A Slow Start to Conflict Minerals Compliance

By Cydney Posner

This Compliance Week article reports that compliance by companies with the conflict minerals rules is not exactly going gangbusters. Many companies are apparently not yet willing to accept reality. According to the preliminary results of a survey by PwC, nearly 33% of survey respondents are still trying to identify which products contain conflict minerals, 5% are in the country–of-origin phase of the inquiry (currently assessing most of the necessary data gathered from suppliers), and only 2% have started the last phase, due diligence. Nearly 17% are waiting to see whether a legal challenge from the Chamber of Commerce and National Association of Manufacturers is successful in modifying or setting aside the rule. (Oral argument is scheduled for May 15, with a decision expected in the third quarter of the year, which doesn't leave much time if the challenge is unsuccessful.) I suppose we don't even want to find out what the other 43% are doing….

Under the rules, one way for a company to conduct a reasonable country-of-origin inquiry is to obtain "reasonably reliable representations" from its suppliers regarding origin of the materials in question. The article reports that companies are having difficulty encouraging their suppliers to cooperate. According to one commentator, "‘A lot of entities in the supply chain aren't necessarily public companies, located in the United States, or even have much visibility into this issue…. So when they get these questionnaires from companies they are not inclined to always respond.'" Since most contracts with suppliers predate the rules, companies have little leverage under the contracts to compel suppliers to provide the necessary information. In addition, according to another commentator, "'[d]epending on the complexity of the part or product involved, there may be 10 steps down to where you finally get to the actual source of the conflict mineral.'" Companies are also required "to be aware of, and address, ‘red flags' that might signify a supplier is misrepresenting information. The intent is that companies must be on the lookout for inconsistencies, and perhaps even outright lies, offered by suppliers. They cannot just take supplier questionnaires at face value…." Companies are also having difficulty managing the volume of data.

In what may be the understatement of the year, the article notes that there "remains confusion about exactly what companies the regulations cover." Issues identified relate to "murky definitions" in connection with branded or private label products, "maintenance and repair" businesses that replace returned products with new ones, as well as the types of "packaging" that can properly be excluded.

The article reports that the "National Association of Manufacturers estimates a cost of $9.34 billion for compliance, a figure that includes $1 million per issuer to institute IT systems to collect and maintain auditable records, and $1.2 billion for all affected companies to strengthen internal management systems as they perform due diligence." However, some new strategies are emerging: "Third-party solutions are rapidly emerging as cost-effective alternatives to in-house programs. And although there were initial fears over anti-trust laws and exposing proprietary information, industry-wide initiatives, such as ones launched by the electronics industry and auto part makers, are also proving popular and effective."

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