Conflict minerals (Dodd-Frank Section 1502)

Transcription

1 Conflict minerals (Dodd-Frank Section 1502) A Path to Compliance April 11, 2013

2 Introductions Shawn Curtis Risk Assurance Director PricewaterhouseCoopers, LLP Jeff Fowler Risk Assurance Manager PricewaterhouseCoopers, LLP PwC 2

3 Agenda 1. What are Conflict Minerals? 2. Understanding Dodd-Frank Section 1502 Who will be impacted? What are the requirements? What is the reporting timeline? 3. A Path to Compliance 4. Additional Considerations for Success PwC 3

4 Video from PwC.com PwC 4

5 What are conflict minerals? Conflict minerals finance conflict in the Democratic Republic of the Congo (DRC) and/or adjoining countries The four conflict minerals are also referred to as 3TG metals Tantalum Tin Tungsten Gold DRC Adjoining Countries Angola Republic of the Congo Tanzania Burundi Rwanda Uganda Central African Republic South Sudan Zambia PwC 5

6 Common uses of conflict minerals Metal Industries using the Metal Common Applications Commercial Ores (1) Tin Electronics Automotive Industrial equipment Construction Solders for joining pipes and circuits Tin plating of steel Alloys (bronze, brass, pewter) Cassiterite Tantalum Electronics Medical equipment Industrial tools and equipment Aerospace Capacitors (in most electronics), Carbide tools Jet engine components Coltan (columbite-tantalite) Tungsten Electronics Lighting Industrial machinery Metal wires, electrodes, electrical contacts Heating, and welding applications Wolframite, Scheelite, Ferberite, hübnerite Gold Jewelry Electronics Aerospace Jewelry Electric plating and IC wiring Various free and combined forms PwC 6

7 Notes: 1. DRC production has substantially decreased since the Dodd Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Barack Obama on July 21, Sourcing figures should be used to assess likely transportation routes during the RCOI - To meet rule requirements, companies should attempt to identify and assess the status of smelters in their supply chain. Estimated mine production of 3TG in the DRC and covered countries in Metric Tons (000) 100 Sn Tin Cassiterite 5% at least of world production DRC 3% of world production at least 26% of world production* * DRC 12% of world production 0 Metric Tons 260 Ta Tantalum Coltan Used in solders for joining pipes and circuits, plating of steel and alloys (bronze, brass, pewter) 0 Metric Tons (000) 62 W Tungsten Wolframite, Scheelite, Ferberite, Hübnerite Used in metal wiring, electrodes, electrical contacts, heating, and welding applications <1% of world production <1% of world production Used in capacitors (in most electronics), carbide tools, and jet engine components Au Gold Various free and combined forms Used in capacitors (in most electronics), carbide tools, and jet engine components Covered Countries: Angola, Burundi, Central African Republic, Congo Republic, Rwanda, Sudan, Tanzania, Uganda, Zambia Source: U.S. Depart of Interior U.S. Geological Survey, Mineral Commodity Summaries, January Metric Tons 645 PwC 7

8 Understanding Dodd Frank Section 1502 Requires companies to disclose annually whether any conflict minerals that are necessary to the functionality or production of a product originated in the Democratic Republic of the Congo (DRC) or an adjoining country. Promotes the strengthening of custody controls and prevents funding of the civil wars in the DRC. Does NOT prohibit the use of conflict minerals PwC 8

9 What is the impact of the conflict minerals rule Based on SEC estimates Number of companies impacted: ~6,000 Issuers will need to perform some level of due diligence >4,500 Issuers will need to submit an audited conflict minerals report ~278,000 Additional companies will also be impacted by customer requests Compliance cost estimates: $3-4 Billion in total compliance cost $ Million in annual ongoing compliance cost $1.2 Billion in compliance costs incurred by suppliers to comply with customer requests PwC 9

10 The SEC estimates approximately 6,000 issuers and 278,000 suppliers will be impacted Directly subject to Section 1502 May experience indirect exposure to final rules Scoped out of final rules Examples Any company whose final products contain any of the metals, e.g.: - High-tech - Autos and auto components - Aerospace and defense - Industrials - Medical devices - Jewelry - Food products Suppliers responding to customer requests Mining companies to support implementation of on-the-ground certification mechanisms Retailers who have no significant level of influence over manufacturing of generic products Mining companies who have only extraction activities and no manufacturing activities Scrap or recycled materials only Metals use (e.g., catalyst) which does not end up in final product PwC 10

