September 26, 2013 Fast Approaching

Volume 16 | Issue 8

Next May marks a big month for many manufacturers: That’s the deadline for companies to reveal whether they’re using minerals that help fund

The clock is ticking on a deadline that is forcing manufacturers to reveal whether or not their products contain certain minerals that help fund genocide in the Democratic Republic of the Congo and other conflicted areas.

And now that a U.S. Federal Court judge has upheld the rule, implemented last year, potentially affected companies must not delay in determining whether the law applies to them and conducting the necessary due diligence to meet the reporting requirements.

“Companies that were waiting for the court ruling are now realizing that they will likely end up having to report,” says Kimberley Anderson, a partner at Dorsey & Whitney, where her practice specializes in the areas of corporate finance and securities.

“It’s a daunting process that cannot be put off,” she says. “They should have started the process long before now. If you’re a company that’s procrastinated, honestly, you may have to scramble to prepare. This isn’t something businesses can put off anymore.”

The rule, in essence, mandates that manufacturers disclose whether their product contains “conflict minerals” from the DRC and its adjoining countries, and if so, whether those minerals financed or benefitted an armed group in one of those countries.

In essence, the SEC – via a law implemented by Section 1502 of the Dodd-Frank Act – put a May 2014 deadline requiring U.S. reporting companies to disclose whether or not some of the materials used in their products are “conflict minerals.”

These minerals include tantalum, tin, tungsten, and gold (or 3TG) that are mined in areas where armed conflict and civil rights abuses happen every day.

“I call it the Hester Prynne problem,” she adds in an interview with Industry Today. “Companies are not required to establish supply chains to ensure their products are “conflict-free,” but we are going to make the manufacturers wear scarlet letters if they can’t comply. It’s public policy through public shame.”

And if manufacturers who are required to report do not comply with the rules, she adds, they may be subject to liability under federal securities laws.

“Procrastination is not an excuse for the SEC,” Anderson says. “The law covers foreign private issuers, small reporting companies – and unless you’re a brand new public company, it’s pretty much going to cover you if you’re a reporting company.”

And since many private companies supply products to public companies – or they supply products to private suppliers who then supply those same products to public companies – the aforementioned rule affects both public and private manufacturers.

“This is going to be a time-consuming process for everyone at all levels of supply chains, so it’s better to get ahead of the game now than to wait until the last minute,” she says.

Anderson says an appeal of the July court ruling, on behalf of the U.S Chamber of Commerce, the Business Round table, and the National Association of Manufacturers, has been filed, but a decision on that isn’t likely before 2014.

DOES YOUR COMPANY USE SUCH MATERIALS?
Anderson says many manufacturers do not realize they’re using conflict minerals sourced from the DRC or adjoining countries in their products – and now that the deadline is less than a year away, they’re scrambling to find out if they are.

While determining whether your manufacturing firm needs to adhere to this law is a thorny, drawn-out legal process, Anderson outlined a brief synopsis of how to go about it.

First, she says, each manufacturer must determine which of their products contain any 3TG or require 3TG in their manufacturing process, and if so, are the conflict minerals necessary to their functionality or production.

Then, the manufacturer needs to determine whether the conflict minerals used may have originated from the conflict region – the DRC and its neighboring countries – or whether they came from scrap or recycled sources. This step is regarded as the “reasonable country of origin inquiry.”

Manufacturers will be required to undertake additional review and disclosure if they know, find out, or have reason to believe that they have conflict minerals that originated in the aforementioned region and did not come from recycled or scrap sources. It’s vital that a company assess supplier-provided data to ensure it is complete and accurate when preparing the Form SD and Conflict Minerals Reports to the SEC.

“It has to be in conformance with a national or an international due diligence framework,” Anderson says.

Likewise, warning signs cannot be ignored, Anderson says.

“Keep in mind, if a supplier gives you a report that you just know is wrong or you strongly suspect is wrong, you can’t ignore that red flag,” she explains. “As much you’d like to, you’re not allowed to shut eyes to the obvious problems.”

Ultimately, the manufacturer will have to prepare and submit documentation claiming one of the three about its products:

• DRC Conflict Free;
• Not Been Found to Be DRC Conflict Free;
• DRC Conflict Undeterminable.

That last category, Anderson says, is only available on a temporary basis of two years – or four years for smaller reporting issuers. This response, she adds, may be the most common reply.

“Considering there are thousands of small mines all around, trying to track the source of ore, smelters, and other minerals that come out of that area is going to be very hard to do,” Anderson says. “It’s going to be difficult for a lot of manufacturers to able to say anything other than ‘conflict undeterminable.’”

HERE TO STAY
The process is taxing, expensive, and far more complicated and drawn-out than the above synopsis. Altogether, it will cost manufacturers, of varying sizes and industries, billions of dollars to complete.

But Anderson says get used it. This is not a one-time, one-country event.

“The EU is now considering legislation that may be even broader than Dodd Frank,” she says. “Canada is considering passing similar laws. States such as California and Maryland have imposed restrictions on doing business with companies that violate Section 1502 of Dodd-Frank.”

In essence, corporate transparency, particularly in its supply chain, will not be a come-and-go trend. All manufacturers will not only need to take into account what materials they need but also where they come from, particularly in respect to the environmental and social aspects of its region.

And every player – large and small, public and private, domestic and international – will need to play along.

“Even if all of this overturned in the U.S., it is likely going to be imposed on companies elsewhere in the world,” she explains. “You are not going to escape it. It is inevitable.”

It’ll be daunting at first, but once it’s implemented, manufacturers will be able to better manage the risk of their reputation and their supply chain, socially and environmentally.

“There is actually an upside,” Anderson says. “It’s not all just cost expense and heartache. There is actually some significant benefit to companies that come out of this supply chain review process. With efficiencies in your supply chains, you can save money, minimize risks, and figure out the best and simplest way to do business and move products.

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