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Electronics businesses that believe the so-called “conflict minerals” provision of the U.S. Dodd-Frank Act no longer applies to them should think again. Although SEC Acting Chairman Michael Piwowar recommended in April that the Securities & Exchange Commission not enforce the provision -- which requires companies to disclose the origin of tungsten, tin, tantalum and gold (3TG) in their manufactured products – his authority to do so is being challenged in the U.S. Senate. For now, the disclosure mandate still stands.
Even if the rule was thrown out in the U.S., electronics companies would still face compliance to a similar measure in the EU. In May 2017, the European Union passed its own conflict minerals regulation, which requires all but the smallest EU importers of 3TG and their ores to perform due diligence on their suppliers worldwide. The legislation exceeds Dodd-Frank by requiring diligence on minerals sourced from all regions of the world—not just high-risk nations such as the Democratic Republic of Congo (DRC). Rebel factions in the DRC have enslaved miners and have used the proceeds from the sale of ore to fund terrorist activities. Dodd-Frank, and now the EU measure, seek to curtail those practices.
For the third year in a row, Development International has benchmarked compliance to the Dodd-Frank conflict minerals provision that applies to publicly traded companies. As of July 10, 2017, 1,153 issuers filed a conflict minerals disclosure (CMD) describing their due diligence on conflict minerals in their supply chains. That’s a 5.6 percent drop in companies filing a conflict minerals disclosure compared with reporting year (RY) 2015. This percentage is slightly higher than prior years, which saw an average filing decrease of 4 percent. "No doubt Piwowar played a role in setting expections for some companies," said Dr. Chris Bayer of Development International. "Surprising, however, is how small that decline was."
Electronics companies have continued to demonstrate a high level of compliance. Most of the businesses impacted by Dodd-Frank are in manufacturing. The most compliant subsectors of that group are the computer and communications equipment industry – which registered an average compliance of 90 percent -- and the semiconductor and related devices industry which averaged 87.9 percent. Printed circuit board makers averaged 87.8 percent. "The electronics industry does deserve recognition here," said Bayer.
Even though these sectors are among the heaviest users of 3TG, Bayer said consumer pressure and social responsibility awareness also play a role in compliance motivation. "[These companies] are highly visible, being consumer-facing, and in this high-tech age of ours are also quite profitable. They were also the object of the Conflict Free Campus and Enough campaigns," he said.
The report benchmarks the latest compliance filings with the SEC Final Rule and conformance with the Organization for Economic Cooperation and Development (OECD) Due Diligence Guidance. One hundred and twenty-five (125) issuers did not file a RY 2016 Conflict Mineral Report (CMR) which had done so for the previous year. Thirty of these 125 former CMR filers did submit a specialized disclosure form, whereas 95 did not file anything for RY2016. Yet the great majority of companies continued to file according to their existing compliance obligations. "The main take-away for me was that after seven years since the passage of Dodd-Frank -- and in spite of the headwinds -- there is considerable momentum behind conflict minerals due diligence," Bayer said.
Companies are not required to obtain an Independent Private Sector Audit (IPSA) on their necessary products unless they opted to use the explicit "DRC Conflict Free" determination after exercising due diligence. Still, 16 companies -- many of them in the electronics industry-- commissioned an IPSA for RY2016. 
Twenty-one companies described one or more of their products containing 3TG as "DRC Conflict Free." Nine CMR filers stated a product containing 3TG was "DRC conflict free," but did not furnish the required IPSA. 
In all, three companies earned a perfect score on both SEC compliance and OECD conformance. "Three hundred thirteen companies – one quarter of all filers – earned at least 75 percent on the combined SEC-OECD score," according to Bayer. "That's almost three times more than what it was last year -- for RY2015 it was 116 companies." In general, the study finds that the majority of companies subject to Dodd-Frank Section 1502 remain committed to conflict minerals due diligence. "Keep in mind: the more 3TG due diligence and supply chain engagement, the cleaner U.S. supply chains are," Bayer added.
Development International notes that there has been significant progress among businesses, NGOs and governments in developing systems that aid compliance efforts. The Conflict Free Sourcing Initiative (CFSI), a group of 360 member companies and associations including Electronic Industry Citizenship Coalition (EICC) and Global e-Sustainability Initiative (GeSI) members, has:
- Created a smelter or refiner (SOR) assurance system. The concept of the Conflict Free Smelter Program (CFSP) was first agreed upon in December 2009 – an assurance system in which the first conflict-free designation was awarded in December of 2010. As of June 30, 2017, tantalum smelters lead the pack, with 100 percent of identified worldwide tantalum smelters participating in the program. The tin and tungsten SORs are almost tied at second place, while the gold industry noticeably lags.
- Stipulated an SOR audit policy. Starting in the fall of 2010, SORs sourcing from the covered countries would have to demonstrate that their sourcing practices and management systems were in alignment with the OECD Guidance to meet the CFSP’s requirements.
- Identified a universe of smelters and refiners.
In a matter of years, the CFSI turned an extremely opaque market into an increasingly transparent one, Development International reports. With sufficient downstream engagement, responsible mining and sourcing initiatives may be further scaled up and matured. SORs may obtain responsibly sourced raw material through many upstream programs which provide traceability information accompanying the material.
The largest third-party verification system, in terms of 3T volume, is the ITRI Tin Supply Chain Initiative (iTSCi) program. Run by UK-based ITRI Ltd, iTSCi facilitates the responsible production and trade of 3T. Its mechanism relies on the following components:
- Chain of custody (traceability including bar-coded tags, added to each bag of minerals at the first two steps of the supply chain: extraction and processing);
- Risk assessment (homing in on the supply chain operators, the operating context, the mine sites and transportation routes through field visits, document verification, whistle-blowing mechanisms through local stakeholder committees, and data analysis);
- Publicly-available incident reporting at the local level, with documentation of the incidents and related corrective actions taken;
- Independent third-party audits of all supply chain operators each year.
A UN group of experts has recognized that illegal activity has been reduced where the iTSCi due diligence program was introduced.
There are other tangible measures of success. In the DRC, conditions for miners in tin, tungsten and tantalum (3T) have noticeably improved. A 2015 International Peace Information Service (IPIS) survey found of 2,026 artisanal mining sites surveyed, 80 percent of the artisanal miners work on a gold site; the 3T minerals sectors employ an estimated 16 percent of the miners. IPIS found that 79 percent of 3T miners surveyed worked in conflict-free mines.
Watchdog mechanisms in the form of monitoring and traceability initiatives provide necessary transparency and credence to claims of “responsible 3TG,” according to International Development. However, in the long run, each system’s business model will need to stand on its own without donor funding, and programs must be feasibly supported by local market mechanisms to be sustainable. "In terms of impact in-region -- pivotal is the quality of the due diligence companies carry out," Bayer said. Downstream-upstream cooperation, pre-competitive, joint audit initiatives, and limited overlap/competition between monitoring and traceability initiatives are steps in that direction.