11 Dodd-Frank Section 1502 requires companies to determine whether their minerals are conflict free Examine products to determine whether and to what extent Section 1502 applies Develop and conduct reasonable country of origin inquiry (RCOI) and due diligence (DD) Obtain independent audit, if needed Comply with disclosure requirements PwC 11

12 Summary Flow-chart The ruling can be summarized in a decision tree with four possible outcomes product companies must evaluate their portfolio as such, in order to comply with reporting requirements. Each of the decision points brings its own unique challenge Process 3TG within product*? Yes Conduct RCOI Sourced outside covered countries?** No / maybe Conduct due diligence No Yes Unknown Adequate chain of custody? No Yes Conclusion Temporarily 3TG-free Conflict-free mineral Conflict-free mineral undeterminable*** Not conflict-free mineral Disclosure requirements No disclosure requirements Form SD Form SD + Conflict Minerals Report + Audit * Products the company manufactures or contracts to manufacture on its behalf ** Or comprised of recycled/scrap materials PwC *** The undeterminable option is only available for the first two years for larger companies, and four years for smaller companies. This option does not require the independent audit for those products. 12

13 Summary of the SEC rule Step one who s in scope? Any company that files periodic reports under Sections 13(a) or 15(d) of the Exchange Act who: - Manufactures or contracts to manufacture products, and - Conflict minerals are necessary to the functionality or production of those products Includes domestic, foreign, and voluntary issuers regardless of size No de minimis exception associated with necessary If contracting to manufacture, the degree of influence over the materials included in the product determines whether in scope Not a manufacturer if servicing, maintaining or repairing a product manufactured by a third party PwC 13

14 Summary of the SEC rule Step two reasonable country of origin inquiry (RCOI) Conduct RCOI to determine whether the conflict minerals originated in the DRC countries - Must be reasonably designed to determine whether the minerals originated in the DRC or came from recycled/scrap materials, and must be performed in good faith - Will likely involve obtaining supplier representations Disclose description of RCOI and results in new Form SD, filed annually by May 31 If the issuer determines that the minerals originated in DRC and did not come from recycled/scrap sources, or has reason to believe that they may have originated in DRC, then proceed to Step Three PwC 14

15 Summary of the SEC rule Step three due diligence and the Conflict Minerals Report Conduct due diligence on the source and chain of custody of the conflict minerals using a recognized due diligence framework. File a Conflict Minerals Report as an exhibit to Form SD describing the due diligence measures taken and disclosing whether products are: - DRC Conflict Free originated from DRC, but did not finance armed groups, - Not DRC Conflict Free, or - DRC Conflict Undeterminable for a temporary 2-year period (4 years for smaller issuers), if the issuer is unable to determine origin of minerals or whether they financed armed groups. After temporary period, undeterminable minerals will be treated as if Not DRC Conflict Free. PwC 15

16 Preparing the new SEC report First filings are due May 31, 2014, for calendar year 2013 Timeline for reporting and audit Calendar year Origin of 3TG minerals File SEC form SD Conflict minerals report Independent audit required 2013 and DRC and covered countries Yes Yes Yes 2. Outside the DRC and covered countries 3. Unknown (undeterminable option available only in 2013/2014) Yes No No Yes Yes No After DRC and covered countries Yes Yes Yes 2. Outside the DRC and covered countries Yes No No PwC 16

17 Conflict minerals program architecture Determine product and supplier scope Understand source of minerals and chain of custody Report conflict minerals status 1 Determine S1502 applicability 5 Administer RCOI/DD¹ questionnaire 9 Manage performance 2 Establish and communicate policy 6 Perform additional due diligence 10 Respond to customer questionnaires 3 Identify 3TG content 7 Develop and execute risk mitigation 11 Obtain independent private sector audit 4 Determine scope for supplier RCOI/DD¹ 8 Determine product conflict status 12 File Form SD and Conflict Minerals Report 13 Program management 14 Resource and change management 15 Technology and information management Denotes process steps that may be enabled by technology tools 1 Reasonable country of origin inquiry/due diligence PwC 17

