Elm Summary, Analysis of OECD Conflict Minerals Pilot Study Report for Downstream Companies

Ahead of this week’s meeting in Paris, the Organisation for Economic Development and Cooperation (OECD) published its Baseline Reports on the pilot project for the implementation of the Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, Supplement on Tin, Tantalum, and Tungsten.

Two separate reports were published, one for upstream companies (from the mine to the smelter) and another for downstream companies (from the smelter to the final product).

Click here to download our summary and analysis of the baseline report for downstream companies.

NEWS ALERT – SEC Announces Public Roundtable on Conflict Minerals Regulations

See the press release here about SEC’s roundtable to be held in Washington DC on October 18, 2011.  More information will be provided as it becomes available.

Guest Viewpoint: EICC-GeSI Conflict Minerals Workshop in Brussels

Elm welcomes Michele Bruelhart as a guest blogger.  Michele is the Global Traceability Manager with UL-STR in Burundi and attended the EICC-GeSI Workshop held in Brussels recently.  She provided Elm with her perspective on the meeting, and regional progress on conflict minerals programs/infrastructure.

 

The challenges surrounding supply chain traceability of so called “conflict minerals” continue to be discussed in numerous fora in Europe and the US. Starting with roundtable consultations organized by the World Gold Council, the EICC-GeSI Group and the London Bullion Market Association (LBMA) held their conferences last week in Brussels which will be followed by the launch of a Public-Private Alliance for Responsible Minerals Trade in October and lastly a meeting of the OECD hosted working group on the implementation of the Due Diligence Guidance in November.

Broadly speaking, participants of these meetings appear divided into two groups: those contributing to discussions on the 3Ts (tin, tantalum and tungsten) and those trying to address the issues around gold. For the former, the EICC-GeSI Workshop provided an overview on the latest progress (or lack thereof) since their previous workshop in June of this year. Some of the main points from Brussels are summarized below:

• The EICC-GeSI reporting template for the downstream supply chain is publicly available and has been piloted by a number of companies. While the tool itself was found to be helpful, it does not address the main challenge faced by end-user companies, which are (1) how to reduce the complexity and number of suppliers standing between the end product and the smelter in their supply chains and (2) how to get responses from supplier, investing a reasonable amount of time and resources.
• The hours required to obtain a completed reporting template from all suppliers seem disproportionate to the information sought. Furthermore, the data provided by suppliers is not validated or verified externally. Lastly, the tool merely allows companies to gather information “backwards” for a finished product, rather than “forwards” (i.e., trying to prevent conflict minerals from entering the supply chain).  By the time all the information is collected and compiled, the product will most likely have been sold already, whether smelters used for its production were “conflict-free” or not. Given these limitations, it is not clear if the template truly responds to the needs of companies that are required to report under Section 1502 of the Dodd Frank Act. [Ed. note – this process/timing gap may also create liabilities in the context of representations and warranties made about the nature or status of the material, which could be proven incorrect once all relevant information is available].

• Investing time and resources to gather information from suppliers regarding the smelters used in a company’s supply chain makes sense only if there is a sizeable list of conflict-free smelters that have been approved in the framework of the Conflict Free Smelter Program. So far, this list comprises six tantalum smelters. Assessment protocols for the other metals have been published this summer, though to date no smelters for tin and tungsten or refineries for gold have been approved as “conflict-free”. Despite the progress made in this program and the EICC-GeSI’s repeated assurances that it remains possible for smelters to source from the African Great Lakes region, the requirements defined for smelters to continue purchasing minerals from the Democratic Republic of Congo (DRC) or its neighbors provide a significant disincentive to do so. The assessment protocols list a number of conditions that must be fulfilled for minerals from the Great Lakes region. Among those figure full traceability for the shipment – something that has not been achieved yet for three of the DRC’s four affected provinces – and the implementation of the OECD Due Diligence Guidance. On the latter, it remains to be seen how this criteria should be implemented as the OECD is stressing that its Guidance should be understood as a process over time, whereas a mineral purchase is a punctual transaction. [Ed. note:  As Elm previously reported, OECD has softened its stance on its Guidance.  In addition, EICC CFS audits may not be completed in time for many companies to use them for purposes of fiscal year 2012 SEC compliance].

