Conflict minerals rule poses compliance challenge

SEC regulation forces deep dive into supply chains.

To get an idea of how complex and far-reaching the new “conflict minerals” rule is likely to be for manufacturers, consider Hewlett-Packard. HP estimates that about 1,000 suppliers in its chain ultimately provide a product to HP that may contain one of the conflict minerals, said Jay Celorie, who coordinates HP’s conflict minerals compliance. And suppliers will be asked to do their part in the due-diligence process required by the new rule.

The SEC in August enacted a rule that is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203, and represents an unusual attempt to curtail human rights abuses in Africa through regulation of U.S. public companies.

The SEC estimates that 6,000 U.S. issuers will be directly affected by the new requirement to trace the conflict minerals (gold, tantalum, tin, and tungsten) in their supply chains. The SEC has estimated initial compliance costs of $3 billion to $4 billion as end users of the four conflict minerals attempt to find out whether their raw materials originated at mines run by warlords in the Democratic Republic of the Congo (DRC) or its nine adjoining neighbors (Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia). For companies required to file them, the first Conflict Minerals Reports are due to the SEC on May 31, 2014, to report on the 2013 calendar year.

As companies form cross-functional teams to track the minerals in their supply chains, trade organizations are developing efficiencies that could aid in compliance with the rule, which sets an international precedent for the rigorous way in which it demands tracing of conflict minerals. The rule was designed to choke off funding for warlords accused of committing atrocities as they run mines in the affected countries. The rule does not ban use of materials from such mines, but it requires companies to track and report the origin of the gold, tantalum, tin, and tungsten through their supply chain. The goal is to create transparency that will cause companies that want to be seen as good corporate citizens to avoid obtaining raw materials from mines where human rights abuses are occurring.


Some companies want to go beyond the minimum of complying and reporting and make a perhaps costly effort to make sure none of their materials come from mines run by warlords in the affected countries. Jim Low, CPA, a partner and conflict minerals compliance expert who leads KPMG’s Financial Services Regulatory Centers of Excellence, said a company’s board of directors needs to be involved in deciding whether to simply comply with the reporting requirements or to try to source conflict free. That might not be an easy decision. On one hand, committing to using only conflict-free materials can involve paying higher costs for those materials. On the other hand, a company risks falling behind with respect to reputation and goodwill if its products include conflict minerals from the affected areas while its competitors commit to a conflict-free business plan.

“You’re starting to see some of the biggest and most admired companies in the U.S. putting out public statements about committing to be conflict free, which ultimately, by virtue of the interconnectivity of the supply chain, is going to force companies that are purely compliant to do something more,” Low said.

Companies making public anti-conflict minerals statements include:

  • Intel, whose goal for 2012 was to verify that the tantalum it uses in its microprocessors is conflict free, and whose goal for 2013 was to manufacture the world’s first verified, conflict-free microprocessor.
  • Philips, which has committed not to purchase materials that it knows finance armed groups in the affected countries, and has requested that its suppliers confirm that they are providing only conflict-free minerals to the company.
  • Samsung, which prohibits the use in its business units of conflict minerals identified as sourced from conflict mines in the affected countries, and has required suppliers to sign a compliance agreement that prohibits use of materials from conflict mines.

Once a strategy is determined, management and even the board of directors can be tasked with seeing it carried out. Experts at Ernst & Young advised in a recent webcast that companies should build multidisciplinary teams that include:

  • Legal counsel (to ensure compliance with securities laws).
  • CFOs and chief accounting officers.
  • Procurement and supply chain personnel.
  • IT personnel to develop an automated compliance process as quickly as possible.
  • Internal auditors, because this is a compliance function.
  • Engineering.
  • Communications personnel to help get all these groups on the same page.

Donald Robertson, CPA, chief accounting officer for California-based memory card manufacturer SanDisk, said his company has created a cross-functional working group that also includes R&D, because the company wants to understand the types of material that will be needed in new products. Audit committees also can play a role in the process. Cathy Lego, CPA, is audit committee chair for SanDisk, which was ranked fourth among 23 electronics companies rated by human rights activist group Raise Hope for Congo for its conflict minerals compliance in 2012. Lego said SanDisk’s audit committee is involved in the developing compliance process.

“We have to make sure our suppliers and distributors comply,” she said. “So we just have to figure it out.”

SanDisk, which uses gold and tungsten in its manufacturing, has devoted significant time to the issue of conflict minerals for more than two years, starting long before the SEC rule was finalized in August 2012. HP, which Raise Hope for Congo rated No. 2 out of 23 electronics companies with regard to conflict minerals compliance, has been working on responsible sourcing of conflict minerals since 2007.


Although the SEC rule is being challenged in court, Gibson, Dunn & Crutcher lawyer and SEC expert Brian Lane said smart companies have resisted the urge to delay implementing this process until the outcome of the legal challenge is known. Lane said that even if the rule is struck down, the legislation behind the rule would remain intact. The SEC would have to go back and redesign the rule if it loses in court, and eventually companies would have to track conflict minerals in their supply chains, Lane said.

