A surprise development from the inaugural batch of conflict minerals reports filed with the Securities and Exchange Commission in May is that nearly 65 companies—among them IBM, Hewlett-Packard, and Williams-Sonoma—reported that materials they used were sourced from North Korea.
While the information doesn’t raise conflict minerals problems—North Korea, of course, is far from the war-torn Congo and the militia groups government officials created the rule to strike against—it could indicate violations of U.S. trade sanction laws and raise other supply chain problems.
Many of the companies that reported North Korean smelters later determined that the disclosure was in error, but the revelations still underscore a point that advocates of the conflict minerals rule have made from the start: greater scrutiny of a company’s supply chain can help it better manage reputational risk, comply with other regulations, and offer business benefits.
A new report from audit firm KPMG details the benefits that a deeper dive into supply chain sourcing can provide. “By demonstrating that a company’s supply chain is conflict-free, it will reassure stakeholders that the company is compliant and will engender trust among suppliers, consumers, and others,” it says. “A framework to comply with [the conflict minerals rule] will also stand companies in good stead for other supply chain-related laws and regulations, such as the Foreign Corrupt Practices Act and the U.K. Bribery Act.”
When the conflict minerals rule was introduced as part of the Dodd-Frank Act, some questioned the benefit of the rule weighted against the cost of the huge undertaking of tracing all instances of the metals back to their sources. Now some are looking to get more out of the exercise. “We have customers who are looking at this and saying, ‘I have invested time and money in a conflict minerals compliance program. Is there any way that I can leverage and better integrate what we are doing with some of our other supply-chain risk mitigation efforts,” Jennifer Kraus, chief scientific officer and co-founder of supply chain management consultant Source Intelligence, says.
Supply Chain Intelligence
Compliance with federal trade sanctions, administered by the Treasury Department’s Office of Foreign Assets Control (OFAC), is a logical place to pair up compliance efforts, Kraus says. “The ultimate goal of these types of programs’ regulations and policies might be slightly different, but they all involve some sort of supply chain-related risk.”
“We have customers who are looking at this and saying, ‘I have invested time and money in a conflict minerals compliance program. Is there any way that I can leverage and better integrate what we are doing with some of our other supply chain risk mitigation efforts.”
Jennifer Kraus, Chief Scientific Officer, Source Intelligence
According to Bruce Calder, vice president of consulting services at Claigan Environmental, leading companies are overlaying conflict minerals compliance programs, OFAC compliance, and other supply chain corporate social responsibility issues to reduce duplicate efforts. Even among those not intentionally leveraging conflict minerals programs for these purposes, “when they turn over stones they are often finding creepy crawlies,” he says.
Companies can even use conflict minerals reports to inform their efforts to comply with the Foreign Corrupt Practices Act. “The two will occasionally intersect,” says Michael Littenberg, a partner at law firm Schulte Roth & Zabel.
“We’ve seen a very limited number of instances where an FCPA red flag was implicated based on information received from a supplier as part of conflict minerals outreach or a related internal review of the supplier relationship,” he explains. The lesson, he says, is to make sure that the individuals reviewing supplier information are sensitive to those red flags and are appropriately trained.
Companies must also consider that conflict minerals reports could be used by other regulatory agencies and watchdog groups who will scour them for red flags on other types of problems or violations, says Littenberg. The disclosures will be pored over and picked apart by reporters, NGOs, socially responsible investors, and, not least of all, other government officials who may find problems with other laws and regulations.
UPPING THE ANTE
The following is an excerpt from an executive order issued by President Barack Obama in July that added conflict in the Democratic Republic of the Congo to U.S. sanctions.
