Conflict Minerals Reporting: It’s OK to Say You Aren’t Conflict-Free (For Now)

Authors

Brad Brooks-Rubin, Of Counsel, Holland & Hart LLP

Brad Brooks-Rubin, Of Counsel, Holland & Hart LLP

As companies prepare their first reports on conflict minerals for the U.S. Securities and Exchange Commission (SEC), many are apprehensive about whether they will be able to say their products are “conflict-free.” Fearing public backlash, they may consider ensuring that their supply chains avoid the Democratic Republic of the Congo (DRC) or Great Lakes Region entirely. Although understandable, that’s not the best approach.

Instead, your conflict minerals compliance program should have a two fold strategy: 

1. Direct your supply chain to source responsibly from the DRC.
2. Be prepared to report that your products are “DRC Conflict Undeterminable,” or even “Not DRC Conflict-Free.”

As a brief review, section 1502 of the Dodd-Frank Act establishes a rigorous, three-step process concerning “conflict minerals” that requires reporting from all SEC annual filers, with the first reports due in May 2014. Section 1502 requires a company to determine whether gold, tin, tantalum, or tungsten are necessary, in any amount, to a product it manufactures or contracts to manufacture. If so, the company must work with its suppliers to make a reasonable country-of-origin inquiry to identify whether the minerals originated in the DRC or any of its nine neighbors. Following other steps and the exercise of due diligence, the company will then report to the SEC on whether its products are “DRC Conflict-Free” or have “Not Been Found to Be DRC Conflict-Free.” For an initial phase-in period, the term “DRC Conflict Undeterminable” may be used. 

If the stated goal of 1502 is to break the link between minerals and conflict in the DRC, why should you source from there, or even consider reporting that your products are “Not DRC Conflict-Free?”

You should do both because there are a number of positive and potentially game-changing efforts underway in the DRC to develop conflict-free supply chains. For example, Solutions for Hope and the Public-Private Alliance for Responsible Minerals Trade, among other initiatives, are working on responsible in-region sourcing. Although these types of initiatives alone will not eradicate conflict in the DRC, if they gain traction, they could be the steps the region needs to solve underlying problems, while also allowing miners to keep supporting their families and communities. More companies need to support—and have suppliers source directly from—sustainable development projects of this kind.

But when companies do, they risk having to report to the SEC that their products are not conflict-free. For example, if rebels overrun the area where a conflict-free pilot is underway, that may taint previously sourced material. Sadly, because of the risks of what it may take to be “DRC Conflict-Free,” many companies prefer to avoid the region altogether.

Rather than flee, companies must persist in their efforts. The challenge to achieve true “conflict-free” status for minerals in the DRC requires a long-term vision that does not view a report of “Not DRC Conflict-Free” as PR suicide. 

Not only is there little evidence to show that consumers or the public will truly alter purchasing or investing patterns in light of these types of reports, they are even less likely to do so if we develop a more nuanced and accepting approach with companies. By encouraging engagement and honest reporting in the short term, we may achieve the long-term mission of 1502 to support stable economic development in the region. There is a choice to be made, and I will continue to encourage choosing responsible sourcing in the region, with the possible risks it may entail for early reporting, rather than more short-term approaches.

Brad Brooks-Rubin is of counsel in the Washington, D.C., office of Holland & Hart LLP. He previously served as the special advisor for conflict diamonds at the U.S. Department of State, where he worked extensively on conflict minerals issues.