Companies are taking the compliance task seriously, Lane said.

“You could have an enforcement case brought against you if you didn’t comply with SEC rules,” he said. “They could, maybe, force you to amend a previous filing, which is very embarrassing. Having a cease-and-desist order against your company is not a badge of honor. It’s a scarlet letter.”

By now, company officials should be familiar with the SEC’s compliance process (see Exhibit 1):

Step 1 requires companies to determine whether tin, tungsten, tantalum, or gold is present in or critical to the functionality of their products. If these minerals are not present, the company doesn’t need to do anything more with respect to the regulation.

Step 2 requires companies that find conflict minerals present to conduct a reasonable country of origin inquiry (RCOI) to determine whether its minerals originate in the DRC or its neighboring countries. If the company determines that those materials did not originate in those countries, the company must disclose that information and describe its RCOI process to the SEC on a new Form SD.

Step 3 applies to companies whose RCOI process reveals minerals that originated in the DRC or its neighboring countries. These companies must undergo a due-diligence process to determine whether the minerals directly or indirectly benefited armed groups in the neighboring countries. They must file a Conflict Minerals Report as an exhibit to Form SD, describing the materials’ origin and efforts to determine their exact location of origin. Minerals that are not conflict free must be listed in the Conflict Minerals Report, which must be audited by an independent auditor.

In the first two reporting years (calendar years 2013 and 2014), though, the SEC will allow companies to classify minerals as “conflict undeterminable” if they can’t pin down the source of their materials, and it’s expected that some companies will need to take that option. Robertson said SanDisk quickly found that tracing minerals through a multiple-tiered supply chain can be difficult. He said smelters have varied levels of sophistication, which also can cause problems.

“It’s a very time-consuming process,” Robertson said. “… You have to be patient. It’s something that takes time and persistence.”


HP’s Celorie said that, ultimately, concentrating on smelter facilities—which extract the minerals from ore—could facilitate conflict-free sourcing at U.S. public companies and throughout their supply chains. He estimates that approximately 400 smelters exist for gold, tin, tantalum, and tungsten. So if the materials that enter the supply chain there can be verified to be conflict free, companies can be assured that their minerals are sourced responsibly.

Industry organizations are taking the lead in this effort, developing tactics to aid in tracking and reporting that could potentially help companies certify that they are not getting any raw materials from mines where warlords use forced labor and commit atrocities to finance their activities. Industry organizations are leveraging the work of multiple companies to find common methods for suppliers to provide information on sourcing of their raw materials to end users, which could spare the suppliers a nightmarish collection of different compliance document requests. The Electronic Industry Citizenship Coalition (EICC) and Global e-Sustainability Initiative have created a process for certifying that participating smelters are getting their raw materials from conflict-free sources, which ultimately could establish the smelters as the key verification point for companies large and small.

Smelters that wish to be certified conflict free can submit to an audit process that examines the tin, tungsten, tantalum, and gold that enter their facility in a given year (see Any materials that come from the affected countries need to be accompanied with information that meets Organisation for Economic Co-operation and Development (OECD) due-diligence procedures documenting that the materials are conflict free. Smelters that submit to the program have their processes reviewed annually. As of February, 28 smelters were certified as conflict free—all for gold or tantalum, according to information available at

“The smelter is the chokepoint,” Celorie said. “There are only so many smelters in the world. And if we can create the independently verified, conflict-free smelters, then as an end user of these metals drive our supply chain to sourcing from conflict-free smelters, that’s the end goal.”

Companies are also dealing with the compliance challenge by requiring their suppliers to help with the tracking of conflict minerals. Celorie said HP suppliers are required to conduct due diligence on the smelters in their supply chain and report their findings to HP. He said suppliers are asked to source conflict free.

“It’s not a black-and-white requirement yet [for HP suppliers],” Celorie said. “But it will be when there are sufficient [conflict-free] smelters available.”

Celorie and SanDisk’s Robertson said compliance for suppliers will be easier and less costly if they can report consistent information with uniform documentation to each of their downstream users. The EICC has helped develop a template and dashboard tool (also available at for companies to use to prevent suppliers from being overwhelmed trying to provide different information for each end user.

Also, organizations are establishing processes in the affected countries to trace minerals from their extraction point at reputable mines to a point of export to smelters that are certified as conflict free. Solutions for Hope and the Conflict-Free Tin Initiative have set up systems to enable on-the-ground traceability of conflict minerals in the affected countries, said Celorie, who has traveled to Africa to observe the mineral supply chain from its start at conflict-free mines. The Public-Private Alliance for Responsible Minerals Trade also plans to develop validated, certifiable, traceable conflict-free supply chain routes.

Despite companies’ best efforts to comply, legal questions remain, particularly over the definition of whether conflict minerals are “critical to the functionality” of products and must be traced. KPMG’s Low said financial services companies that think the rule does not apply to them might want to think about what materials are present in the chips in their credit or debit cards. He said telecommunications companies might have to perform due diligence on more than their cellphones. Will their phones ring without their satellite transformers? If not, is the transformer necessary to the functionality of their mobile phone?