• In the region itself, progress has been quite significant. The DRC Government is about to make the implementation of the OECD Guidance a requirement for companies bearing administrative sanction, mine site inspections have taken place at over 30 mine sites in North Kivu and the Government expects to be ready to issue regional certificates for its minerals within the ICGLR framework by the end of 2011. ITRI’s tag-and-bag scheme is targeting 75% of the 3Ts from Katanga province to be tagged by the end of this year and the German federal institute BGR has validated 35 mines against its Certified Trading Chains Standard.

Nevertheless, some important issues were not addressed during the Brussels workshop:

• First and foremost, it remains unclear if the Congolese Government has the financial and human capacity to enforce the various rules and regulations that were passed over the last couple of months. In particular as the country is preparing for Presidential elections in November, no concrete plans for the enforcement of recently taken measures were presented, nor does the Government appear to take a clear leadership role in coordinating the various efforts on the ground.
• For the in-region tracing or certification schemes, the monitoring and evaluation process of participating companies is not fully transparent. In the case of the mine visits of the DRC Government, no information is provided on the standards applied to flag a specific mine green, orange or black or the qualifications of the mine inspectors. For BGR’s and ITRI’s certification and traceability schemes, the boundaries between baseline assessments, preparation of participating companies, third party verification and remediation are not clearly defined. The absence of clearly defined tasks may lead to potential conflicts of interest where verifiers could be consulting and auditing the same companies.
• The presentation of Gregory Mthembu-Salter of the United Nations Group of Experts (UN GoE) on the Democratic Republic of Congo painted a rather grim picture of the likelihood to see any of the above schemes being implemented in the Kivu provinces. The security situation in the Kivus renders the implementation of any traceability scheme difficult and the level of due diligence required from buyers in ensuring their purchases do not benefit armed groups appears to be prohibitively high.
• The highly unique aspects of the gold supply chain and its traceability remain unresolved.  There are growing doubts that a viable framework applicable to gold will be available in the near future.

Despite these activities along the entire mineral supply chain there remains much to be done to establish credible systems of assurance in the African Great Lakes region that satisfy the needs of end user companies obliged to report on the origin of their raw materials.

Demo Version of Conflict Minerals Audit, Program Development Tool Now Available

Elm has released a demonstration version of its pioneering Self-Implemented Conflict Minerals Audit Preparation© tool, or SICMAP℠.  The demo contains abridged content, but retains the functionality, pragmatic approach and simplicity of the full version.

“While we originally designed SICMAP℠ to assist companies in preparing for audits, we have seen an unexpected interest in use of the tool as a conflict minerals program development guide/framework”, said Lawrence Heim, Elm’s conflict minerals services leader.  “The demo version was made available because of the increased demand and interest.”

To request a copy of the demo version, contact Lawrence Heim at lheim@elmgroup.com.

OECD Backs Up A Step on Conflict Minerals Guidance

IPC has announced a pilot study of the OECD due diligence guidance that will run until June 2012.  Elm confirmed that this study is an OECD-lead study intended to help the OECD identify important changes to their document.

We recently wrote about views expressed by companies who tried to implement the Guidance earlier with little success.  Another post dealt with the inconsistencies between the OECD Guidance and SEC standards for auditors and auditing engagements.

It appears that OECD has capitulated – essentially reverting the status of their “final” standard back to a draft.  While that may be good news to some extent, critical questions arise about the uncertainty it creates in the content of SEC’s upcoming final regulations, as well as how the project timing will impact companies seeking to implement a program to meet 2012 or even 2013 reporting.

US State Department Issues Conflict Minerals Traceability Statement

Last Friday, the US State Department issued its statement on conflict minerals supply chain traceability.  Section 1502 of the Dodd-Frank Act requires that the State Department – in parallel with the SEC – provide guidance on due diligence activities to companies.

The Department stated that

… it is critical that companies begin now to perform meaningful due diligence with respect to conflict minerals. To this end, companies should begin immediately to structure their supply chain relationships in a responsible and productive manner to encourage legitimate, conflict-free trade, including conflict-free minerals sourced from the DRC and the Great Lakes region. Doing so will facilitate useful disclosures under Section 1502, as well as effective responses to any discovery of benefit to armed groups.

The Department specifically endorses the guidance issued by the Organization for Economic Cooperation and Development (OECD) and encourages companies to draw upon this guidance as they establish their due diligence practices. We encourage companies, whether or not they are subject to the Section 1502 disclosure requirement, that are within the supply chain of these minerals to exercise due diligence based on the OECD guidance and framework as a means of responding to requests from subject suppliers and customers.

