by Cydney Posner

By coincidence, the same day that the three-judge panel of the D.C. Circuit  struck down (again) a portion of the conflict minerals rule (see this post), the GAO issued a report to Congressional Committees entitled “SEC CONFLICT MINERALS RULE Initial Disclosures Indicate Most Companies Were Unable to Determine the Source of Their Conflict Minerals.”   The GAO is required to report annually on the effectiveness of the SEC’s conflict minerals rule in promoting peace and security in the DRC and adjoining countries  (the “covered countries”) and on the rate of sexual violence in war-torn areas of the covered countries. The report examines conflict minerals disclosures filed by public companies with the SEC for the first time in 2014, as well as State Department and USAID actions related to the U.S. conflict minerals strategy in the covered countries. The GAO analyzed a random sample of company disclosures from the SEC database to collect the data. Although the study examined data from 2014 filings – which is not the most current available —  it still provides an interesting insight into the results from the government’s perspective, especially given that this information is being furnished to Congress.

The GAO found that most companies were unable to determine the source of their conflict minerals. (And that conclusion seems unlikely to change in the report on 2015.) Of those studied, 99% reported performing reasonable country-of-origin inquiries (RCOI) for the conflict minerals they used. The GAO spoke with some of the companies,  which reported that they had “difficulty obtaining necessary information from suppliers because of delays and other challenges in communication.”   According to the report, the vast majority of companies (94%) also conducted due diligence on the source and chain of custody of the conflict minerals they used, but 67% reported that they  were unable to determine the source of the minerals (i.e., whether they came from the covered countries) and, not surprisingly, “none could determine whether the minerals financed or benefited armed groups in those countries.” The report also indicates that 24% reported that the conflict minerals they used did not originate in covered countries, while 4% reported that they did source from the covered countries, but “indicated that they are or will be taking action to address the risks associated with the use and source of conflict minerals in their supply chains.” Only 2% indicated that their conflict minerals came from scrap or recycled sources.

The report estimates that only 47% of companies reported that they received responses from the suppliers they surveyed, while only 19 companies in the sample had response rates of 100%. Some companies indicated to GAO that the information that they did receive from suppliers was incomplete.  The report also concludes that the conduct of “due diligence on the source and chain of custody of conflict minerals yielded little or no additional information, beyond the RCOI, regarding the country of origin of conflict minerals or whether the conflict minerals used in 2013 in products by companies benefited or financed armed groups in the Covered Countries.” [emphasis added]

The report notes that the International Rescue Committee  estimates that,  since 1998, more than 5.4 million people have died in the DRC as a result of the crisis there. The United Nations has also reported that the defeat of M-23, an illegal armed group, in November 2013 has not led to significant gains in security and stability in 2014 in eastern DRC. With regard to State and USAID actions, the report indicates that efforts were made

“to implement the U.S. conflict minerals strategy, but a difficult operating environment complicates this implementation. The agencies reported supporting a range of initiatives including validation of conflict-free mine sites and strengthening traceability mechanisms that minimize the risk that minerals that have been exploited by illegal armed groups will enter the supply chain. As a result, according to the agencies, 140 mine sites have been validated and competition within conflict-free traceability systems has benefited artisanal miners and exporters. Implementation of the U.S. conflict minerals strategy faces multiple obstacles outside the control of the U.S. government. For example, eastern DRC is plagued by insecurity because of the presence of illegal armed groups and some corrupt members of the national military, weak governance, and poor infrastructure.”

Posted by Cydney Posner