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The GAO has issued a new report on conflict minerals focused in this instance on the supply chain for artisanal and small-scale mined (ASM) gold in the DRC region.  The report also addressed efforts to encourage responsible sourcing of ASM gold and sexual violence in the region since the GAO’s last report in August 2016.

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The GAO reported on companies’ disclosures regarding conflict minerals in April 2017.  That report concluded that companies’ conflict minerals disclosures filed with SEC in 2016 were, in general, similar to disclosures filed in the preceding years.  Just as in prior years, almost all of the companies that conducted due diligence reported in 2016 that they could not determine whether their conflict minerals financed or benefited armed groups in the covered countries.  (See this PubCo post.)

According to this report, gold is a significant driver of the DRC’s economy.  There are reportedly more than 1,000 ASM gold mine sites in the DRC, typically employing groups of 30 to 300 miners. The way the gold mining process is supposed to work is that the supply chain  participants are required to obtain DRC government authorization, such as official mining cards, or register with the provincial or national government to trade or export ASM gold in or from the DRC.  They are also required to pay provincial or national taxes to mine, trade or export ASM gold.   In reality, however, “almost all DRC-sourced ASM gold is produced and traded unofficially and smuggled from the country…. Further, elements of the Congolese army as well as illegal armed groups, frequently exploit ASM gold, often through illegal taxes on its production and transport, according to reports and stakeholders.” Some of the factors cited in the report that facilitate smuggling include “limited government control over the remote areas where ASM gold is primarily produced, inadequate infrastructure, and corruption,” as well as weak border enforcement.

Below is the GAO’s graphic illustrating the disparity between the official and actual supply chains:

gao report

The report observes that, while progress has been made recently “in reducing the presence of armed groups at tantalum, tin, and tungsten mine sites,…the widespread availability of gold in remote, difficult-to-access areas of the eastern DRC and the lack of a functioning traceability system allow armed groups to operate at gold mine sites with minimal government and international oversight.”

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That conclusion is consistent with the most recent Conflict Minerals Benchmarking Study from Development International, which analyzed the results of filings for the 2016 filing period. That study showed that there had been progress in validating as conflict-free smelters and refiners of the 3Ts. As of June 30, 2017, the report indicates that 100% of identified worldwide tantalum smelters were participating in the Conflict-Free Smelter Program of the Conflict-Free Sourcing Initiative, with tungsten smelters at 93.5%  and tin at 90.4%.  The laggard, however, was the gold industry, significantly behind at 70.7%. The report attributed the low levels of participation by gold refiners to many causes, including the vast and diversified web of buyers and middlemen in the gold sector, many of whom obscure the true origin of the metal, the delay in introduction of initiatives to trace gold from DRC mine sites to the point of export, and the ease of refining gold (relative to the 3Ts), making it more difficult to tag through chemical analysis and more susceptible of being characterized as recycled gold. operations.  Also, 3T ore can be “fingerprinted” before smelting, whereas gold cannot. In addition, several significant jurisdictions that govern buyers/sellers of gold do not have due diligence frameworks in place, and gold smuggling “is politically tolerated or effectively incentivized through price differences.” (See this PubCo post.)

While the DRC and the USAID, as well various international organizations, have commenced initiatives to encourage the responsible sourcing of ASM gold, there are still few mines validated as conflict free, and, the GAO concluded, there are few incentives for responsible sourcing.

In  the meantime, a USAID-funded study of the rate of sexual violence in 2016 in “parts of the eastern DRC estimated that 32 percent of women and 33 percent of men in these areas had been exposed to some form of sexual and gender-based violence in their lifetime. According to the United Nations, the DRC government has taken some steps to address sexual violence in the eastern region.”

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Whether the conflict minerals mandate survives for next year is still an open question.  On April 7, 2017, Corp Fin issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule, which provided substantial relief to companies subject to the rule. You may recall that, in the conflict minerals case, National Association of Manufacturers v. SEC, the court held that a part of the conflict minerals rule violated the First Amendment. Corp Fin’s Updated Statement, issued following that court decision, advised that companies would not face enforcement if they performed only a reasonable country-of-origin inquiry and filed only a Form SD and did not conduct detailed supply-chain due diligence or prepare and file a conflict minerals report (Item 1.01(c) of Form SD) or have an audit performed—even if they would otherwise be required to do so under the rule. In a separate Statement, Acting SEC Chair Michael Piwowar commented that the “primary function of the extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals set forth in paragraph (c) of Item 1.01 of Form SD is to enable companies to make the disclosure found to be unconstitutional. In light of the foregoing regulatory uncertainties, until these issues are resolved, it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.” (See this PubCo post.)  In addition, Corp Fin’s Updated Statement noted that, in response to the invitation of the Acting Chair (see this PubCo post), the SEC had received a number of public comments requesting additional relief and further guidance on the rule.  Piwowar indicated in his Statement that he had instructed the staff to work on a recommendation for future action, taking into account the public comments received. He also noted that “the Department of State has recently requested comment on how best to support the responsible sourcing of conflict minerals.” The action by the State Department could portend a serious reworking of the rule from a different perspective. (See this PubCo post.) In addition, the future of conflict minerals reporting could be entirely in jeopardy: the Financial Choice Act of 2017 would repeal the applicable Dodd-Frank mandate,  although its prospects of passage in the Senate are, at this point, dim. (See this PubCo post and this PubCo post.)

Posted by Cydney Posner

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