Companies should no longer be in a “wait and see” mode.  Basic planning, assessment and program development can – and should – begin now.

If nothing more, companies should evaluate whether the OECD Guidance is the appropriate reference point.  As we pointed out in an earlier post, that guidance contains a number of pitfalls and auditor impairments that may deter its use by many companies.

Revision to SICMAP℠ Tool for Conflict Minerals, OECD Incorporates California Supply Chain Law

The Elm Consulting Group International LLC has released a new revision to the Self Implemented Conflict Minerals Audit Preparation Tool.  The update, Revision 1.33, incorporates

• Minor changes in response to feedback obtained from the late June EICC Extractives Supply Chain Workshop VI in Washington DC;
• Further clarifications on the OECD framework, its relationship to SICMAP℠  and SEC auditor standards; and
• Related elements of California Transparency in Supply Chains Act of 2010.

Lawrence M. Heim, CPEA, is leading the firm’s conflict minerals services and SICMAP℠ development:

In our discussions with various companies and workshop attendees, we obtained feedback on a few minor changes and clarifications to improve the tool.  In addition, we decided to incorporate the new California law as there are many similarities between those mandates and the conflict minerals requirements.

The video introduction and overview of SICMAP℠ can be viewed here.

OECD to SEC: Make us the Conflict Minerals Due Diligence/Audit Standard for the US

ITRI reported the following yesterday:

The Organisation for Economic Co-operation and Development (OECD) is expected to make a formal request that the US Securities and Exchange Commission (SEC) makes explicit reference to existing, internationally agreed due diligence guidelines when it releases new “conflict minerals” reporting rules shortly. The SEC is in the final stages of considering the interpretation of the US Dodd-Frank Wall Street Reform and Consumer Protection Act and may release the new ‘rules’ sometime in August. The OECD believes that its own guidelines, together with those set out by the UN Group of Experts on the Democratic Republic of Congo, can be used to help clarify definitions of “not DRC conflict free” and “DRC conflict free” under the US law.

OECD has drafted a letter to SEC and is looking for companies or associations willing to support the concept of progressive due diligence and improvement of mining circumstances in the central African region, and to request clarification of the expectations for company reporting in terms of the ‘conflict mineral’ issue.

Elm recently reported on certain US industry views on the OECD standard, which includes general concerns about potential inconsistencies with SEC auditor standards.  These concerns are relevant to not only the audits themselves, but the scope of the supply chain management programs, audit preparations and a range of potentially significant liabilities.  Elm shares these views; the following table highlighting the main points.

