origin data, with the level of reporting remaining substantially unchanged from the prior year. The data showed that, for 2016, 43% of CMR filers did not identify the smelters/refiners used to process their necessary conflict minerals, the same percentage as for 2015, but an improvement over the 2014 level of 58%. And, for 2016, 66% of CMR filers did not report the countries of origin of their conflict minerals—an aspect that would seem to be important to the ultimate analysis—compared to 65% for 2015 and 67% for 2014.
In its evaluation, the study applied its 7-point SEC compliance criteria to 241 Form SD-only filers and its 15-point compliance criteria to 911 Form SD-and-CMR filers. The study also applied separate OECD-related criteria. The findings showed that, according to the study’s criteria, due diligence efforts (the OECD five steps) improved by eight percentage points over the prior year.The study also found that 19% of “CMR filers had 100% compliance, and 79% were at or above the 75% compliance threshold. In all, CMR filers averaged a compliance score of 84%, an improvement of 5 percentage points over the previous reporting period. Nine percent (9.6%) of CMR filers did not attain an SEC compliance score of or above 75%.” Categorized by industry, the study found that companies in the computer communications equipment industry had the highest compliance scores, with an average compliance of 90%, followed by the semiconductors and related devices industry at 87.9% and the printed circuit board industry at 87.8%.
According to the SEC guidance, companies were still not required to have an independent private-sector audit performed unless they characterized any of their products as “DRC conflict-free.” As a result, only 16 companies had IPSAs performed, four of which did not specify that any products were DRC conflict-free. On the other hand, nine companies filing CMRs characterized a product as DRC conflict-free, but did not provide the required IPSA. The study indicated that 21% of CMR filers implied that their products were DRC conflict-free, but also explicitly denied that conclusion (presumably to avoid the IPSA requirement).
Companies cited as problems related to their due diligence inquiries uncooperative suppliers, incomplete due diligence inquiries and potentially unreliable supplier information, among other things. Interestingly, with regard to unreliable supplier data, the study listed a number of countries that were identified by CMR filers as countries of origin even though that designation seems implausible; the most recent USGS Mineral Yearbooks indicated that these countries had no known deposits of cassiterite, columbite-tantalite, wolframite, or gold: Belarus, Belgium, Bermuda, France, Hong Kong, Hungary, Israel, Italy, Luxembourg, Netherlands, Singapore and the UAE/United Arab Emirates.
Despite these efforts, the security situation in the region remains grim. The report indicates that, with regard to political and security developments in the region, the “DRC is host to the most expensive peacekeeping operation in history, yet the government and international peacekeepers struggle to contain outbursts of armed conflict and atrocities in the DRC. The security condition remains precarious. Between mid-2016 and mid-2017, 1.3 million people have been displaced and more than 600 schools have been attacked or destroyed, affecting an estimated 1.5 million children.