Section 1502 of the Dodd-Frank Act was adopted on August 22, 2012 and specifies the requirements surrounding the sources of materials that are classified as "conflict minerals" that may be present in the products a company produces and/or sells. The key minerals are tin, tantalum, tungsten and gold. Deadlines for the first reporting period regarding reasonable country of origin inquiries (RCOIs) and conflict minerals are due May 31, 2014. With just six months left to complete your due diligence, it is crucial that your company has actively initiated a plan that includes a review of potential conflict minerals and the country of origin.
According to the Organization for Economic Cooperation and Development, completing due diligence of your mineral supply chain requires that you have an ongoing and proactive strategy to ensure that your company "respects human rights, and does not contribute to conflict." Although you may feel that your company is not directly impacted by conflict minerals, you remain responsible if your organization is purchasing goods from suppliers who, in turn, use minerals that are not conflict-free. This is the primary reason why a proactive due diligence strategy is critical.
Key questions you may be asking yourself:
What countries are we talking about?
The primary country is the Democratic Republic of the Congo (DRC) or adjoining countries, which some believe are financing the conflict in the DRC.
I thought this was only for public companies?
Though private companies do not have a reporting obligation or any duties under the rules, many private companies supply manufacturing products to public companies - or supply to other private companies that then supply products to public companies. As located on the SEC's website, a product is covered by the SEC conflict minerals rules if it is "manufactured or contracted to be manufactured by a company and necessary to the functionality or production of the product".
A company is considered to be "contracting to manufacture" a product if it has some actual influence over the manufacturing of that product. This determination is based on facts and circumstances, taking into account the degree of influence a company exercises over the product's manufacturing.
A company is not deemed to have influence over the manufacturing if it merely:
Component parts manufactured by a supplier and contained in a company's assembled product will be considered manufactured by that company. However, the SEC conflict minerals rules will not apply to product packaging, unless a company manufactures or sells packaging independent of any other product.
Does this still apply to those who are retail only?
Retailers are not required to report on products they simply buy and resell. If you contract to manufacture products, you need to assess your products to determine if you are subject to the conflict minerals requirements, and if so, initiate a course of action.
I'm not sure what's next?
If you are a public or private company that manufactures or contracts to manufacture products, we suggest that you take the steps necessary to be prepared to comply with the SEC conflict minerals rules.
If you are a publically traded company involved in manufacturing, you need to conduct due diligence of your supply chain. If your inquiry determines that either of the following are true: a) you determine that the minerals did not originate in the covered countries or are from scrap or recycled sources, or b) you have no reason to believe that the minerals may have originated in the covered countries or may not be from scrap or recycled sources, then you must disclose your determination, provide a brief description of the inquiry you undertook and file the results with the SEC on Form SD and post it on the company's website with a link to the Form SD.
If you determine that both of the following are true: a) that you know or have reason to believe that the minerals may have originated in the covered countries, and b) you know or have reason to believe that the minerals may not be from scrap or recycled sources, then you must conduct a due diligence investigation on the source and chain of custody of the designated minerals and file a Conflict Minerals Report with the SEC as an exhibit to the Form SD and post it on the company's website with a link to the Form SD. The requirements of the due diligence investigation are complex.
The Organization for Economic Cooperation and Development provides guidance that can assist in developing an acceptable plan to address conflict minerals. Since a conflict minerals program can require more than a simple check, UHY has the expertise to assist in this initiative and has worked with companies to provide recommendations and assistance to implement a sustainable program.
For more information or questions on this topic, please contact your local UHY LLP professional.