Manufacturers Struggle With ‘Conflict Minerals’ Audit Compliance

Rules arising from the 2010 Dodd-Frank act mandated that companies begin to disclose in reports filed with the U.S. Securities & Exchange Commission whether any tin, tantalum, tungsten or gold in their supply chains is connected to violent militia groups in Africa. These materials can be crucial for manufacturers of many goods, especially smaller and lighter cellphones, laptops, hard drives and other electronic devices.

And many CEOs have been complaining about the rules since. More than 6,000 public companies are covered by the regulation.

The idea, of course, is to reduce violence by armed groups in central Africa by reducing profits they can make from illicit trading of conflict minerals, which are found in abundance there.

The problem is that tracing the origin of these minerals through their supply chains, sometimes through several layers of sub-suppliers, is like trying to “apply modern supply-chain logistics to the equivalent of the 1849 California gold rush,” Chris Bayer, a consultant hired by Tulane to study the latest conflict-minerals reports filed by U.S. companies, told The Wall Street Journal.

Industry groups are trying to come to their members’ aids with programs to help companies find conflict-free smelters, mainly based in East Asia, that sell, procure and process the Congo’s minerals and then sell them to electronics manufacturers. The Electronics Industry Citizenship Coalition and the Global e-Sustainability Initiative have launched a Conflict-Free Smelter Program, for instance.

The initial deadline for U.S. companies came in June, by which time they had to declare at least whether they could determine if conflict minerals were in their products. Now companies will need to be more specific when they next file by the end of June 2016, and will have to hire outside auditors to inspect their reports.

Only a handful of companies so far have been able to fully comply. Even the U.S. Commerce Department has come up empty: It was supposed to publish a worldwide list of refiners and smelters that are being used to fund militia groups, but it said last fall that the task was impossible.

In fact, so steep are the requirements of the conflict-minerals rule that the practical effect might be for companies to be given a pass. “The cost of doing a bad job [of compliance] isn’t much,” argued Jeff Schwartz, a law professor at the University of Utah, in the Journal. “Companies can just kind of check the boxes in the rule, send out a survey, report the results, and I don’t think the SEC is really going to do anything about it.”