SEC expert Lane said, "Deciding which products are impacted [is difficult]."

In some companies, the opinion of what “necessary to the functionality” means might be a matter for debate. Legal counsel has been casting a wide net with regard to which products should be included in order to take a conservative approach toward the filing requirement, according to Low. But he said supply chain and procurement personnel naturally gravitate toward a narrower definition because they are the ones who have to do the difficult work of tracking the minerals through the supply chain.


According to the SEC, the affected countries supply 15% to 20% of the world’s tantalum, and considerably smaller percentages of gold, tin, and tungsten. Although companies that want to save money could try to avoid minerals from the affected countries altogether, doing so would be an unintended, undesirable consequence of the SEC regulation, Celorie said. Used on a large scale, that tactic could create a sort of embargo on resources in the area that would cause economic harm for owners and workers at mines that are acting responsibly. So far, it appears that companies are trying to source their minerals without causing harm to the entire region.

“Being a part of responsible sourcing [sends] the right kind of economic signal to those who are helping create and sustain some livelihoods of some of the citizens of that part of the world,” Celorie said.

Existing Relationships to Be Leveraged in Conflict Minerals Audits

For many companies, the easiest path to complying with the audit requirement of the SEC’s conflict minerals rule could be to use the same firm that audits their financial statements.

“There’s a general sense that it will be the financial statement auditor [who gets selected to do a company’s conflict minerals audit],” Steve Starbuck, CPA, Ernst & Young leader in the Americas for climate change and sustainability services, said in a recent webcast.

But other options will be available, too. The SEC rule says the audit of the Conflict Minerals Report can either be an attest engagement performed by an auditing firm or a performance audit that doesn’t necessarily have to be performed by a CPA.

Jim Low, CPA, a partner and conflict minerals expert and leader of KPMG’s Financial Services Regulatory Centers of Excellence, said companies that seek merely to comply with the SEC regulation by reporting where their conflict minerals come from—rather than determining that they are conflict free—may choose to save money by putting the audit out for bid.

“I think they obviously will look to the quality of the firm and whether or not they have the experience actually auditing this,” Low said. “But I could see more of a bidding scenario in that bucket.”

The audit must conform to U.S. Government Auditing Standards, which also are known as GAGAS or The Yellow Book standards. The audit’s objective will be to express an opinion or conclusion as to whether the company’s due-diligence measures conform with criteria set forth in a nationally or internationally recognized due-diligence framework, and whether the company’s description of the due diligence performed is consistent with the process it undertook. The only due-diligence framework currently available for conflict minerals reporting is that of the Organisation for Economic Co-operation and Development (OECD).

Low said companies need to act quickly to determine who will audit their Conflict Minerals Reports. He said companies will be in a better position if their auditors are kept informed—perhaps through quarterly reviews—on management’s processes. If companies wait too long to figure out who will perform the conflict minerals audit, the auditors could face a time crunch, particularly if they also are auditing a company’s financial statements.

“If you’re a calendar-year company, [your auditors] have to deal with your year-end financials and the filing of your 10-K,” Low said. “Two months later you’re going to have to file your Form SD [with the accompanying Conflict Minerals Report as an exhibit]. And that does not give your auditors a lot of time to plan, perform, and design an audit.”


An estimated 6,000 U.S. public companies will be directly affected by the SEC’s new conflict minerals regulation. Cost estimates for initial compliance range from $3 billion to $4 billion, as companies and their suppliers will have to trace the origins of gold, tantalum, tin, and tungsten that they are supplying to manufacturers who must comply with the SEC rule.

The rule is an unusual attempt to use securities laws to curtail human rights abuses in the Democratic Republic of the Congo and adjoining countries. The goal is to choke off funding for warlords accused of committing atrocities and using forced labor in mines to finance their activities.

U.S. public companies are required to trace the gold, tantalum, tin, and tungsten in their supply chain and report on its origins. Although using materials from “conflict” mines remains legal, human rights activists hope that companies that wish to be seen as good corporate citizens will enact “conflict-free” policies. Some companies already have indicated their plans to be conflict free.

Industry associations are developing tactics to aid companies and suppliers in tracing gold, tantalum, tin, and tungsten to their source. One effort aims to make smelters the point in the supply chain where minerals are certified as conflict free. Another initiative standardizes conflict mineral information suppliers give to end users, and still another aims to verify the custody of minerals from conflict-free mines to conflict-free smelters.

Ken Tysiac is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at or 919-402-2112.


CGMA Magazine articles

Build a Strong Team to Comply With Conflict Minerals Rule,” Dec. 12, 2012

Highly Scrutinised SEC Conflict Mineral Regs. Include New Audit Requirement,” Aug. 23, 2012


The AICPA’s Financial Reporting Center includes more information about conflict minerals reporting at

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