Conflict Minerals Due Diligence: Using a Risk-Based Approach

by Source Intelligence

on July 18, 2014

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act, 2010) requires publicly-traded companies in the U.S. to disclose whether they manufacture products containing conflict minerals originating from the Democratic Republic of Congo (DRC) or its adjoining countries. The Act directs the Securities and Exchange Commission (SEC) to issue rules that would require companies to disclose via their 10-K, 20-F and 40-F filings. The concern? Proceeds from the mining of these minerals and associated metals (gold, tin, tantalum and tungsten) are known to finance armed militias that engage in human rights atrocities in those countries (UN; 2008, 2011). 

Who are the companies that could be impacted? Not surprisingly, they include business enterprises within the electronics, aerospace, automotive and jewelry sectors; but also those in the retail, medical devices and consumer manufacturing sectors. While the rules have yet to be promulgated by the SEC, many companies are taking a proactive approach and beginning to engage in their own due diligence activities to uncover the origins of the products they are branding, manufacturing and selling. 

Of interest is that SEC-listed companies are required to comply if they use conflict minerals in the “functionality or production” of a manufactured product. This is important because it means the conflict mineral doesn’t have to be a part of the final product for disclosure requirements to be triggered. In other words, supply chain transparency must be sought to ensure compliance with the intent of Section 1502. It is no longer sufficient for a company to know only their Tier 1 and possibly Tier 2 suppliers. It is critical that supply chains be clearly traced to raw material points of origin. Gaining intelligence regarding all entities in a product’s supply chain can enable responsible sourcing, cost reduction and risk mitigation. 

 

Due Diligence 

 

Due diligence refers to the action of taking reasonable steps in order to satisfy a legal requirement. It generally requires research or analysis by a company or person in order to meet disclosure requirements. 

There are generally two different methods to demonstrate due diligence with respect to the presence of conflict minerals in your products: raw material tracking and supply chain tracing. Raw material tracking begins at the mine and tracks the mineral and extracted metal down the supply chain through refining and manufacturing. Tracing entails beginning with the product in question, and tracing suppliers of parts and components back up the supply chain to the points of origin. Many companies may come to rely on a combination of both methods for ultimate discovery on product metal origins. 

 

Raw Material Tracking 

 

As of yet there have been few efforts at tracking minerals from their origin mine to the smelter and beyond. In 2009, the iTRi launched the International Tin Supply Chain Initiative, which piloted a “bag and tag” program in the DRC. “Bag and tag” involves chain of custody for minerals from the mine to negociants, comptoirs, traders, and finally smelters.

Though it was judged a success, and participants expressed a desire to continue their involvement, the program included only a handful of mines. Expansion has been extremely slow, and with renewed violence in eastern Congo, it may be years before a complete program exists on a level approaching commercial scale. The commodity nature of these minerals means that verification must be performed at each level of the supply chain, from mine to smelter, as materials are mixed along the way. These efforts will continue to be relatively more expensive to implement, a cost that will be hard to justify if it is passed on to the international market.

Nonetheless, the DRC’s government announced a program in February requiring its mines to be mapped and certified on a regular basis so that exporters have secure documents showing their shipments are conflict-free. According to government officials, all minerals that are exported without these documents are to be seized, and the exporters considered smugglers. The future of this program is uncertain in light of recent political unrest in North Kivu province. Due to the limitations currently associated with these programs, companies are likely to pursue supply chain tracing as a first step for due diligence. 

 

Supply Chain Tracking 

 

Path One: From Smelters to Mines 

 

Believing that an industry-wide approach is needed to address the challenge of tracing conflict minerals, over 80 companies in the electronics and information and communications technology industries have joined the Electronic Industry Citizen Coalition (EICC) and the Global eSustainability Initiative (GeSI). Efforts by the EICC-GeSI have resulted in initiatives, like the Conflict-Free Smelter (CFS) Assessment Program, that aim to enable companies to evaluate the conflict-free status of minerals that are processed by smelters.

CFS is a voluntary program in which an independent third party evaluates procurement activities and determines if smelters or refiners demonstrate all the materials they process originate from conflict-free sources. It is currently implemented for tantalum smelters only. While certified smelters in a product’s supply chain will minimize risk, all companies should still strive towards? transparency to mine of origin for at-risk 3TG (gold, tantalum, tungsten and tin) contained in their products. 

 

Path Two: From Finished Products to Smelters 

 

Companies like Source Intelligence who have developed supply chain traceability tools and technologies offer a way to efficiently trace the metals used in finished products back to the smelter from where they were sourced.

Source Intelligence’s Conflict Minerals Program provides an automated approach to assessing the potential for conflict minerals in the supply chain of a finished product. Proprietary technology drives the tracing process, while an experienced supplier engagement team follows up, making it easier to identify companies and regions of particular concern. The information about a finished product is compiled in an easy-to-understand disclosure statement that summarizes the supply chain map, traceability and risks – another benefit for companies looking to streamline the due diligence process. 

 

Risk-Based Approach 

 

Applying risk-based methods to evaluate the due diligence data collected through the tracing process generates information useful to sourcing and procurement decision-making. Source Intelligence has developed a cost effective risk-based approach for assessing the potential for conflict mineral use in a company’s supply chain.

This approach conforms to the Organization for Economic Development Guidelines (OECD) and may be applied to intricate products and complex supply chains and is compatible with trade association led efforts such as the EICC’s CFS Program. The approach also enables companies to begin the due diligence process with either a list of products or list of suppliers. The primary results of this approach are two-fold: a simple Product-Specific Disclosure Statement that summarizes the risk of DRC sourcing, and a series of Supplier Risk Profiles that can be used to inform sourcing decisions. 

