Dodd-Frank Act: Time to Develop a Compliance Strategy to Conflict Minerals

Thousands of manufacturing companies across the nation, including many in Minnesota, are affected by the conflict minerals provision of the Dodd-Frank Act, but aren’t yet prepared to comply. For those still lacking a strategy, it’s time to act.

The provision and accompanying rules, adopted by the Securities and Exchange Commission last August, require that companies disclose whether products they manufacture, or contract to manufacture, utilize so-called “conflict minerals” from the Democratic Republic of Congo and adjoining countries.

These materials (tin, tantalum, tungsten and gold known as 3TG) are used in everything from cell phones to computers to medical equipment. So, Minnesota-based companies in health care devices, diversified industrials, electronics/communications and other manufacturing sectors are affected.

Under the rules, companies must compile data for calendar year 2013 (regardless of their fiscal year) and make their first filing with the SEC no later than May 31, 2014.

Congress included the conflict minerals provision in Dodd-Frank because of concerns that the exploitation of these minerals by armed groups is helping to finance conflict in the DRC region and is contributing to a humanitarian crisis. Congress believes that these reporting requirements will provide transparency for investors, causing companies to source responsibly from this region of the world, thereby curbing the violence.

Three steps to follow

Under Section 1502, Dodd-Frank mandates three steps for companies to follow:

    SEC-registered companies must determine if they have any exposure to 3TG.
    Determine, on a reasonable basis, if the 3TG minerals they use originated in the DRC or an adjoining country. If the metals did not originate in the DRC nations or are considered scrap or recycled, companies must report how they determined this in a new specialized disclosure form.
    If they do come from the DRC region — or if the source is unknown — companies must trace the supply chain for the source and furnish a conflict minerals report, which may be subject to an independent private sector audit on those due-diligence efforts.

Compliance costly

Without question, compliance will be costly. The SEC estimates it will cost affected companies a total of $3 billion to $4 billion in the first year, and at least $200 million each year thereafter.

If done correctly, however, this new compliance requirement could offer beneficial insights for companies as they gain more visibility into their supply chain. Some are already using this information to rationalize their supply chain operations and exert better risk controls over suppliers. While the timing is tight, and the upfront compliance costs could be significant, this could prove to be an investment that yields even greater savings over the long term.

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