In order to take additional steps to deal with the national emergency with respect to the situation in or in relation to the Democratic Republic of the Congo declared in Executive Order 13413 of Oct. 27, 2006, in view of multiple United Nations Security Council Resolutions including, most recently, Resolution 2136 of Jan. 30, 2014, and in light of the continuation of activities that threaten the peace, security, or stability of the Democratic Republic of the Congo and the surrounding region, including operations by armed groups, widespread violence and atrocities, human rights abuses, recruitment and use of child soldiers, attacks on peacekeepers, obstruction of humanitarian operations, and exploitation of natural resources to finance persons engaged in these activities, hereby order:
Executive Order 13413 is hereby amended to read as follows:
All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person (including any foreign branch) of the following persons are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in: the persons listed in the Annex to this order; and any person determined by the Secretary of the Treasury, in consultation with the Secretary of State:
To be a political or military leader of a foreign armed group operating in the Democratic Republic of the Congo that impedes the disarmament, demobilization, voluntary repatriation, resettlement, or reintegration of combatants;
To be a political or military leader of a Congolese armed group that impedes the disarmament, demobilization, voluntary repatriation, resettlement, or reintegration of combatants;
To be responsible for or complicit in, or to have engaged in, directly or indirectly, any of the following in or in relation to the Democratic Republic of the Congo:
Actions or policies that threaten the peace, security, or stability of the Democratic Republic of the Congo;
Actions or policies that undermine democratic processes or institutions in the Democratic Republic of the Congo;
The targeting of women, children, or any civilians through the commission of acts of violence (including killing, maiming, torture, or rape or other sexual violence), abduction, forced displacement, or attacks on schools, hospitals, religious sites, or locations where civilians are seeking refuge, or through conduct that would constitute a serious abuse or violation of human rights or a violation of international humanitarian law;
The use or recruitment of children by armed groups or armed forces in the context of the conflict in the Democratic Republic of the Congo;
The obstruction of the delivery or distribution of, or access to, humanitarian assistance;
Attacks against United Nations missions, international security presences, or other peacekeeping operations;
Support to persons, including armed groups, involved in activities that threaten the peace, security, or stability of the Democratic Republic of the Congo or that undermine democratic processes or institutions in the Democratic Republic of the Congo, through the illicit trade in natural resources of the Democratic Republic of the Congo;
Source: Treasury Department.
“Until companies started to receive back information from their suppliers, they in most cases were not in a position to know what the intersection between OFAC and conflict minerals was going to be,” Littenberg says. “Until companies got the data back, it was largely a theoretical consideration.”
The information in conflict minerals reports could also increase reputational risks. “Just because a smelter or refiner doesn’t source from the DRC region, just because it is conflict free, doesn’t mean it scores highly on other metrics that may be relevant,” Littenberg says.
A desire to better utilize conflict minerals programs has been driven, in part, by greater board involvement in the process, Lina Ramos, Source Intelligence’s chief business officer, says. “It went from a cost item in the mind of senior management to having board-level attention because the SEC required CEO and CFO sign-off,” she says. “We see the tide turning. At the core was the catalyst of a compliance program, but the new carrot is the business and reputational value of supplier transparency.”
New efforts tied to conflict minerals assessments include environmental assessments like carbon foot printing, and human rights issues, notably human trafficking and slave labor, Ramos says. Companies that “better understand their suppliers beyond tier one had the visibility needed to address both compliance and corporate responsibilities.”
Board members like the added visibility conflict minerals reports provide on the supply chain. “The more companies learn about their supply chain, the more they realize what they don’t know,” Kraus warns, describing a lesson learned following the first batch of conflict minerals reports. “Digging deeper into the supply chain will not just satisfy regulators and activists, there are business benefits that can save money, improve efficiency, and provide business continuity by assessing costs, distribution issues, and risks.
There are plenty of ambitious ways that companies can make the most out of their conflict minerals disclosures, but what’s the best place to start? There may not be a “magic bullet, Kraus warns. The effort requires “leveraging technology, leveraging people, and then integrating existing processes and procedures.”
Supply chain due diligence can no longer be sporadic or rely on random sampling, Ramos warns. “The problem with that approach is that it is periodic and tied to a point in time; the way the real world works is that suppliers and the acquisition of supplies, is dynamic,” she says. Technology has enabled real-time acquisition and monitoring of data, “but technology alone will not solve the problems. It requires the expertise of your people who assess and prioritize risks.
Next year’s conflict minerals disclosures will yield even more information and face even greater scrutiny. “A relatively limited number of companies reported smelter and refinery data last year,” Littenberg says. “More people will have more visibility on their supply chains this year and there will be more pressure from the NGOs and SRIs to report smelter and refinery data. A lot of companies were able to sidestep that last year by saying they didn’t receive any information suppliers in our supply chain, or that the data wasn’t reliable. That’s going to be harder to do this year.”