 

Supply Chain Tracing Process 

 

Step 1 – Start with the BOM 

 

When faced with the daunting task of determining whether a particular product contains conflict minerals, a good place to start is with the bill of materials (BOM) for that product. The complexity of BOMs varies greatly between products, which is why it is important to prioritize listed components based on knowledge of the likelihood that at-risk metals may be present or used in the manufacture of each component. Components that are known or likely to contain conflict minerals should be assessed first. For highly complex products whose BOMs consist of many multi-part components, it may be more efficient to by-pass this step and begin with identifying suppliers (Step 2 below). 

In the case of conflict minerals, many component parts will contain only minute amounts of the associated metal(s), often included several tiers up the supply chain from the reporting companies. It is essential that those participating in the tracing efforts work closely with product design engineers to identify parts most likely to contain at-risk metals. 

Clear communication is also an essential part of tracing efforts. Nothing is more likely to raise the ire of suppliers than repeated inquiries with component part numbers that seem irrelevant. Part numbers are likely to vary between suppliers and customers and it is key that these are kept aligned to ensure that any disclosure issued is in regards to the correct materials. These efforts are made all the more difficult when secondary and back-up suppliers are included. 

Since it was created with large-scale retailers and multi-component products in mind, Source Intelligence is an optimal tool for such a task. The AI-powered data management system is designed to allow easy matching of materials and suppliers, all the way up the supply chain. Information is not finalized and passed up the supply chain until its accuracy has been verified. At the same time, anonymity of suppliers is maintained. These efforts reduce opportunities for error and increase the efficiency of supplier participation. 

 

Step 2 – Identify Suppliers 

 

Once the prioritized list of components has been prepared, the next step is to identify the suppliers for those components. As mentioned above, in the event the components are multi-part in nature, such as printed circuit boards in a television, it often makes sense to begin with a list of priority suppliers. Suppliers may be prioritized based on the type or value of components supplied, physical location or nature of relationship. 

 

Step 3 – Assess Supply Chain 

 

The most essential step in meeting the requirements of the Dodd-Frank conflict minerals provision is tracing your supply chain. One of the best approaches is to continue inquiry efforts until the smelters involved in your supply chain have been identified. These organizations can then be matched against lists of known conflict-free smelters, such as those identified by the EICC-CFS program or in compliance with the World Gold Council’s Conflict Free Gold Standard. If your suppliers are purchasing from these identified organizations, then your products can be declared to be conflict-free. 

With a successful history of supplier engagement for supply chain monitoring, hazardous materials data management, and product carbon footprinting, Source Intelligence is ideally situated to assist in tracing efforts. Years of experience in sustainability and EHS compliance have allowed Source Intelligence to gain an intimate understanding of how supply chains work, and how to gather the required data without damaging existing customer-supplier relationships. The Source Intelligence platform is designed to gather and house all the required information in a systematic and auditable manner, to ensure compliance with the intentions of Section 1502.

 

Step 4 – Assess Risk

 

Once supply chain tracing is complete, Source Intelligence assesses risk of DRC-sourcing for a given product using algorithms based on indicators including geographical location of supplier tiers, political conditions influencing these locations, and level of traceability and transparency in the supply chain. 

In addition to supplying a conflict mineral risk score for a given product, supply chain sustainability data managed through Source Intelligence can be used to assess risk attributable to sourcing from a given supplier. Supplier risk profiles are based on key metrics such as environmental and social performance, legal action, governance and quality. Exposure to this risk is expressed based on the number and percent of materials in a company’s supply chain that pass through a given supplier. Conflict mineral risks can also be reported at the supplier level for the components and/or products a given supplier manufactures. 

 

Step 5 – Comply and Act 

 

Once the data have been aggregated, and the risk assessed, Source Intelligence generates a disclosure statement (product/component specific) that is used to demonstrate compliance with Section 1502 due diligence requirements. The disclosure statement, while simple, also becomes a decision support tool. It includes the name and manufacturer of the product/ component assessed, the metals present, the DRC-origin risk score, and whether conflict-free certifications were obtained at each level of the supply chain. Charts and tables are used to convey this information in a succinct and easy to understand manner.

In addition, Source Intelligence customers will also have available to them, via Source Intelligence Supplier Risk Profiles, which can be used to inform and influence sourcing decisions, manage supply chain risks, and demonstrate an organization’s commitment to sustainability. 

 

Conclusion 

 

Although the specifics of conflict mineral disclosure requirements are still under development by the SEC, tracing the supply chain will be a necessary step in meeting the intent of Section 1502. In fact, proactive companies have initiated activities to begin tracing their supply chains ahead of the final ruling. These organizations will not only enjoy the benefits of identifying and managing supply chain risks proactively, but will also be better positioned to respond quickly and meet the anticipated tight timelines for compliance with the new SEC requirements. 

See what our Conflict Minerals Program can do for you and request a demo of our AI-powered platform!

 

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A Source Intelligence Technical White Paper by Jennifer Kraus, MPH, PhD , Michelle Turner, MS, PhD, and Tristan Mecham, MPIA. 

Endnotes

  1. As noted on the ITRi website, iTSCi has been in development since 2008 and was first piloted in south Kivu, eastern DRC, during the summer of 2010. Project activities had to be closed down due to the mining suspension initiated by the Government of DRC from September 2010 to March 2011. Projects in the Kivu will be re-started in the near future depending on international and industry approval of non-conflict mines, further funding, and the confirmation that Dodd-Frank compliant buyers will re-enter the market. Since 2011, iTSCi has been in the implementation phase in Rwanda and the southern DRC province of Katanga. iTSCi may be extended to Burundi and Uganda, depending on funding, and eventually the entire Great Lakes Region.

 

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