OECD Guidance	Comments
Step 2.II  DOWNSTREAM COMPANIES Downstream companies who may find it difficult to identify actors upstream from their direct suppliers (due to their size or other factors), may engage and actively cooperate with other industry members with whom they share suppliers or downstream companies with whom they have a business relationship to carry out the recommendation in this section in order to identify the smelters/refiners in their supply chain and assess their due diligence practices or identify through industry validation schemes the refiners/smelters that meet the requirements of this Guidance in order to source therefrom.	Supply chain due diligence activities undertaken with suppliers/others with business relationships or members of industry association-sponsored conflict minerals audit programs conflicts with the Auditor Independence elements in Step 4.A.3.a.
Step 4.A contains the OECD’s standards for independent third party audits of smelter/refiner due diligence practices, but continues (Step 4.B.1): … all actors in the supply chain should cooperate through their industry organisations to ensure that the auditing is carried out in accordance with audit scope, criteria, principles and activities listed above [in Step 4.A.]. Also provides additional SPECIFIC RECOMMENDATIONS for exporters, traders, re-processors and downstream companies within the context of the smelter/refiner audit scope.	Creates significant ambiguity in the intended audit scope: are the audits of exporters, traders, re-processors and downstream companies to be included as part of – or directly involved in – the smelter audit? Additionally, this conflicts with the Auditor Independence elements in Step 4.A.3.a.
Step 4.A.3.a    The Audit Principles: Independence To preserve neutrality and impartiality of audits, the audit organisation and all audit team members (“auditors”) must be independent from the smelter/refiner as well as from smelter/refiner’s subsidiaries, licensees, contractors, suppliers and companies cooperating in the joint audit. This means, in particular, that auditors must not have conflicts of interests with the auditee including business or financial relationship with the auditee (in the form of equity holdings, debt, securities), nor have provided any other services for the auditee company, particularly any services relating to the due diligence practice or the supply chain operations assessed therein, within a 24 month period prior to the audit.	SEC has long-established standards and regulations for auditor independence in the US.  Those standards have been tested/validated in the US legal system.  There is no need for untested duplicative standards that do not specifically reflect US law and that apply only to a single set of SEC audits. Other forms of impairments to auditor independence from SEC’s “Yellow Book” (GAO-07-731G) not indicated by OECD: Personal impairments including preconceived ideas toward individuals, groups, organizations, or objectives of a particular program that could bias the audit; and biases, including those resulting from political, ideological, or social convictions that result from membership or employment in, or loyalty to, a particular type of policy, group, organization, or level of government.  Given the emotional nature of underlying issues (human rights atrocities, subsistence livelihood of artisanal miners), personal impairments are highly relevant in these audits. External impairmentsare pressures, actual or perceived, from management and employees of the audited entity or oversight organizations, which includes: external interference or influence that could improperly limit or modify the scope of an audit or threaten to do so; external interference with the selection or application of audit procedures or in the selection of transactions to be examined; the authority to overrule or to inappropriately influence the auditors’ judgment as to the appropriate content of the report. Direct involvement in audit processes by industry associations, NGOs, business competitors and customers alike create a high likelihood of these (and similar) external impairments. As is detailed in other sections of this comparison table, this OECD auditor independence standard conflicts with other elements of the Guidance and increases annual audit costs for companies by mandating “rotating auditors” for annual audits.
Step 4.A.3.b.  The Audit Principles:  Competence Auditors should conform to the requirements set out in Chapter 7 of ISO 19011 on Competence and Evaluation of Auditors.	ISO is not meaningful within the context of legally-mandated audits under SEC jurisdiction.  Such audits are no longer a voluntary standard as is ISO. The audited companies – and auditors themselves – face significant risks related to SEC compliance, reputation and a broad range of consequential liabilities that are addressed far better by specific SEC audit/auditor standards than a general voluntary framework with no direct governmental involvement or support.
Step 4.A.4.b.  The Audit Principles:  Document Review … all records on business partners and suppliers, interviews and on-the-ground assessments…	SEC audit standards are based on “reasonable assurance” and “representative sampling”.  Audit tasks seeking 100% certainty or review are not appropriate/feasible except in limited circumstances. Where expectations are based on 100% certainty or review, auditors face significant and unreasonable liabilities.
Step 4.A.4.c.  The Audit Principles:  In-site Investigations In-site investigations should include… ii.  A sample of the smelter/refiner’s suppliers (both international concentrate traders, re-processors and local exporters), which includes supplier facilities	Suggests the auditors visit another company’s facilities. The auditor faces multiple uncontrolled business liability risks in this “extended audit” scope unless the auditor has a separate specific contract with that supplier.  Such a contractual relationship conflicts with the Auditor Independence elements in Step 4.A.3.a.
4.A.4.c.  The Audit Principles:  In-site Investigations In-site investigations should include… iv.  Consultations with local and central governmental authorities, UN expert groups, UN peacekeeping missions and local civil society.	Suggests direct involvement of external parties in the audit process, an inappropriate extension of audit scope. An auditor may not be able to confirm/verify the information presented by these external parties.  This also presents a potential for inadvertent breach of confidential business information.
4.A.4.d  The Audit Principles:  Audit Conclusions Auditors should generate findings that determine, based on the evidence gathered, the conformity of the smelter/refiner due diligence for responsible supply chains of minerals from conflict-affected and high-risk areas with this Guidance.	The findings envisioned by OECD are based on conformity and not fully consistent with the requirements of Section 1502(b), which requires the audit to include additional information (“compliance”). A substantial body of information over more than 15 years related to ISO14010/14011 (Environmental Management Systems Auditing, now superseded by ISO 19011) demonstrates there is typically a significant gap between the outcome of conformity audits versus compliance audits.
4.B.1.d  SPECIFIC RECOMMENDATIONS – For all downstream companies It is recommended that all downstream companies participate and contribute through industry organisations or other suitable means to appoint auditors and define the terms of the audit in line with the standards and processes set out in this Guidance. Small and medium enterprises are encouraged to join or build partnerships with such industry organisations.	As explained above, this program element conflicts with the Auditor Independence elements in Step 4.A.3.a.
Step 4.B.2  INSTITUTIONALISED MECHANISM FOR RESPONSIBLE SUPPLY CHAINS OF MINERALS FROM CONFLICT AFFECTED AND HIGH-RISK AREAS. All actors in the supply chain, in cooperation and with the support of governments and civil society, may consider incorporating the audit scope, criteria, principles and activities set out above into an institutionalized mechanism that would oversee and support the implementation of due diligence for responsible supply chains of minerals from conflict-affected and high- risk areas. The institution should carry out the following activities: a)  With regard to audits: i)  Accrediting auditors; ii) Overseeing and verifying audits; iii)Publishing audit reports with due regard to business confidentiality and competitive concerns. b)  Develop and implement modules to build capabilities of suppliers to conduct due diligence and for suppliers to mitigate risk. c)  Receive and follow-up on grievances of interested parties with the relevant company.	This takes key audit oversight out of SEC’s hands and places the responsibilities directly with a group of representatives from the regulated community, creating a major gap in auditor standards and dramatic potential for auditor impairment as discussed above in Step 4.A.3.a. Research indicates there is no precedent in any other legally-mandated audit program under SEC that defers this level of direct management and oversight to an industry group or other non-governmental organization.

