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PwC Finds Many Mired in Early Steps of Conflict Minerals Compliance

Joe Mont | July 11, 2013

With reporting demands for the Securities and Exchange Commission's “conflict minerals” rule coming due on May 31, 2014, a large number of public companies are still scrambling to determine their next steps for complying with the new transparency demands on their supply chain.

That's according to a new PwC survey that looked at how companies are preparing for the forthcoming disclosure requirements. Nearly half of the nearly 900 executives it surveyed in Spring 2013 are still in the initial stages of their compliance efforts, while 16 percent have not yet begun gathering information, and 32 percent are still determining if the rule even applies to them.

The SEC rule, mandated by Section 1502 of Dodd-Frank, applies to the mining of tin, tungsten, tantalum, and gold in war-torn Central Africa that is considered a source of funding for militant groups. It compels corporate disclosures around whether the conflict minerals used in a company's products originated in the covered countries, and whether the minerals are “conflict-free” or not.  It is estimated that 6,000 SEC issuers will have to provide new disclosures under the rule; roughly 275,000 private companies that are part of the issuers' supply chains will also be affected.

The single most challenging task for companies is getting accurate information from their suppliers, according to the survey and accompanying report. While it is crucial for businesses to identify how deep into their supply chain they need to go to attain the most up-to-date information, 58 percent of companies have not yet done so, and more than 40 percent have “not done much at all” with respect to gathering information and performing the required Reasonable Country of Origin Inquiry (RCOI) and associated due diligence. 

Of the companies that have at least started gathering information on their conflict minerals status, 72 percent are in the industrial products & manufacturing, technology and automotive industries. Trade associations that are actively involved in the conflict minerals process were credited for that early participation.

According to the survey, the most significant challenges that companies will face include identifying relevant suppliers, obtaining accurate and relevant information from them and establishing an entity-wide conflict minerals philosophy.

Regardless of which department is taking the lead, the majority of PwC's survey respondents believe that the compliance team handling conflict minerals transparency should be cross-functional, including departments such as legal, purchasing/supply chain, SEC reporting/finance, internal audit, R&D, information technology and corporate social responsibility/sustainability.

Approximately 11 percent of companies plan to become conflict-free sometime in the future, and almost a third of surveyed companies expect to require their suppliers to be conflict-free.

“However, that's likely not happening in the near future, and the deadline for compliance is quickly approaching,” says Bobby Kipp, partner in PwC's Risk Assurance practice, and the firm's conflict minerals leader “It's critical for companies first to understand the population of products that are within scope, the number of suppliers that provide conflict minerals, and the depth of information accessible from suppliers before they can properly design their compliance program as a whole.”

Sending conflict minerals focused surveys to suppliers is the most popular method of gathering information on supply-chain activity, with approximately 47 percent of surveyed companies planning to take that route. An almost equal percentage, however, said they are not sure of how they plan to gather this data.

Almost 58 percent of respondents said they have not yet determined how deep in their supply chain they will go to gather the necessary information. Nearly 27 percent of respondents plan to rely solely on information given by the Tier 1 suppliers, while approximately 16 percent intend to survey or follow up with Tier 2+ suppliers.

The report notes that, in many cases, confidentiality provisions between a company and its suppliers can limit a manufacturing entity's ability to gain direct access to Tier 2+ suppliers.

“In reality, these companies may encounter significant challenges in the initial years of compliance if their direct suppliers do not have conflict minerals reporting mechanisms in place farther upstream,” the report cautions.

The full survey is available here.