Conflict Minerals Compliance: Observations and Recommendations for 2014 and Beyond
By Schulte Roth & Zabel LLP | January 27, 2014 12:33 pm

By Michael R. Littenberg and Farzad F. Damania

Michael R. Littenberg

Farzad F. Damania

The Conflict Minerals Rule was adopted during August 2012 and took effect at the beginning of 2013. Since then, many companies have made significant progress in addressing the requirements of this complex rule, moving from determining applicability through establishing a compliance team, developing compliance procedures and engaging in product filtering and vendor outreach. Some companies are even fairly far along in validating vendor responses and have prepared initial drafts of their Form SD and accompanying Conflict Minerals Report. However, to paraphrase Winston Churchill, most companies are not at the end or even at the beginning of the end of the compliance process. Rather, they are approaching the end of the beginning. With that in mind, we offer the following observations and recommended action items for consideration.

Compliance Is About More Than Just Data Gathering and Reporting
Under the Rule, if a company is required to conduct due diligence, it generally must do so in conformity with a nationally or internationally recognized due diligence framework. The only framework that currently satisfies this requirement is the Organisation for Economic Co-operation and Development’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. Depending upon level of granularity, this five-step framework, including supplements, contains approximately 40 different discrete compliance procedures for downstream companies to consider, implement and document.

Expect NGOs, socially responsible investors and other responsible sourcing constituencies to focus on the due diligence measures that are described in your Conflict Minerals Report, including whether these measures conform to the Guidance. In addition, public and private supply chain intermediaries need to be mindful of contractual requirements, customer policies and vendor codes of conduct that require them to implement due diligence procedures that are consistent with the Guidance. Also expect some, albeit a small number, of customers to spot-check vendor compliance programs in 2014, including for their conformity to the Guidance.

Recommendation: Perform a gap assessment, either internally or with the help of a third party, to determine whether your compliance program conforms to the Guidance. Technical compliance with the Guidance will become especially important once an independent private sector audit is required, which for most companies will commence with the 2015 compliance period. Earlier this month, the AICPA published guidance concerning the procedures that may be followed by audit firms.

Conflict Minerals Rule Compliance Requires a Multi-Disciplinary Team
At many companies, Conflict Minerals Rule compliance has thus far primarily been a supply chain initiative, with the focus mostly on product scoping, data gathering and validation of vendor responses. As companies move into the next phase of compliance, other functional areas of the organization that have to date had limited involvement with the compliance program will take on a bigger role. Legal (and at many middle-market companies, Finance) will have significant involvement with the preparation of the Form SD and Conflict Minerals Report. Internal audit may be involved with assessing the adequacy of the substance and documentation of the compliance program. As disclosure is crafted and the communications strategy is developed, Investor Relations and Corporate Social Responsibility also should have a seat at the table, to the extent that these functions reside in-house, since responsible minerals sourcing will be relevant to some of the constituencies that they interact with.

Recommendations: Determine whether you have involved the internal personnel necessary for the next phase of compliance. If you have not already done so, prepare a clear, achievable timetable and responsibility checklist so that all team members know what is expected of them. Most newer team members will not have as much familiarity with the Rule and the Guidance as the project leads, so expect that additional education will be needed for them to fulfill their responsibilities.

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ANALYSIS: Conflict Minerals Compliance: Observations and Recommendations for 2014 and Beyond