Update on Conflict Minerals from Washington, DC

Elm attended this week’s EICC Extractives Supply Chain Workshop VI on conflict minerals, where approximately 200 attendees were present from industry associations, manufacturers from a range of industries, retailers, law firms, the OECD and representatives of several Central African organizations in the minerals trade.

It is Elm’s opinion that a clear rift exists between policy development/governmental organizations and the companies who are expected to implement conflict minerals traceability programs.  Elm observed the following points being voiced most frequently in open discussions with panelists and in “hallway discussions” between attendees:

1. Governmental and quasi-governmental organizations  are almost universally pointing to the recently finalized OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict Affected and High-Risk Areas and the Supplement on Tin, Tantalum and Tungsten as THE answer to all traceability program needs.  In contrast, many of the US companies present who have attempted to apply the Guidance consider the document unusable and unrealistic.  The most common complaints: a major lack of actionable, specific implementation steps/detail and the uncertainty about how the Guidance will comply with SEC requirements.
2. Similarly, a confusing array of new standards, initiatives, policies and documents are emerging from a range of industry groups, non-governmental and quasi-governmental organizations – almost all of which are seeking funding.  Attendees questioned the value and cost to the affected companies and raised concern over possible conflict with SEC regulations and auditor standards.  Also noted:  practically every one of these emerging initiatives includes its own separate third party audit program.
3. Impacted companies are highly concerned about the availability and confidentiality of supplier information.  Specific examples brought forth:  exposing potentially sensitive information including business/supplier relationships; the reality that few supply chain levels will be able to directly identify mines of origin in information-gathering questionnaires; and the unique information availability challenges of the scrap supply chain.
4. Recognition that the gold supply chain is significantly different from that of the other conflict minerals and a unique – and far more complex – solution will be needed for reasonable traceability.

Fundamentally, US companies that are impacted by Section 1502(b) of the Dodd-Frank Act are seeking pragmatic implementation guidance/support that

• reduces the risk of non-compliance with the upcoming SEC regulations,
• maintains business confidentiality,
• supports conformance with customer requirements/contractual mandates, and
• is based on a framework of reasonable expectations.

Elm’s recently announced Self-Implemented Conflict Minerals Audit Preparation© tool (SICMAP℠) is available to support companies seeking such solutions.  Feel free to contact us to learn more.

Video Introduction to Conflict Minerals tool SICMAP℠ Released

As previously announced, The Elm Consulting Group International LLC today released its Self-Implemented Conflict Minerals Audit Preparation© (SICMAP℠) for commercial availability. As part of the product release, a short introductory video provides an overview of the tool, its features and functionality.

We are in the process of uploading a true HD version of the video on our website. Until that is completed, the version posted here has limited resolution even when viewed in HD mode (the “HD” icon in the upper right hand corner of the viewer window below.)

If you have access to YouTube, the video can be viewed in better quality here.