The provision aims to reduce the global sale of specific metals sourced from mines in the conflict-ridden Democratic Republic of Congo (DRC) or certain neighboring countries in Central Africa. The list of minerals includes tin, tungsten, tantalum and gold (often referred to as ‘3TG’) and can be expanded at a future time by the Secretary of State.
Essentially, the law requires any SEC Registrant that determines the minerals are significant to the functionality of its products, including manufacturing, contract to manufacture, production process and packing to determine whether companies within its supply chain using 3TG minerals were sourced from the DRC or neighboring countries. If the registrant determines the answer is yes or if they are not able to ascertain the answer, they must furnish a conflict minerals report attached to its 10-K subject to independent audit.
Affected companies must report on how they determined the source of their metals and – if the origin is determined to be either the DRC, surrounding countries or of ‘unknown’ origin – they must also trace their supply chain to identify the source of the materials. Ultimately, the companies involved must produce an audited report that details their due-diligence efforts and publish them within an annual report.
The imperative for Chemical Companies
Chemical companies may well be affected by the new law. The reality is that 3TG minerals are used in a number of chemical processes (“production process” per the proposed rule)
As a result, those chemical companies that are SEC registrants may experience a direct impact as they strive to comply with the law’s disclosure requirements. But suppliers to SEC registered companies will also feel an increased compliance burden, albeit indirectly, as their customers start to demand detailed and audited records of the source of their materials.
In a set of rules proposed in December 2010, the SEC attempted to clarify that the law did not specifically apply to tools used in the assembly or manufacturing processes, but rather minerals or metals that are incorporated directly into the final product.
However, there is – as yet – no guidance on the applicability of the Act on intermediate chemical processes using chemicals that may contain conflict minerals. Moreover, neither the Act itself, nor the proposed regulation provide for a ‘de minimis’ quantity that would form a materiality threshold under which companies may preclude the audit and reporting requirements.
Working towards compliance
It is critical, therefore, that chemical companies take immediate action to investigate, track and document the source of their materials. And while this compliance burden may be conducted by in-house professionals, chemical company executives may consider working with an external service provider with deep insight into the implications of the act and a strong audit track record.
This will help suppliers and manufacturers to confidently list the source of their materials – down to the mine, or at least the smelter – and guarantee that the materials or parts they provide do not include conflict minerals sourced from the DRC and adjoining countries.
We will be hosting a webcast on the final rules for conflict minerals once they are released by the SEC. Chemical executives interested in joining should e-mail firstname.lastname@example.org to register.
By Sara Ellison
Sara Ellison is a Manager in KPMG’s Americas’ Financial Services Regulatory Center of Excellence (CoE) in New York. The CoE is made up of key industry practitioners and regulatory advisers who work with clients to distill the impact of regulatory developments on their businesses.