GAO’s New Report on SEC’s Conflict Minerals Rule: About Everything You Need to Know

Last week, GAO published its 52-page annual performance audit report on SEC’s conflict minerals regulations. The annual report to Congress is required under Section 1502 “beginning in 2012 and annually thereafter, on the effectiveness of the rule in promoting peace and security in the DRC and adjoining countries; to describe information that may be publicly available about entities that use conflict minerals but are not required to report to SEC under the rule; and report, annually beginning in 2011, on the rate of sexual violence in war- torn areas of the DRC and neighboring countries.”

The report did not address the effectiveness of SEC’s conflict minerals disclosure rule “because the first disclosures of companies’ use of conflict minerals will not be due to SEC until May 2014 and sufficient time must elapse to allow the full impact of the rule to materialize.”

We think the most important take aways from the report are:

Some optimism was expressed …

  • “Stakeholder-developed initiatives focused on sourcing of minerals may enhance companies’ ability to achieve the SEC rule’s desired outcome of denying armed groups in the DRC benefits from conflict minerals.”

… but overwhelmed by in-region realities

  • “Officials GAO interviewed cited constraining factors such as lack of security, lack of infrastructure, and lack of capacity in the DRC that could affect the ability to expand on efforts to achieve conflict-free sourcing of minerals from eastern DRC and thereby potentially contribute to armed groups’ benefiting from the conflict minerals trade. For example, officials GAO interviewed noted that there is a lack of infrastructure in place that would enable companies to set up or expand operations in the DRC. Limited transportation and poor roads in eastern DRC also make it difficult to get to mine sites. Moreover, according to officials, the remoteness of mines also makes it difficult for DRC officials to validate mines and ensure that the mines have not been compromised by illegal armed groups.”
  • GAO notes a “lack of technical, economic, and political capacity as another factor that may affect the creation or expansion of in-region sourcing initiatives focused on responsible sourcing in the DRC and neighboring countries” and “the DRC government lacks capacity to mitigate corruption and smuggling”.

Smelters/refiners

  • GAO identified 278 smelters and refiners; the total number is believed to be nearly 500 worldwide. The 278 smelters and refiners “may not be representative of others, and the information we report about these 278 cannot be generalized to other smelters and refiners of tin, tantalum, tungsten, and gold.”
  • GAO found that “over half of the 278 smelters and refiners of conflict minerals it identified were located in Asia, many processed tin, and most did not have a conflict minerals policy publicly available.”

Companies not subject to SEC

  • “Estimates provided by public commentators responding to the rule indicate that roughly 280,000 suppliers could provide products to roughly 6,000 companies that report to the SEC under the rule and may be asked to provide information on their use of conflict minerals and the origin of the minerals as part of the rule’s due diligence requirements. GAO found little available aggregated information about companies that do not report to SEC under the rule.”

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