18 What are the key challenges to compliance Overall Challenge: Interpreting a rule that, in many cases, intentionally left key terms undefined Determining applicability of the rule Understanding and managing the complexity of the supply chain Developing and conducting an RCOI and, if needed, due diligence process Deciding how to reconcile the OECD guidance with requirements of the rule PwC 18

19 The complexity of the value chain creates challenges to tracing the origin of the minerals Upstream Mine Négociant (buy and transport) Comptoirs (trading houses, buy & sell) Bagging and tagging schemes have been delayed in the DRC countries Only a handful of smelters have been certified as conflict-free Downstream Traders/Exporters Smelter/refiner Component manufacturer Product manufacturer OEM Some industries have several tiers and up to hundreds, if not thousands, of suppliers Component manufacturers will need to respond to hundreds of customer inquiries Suppliers are hesitant to disclose requested information due to confidentiality reasons PwC 19

20 Conflict Free Smelter (CFS) program The CFS is a voluntary program in which an independent third party evaluates a smelter s procurement activities and determines if the smelter demonstrated that all the materials they processed originated from conflict-free sources. PwC 20

21 The OECD due diligence framework is currently the only internationally recognized standard Establish strong company management systems Report on supply chain due diligence Identify and assess risk in the supply chain Carry out independent 3rd party audit of supply chain due diligence Design and implement a strategy to respond to identified risk PwC 21

22 Additional Considerations for a successful conflict minerals program Take a broader view Focus on your customers Determine how compliance may add value Put a stake in the ground Develop a conflict minerals policy/statement as it becomes the basis for supplier expectations and responsibilities Avoid absolutes Avoid taking an all or nothing approach when developing the conflict minerals philosophy and subsequent policy Develop a working group, assign responsibility Dedicate resources; get management sponsorship Bring a broad complement of skills to the table PwC 22

23 Considerations for a successful conflict minerals program (continued) Leverage other efforts Other product or supply chain compliance activities (RoHS, REACH, COI, etc.) Industry initiatives (AIAG, EICC, AAFA, etc.) Evaluate supplier representations Representations of conflict-free may not provide adequate info for reporting Evaluate completeness of information and look for red flags Focus on supplier engagement RCOI/DD alone aren t enough; ensure supplier engagement and establishing conflict minerals expectations into the ongoing supplier relationships Communicate and train early Internal and external stakeholders PwC 23

24 Considerations for a successful conflict minerals program (continued) Use technology to support the process Where possible, leverage what you have COI, GRC, workflow, SCM tools Not just survey management Document as you go Not just supplier surveys, but also decisions like product/supplier scope, and other interpretations Consider engaging an auditor early Helps ensure that your compliance program design and execution plan will meet auditor s expectations; minimize rework PwC 24

25 PwC resources Visit our conflict minerals website: PwC 25

26 Frequently Asked Questions (FAQs) I am a retailer; am I subject to Section 1502? Retailers are not required to report on products they simply buy and resell. Should the retailer manufacture or contract to manufacture products, it must follow the process in the rule to determine whether it is subject to the requirements, and if so, the appropriate course of action. To determine whether a retailer could be scoped in under the "contract to manufacture" concept, it must consider the degree of influence it exerts over the manufacture of the products it sells. The most sensitive area for retailers would likely be any private label brands. Is there any provision in the rules if our suppliers will not provide the requested information? The SEC recognizes that this rule will require cooperation by a company's suppliers, and that no one can force cooperation onto supply chain participants. We believe the SEC recognized the challenge of gathering complete and accurate data from a large number of suppliers, and that's at least part of the reason that they emphasize the threshold for the Reasonable Country of Origin inquiry as being reasonable, not absolute. It's likely companies may need to get creative, work with industry/trade organizations or use different tactics to encourage suppliers to provide the necessary data, which could include negotiating cooperation into contracts, or using their buying power leverage to force the issue. Can I just file as "undeterminable" and be compliant? Some issuers will not be able to readily determine the origin of their conflict minerals in the rule s initial years. Accordingly, for a temporary period of two years (four years for smaller reporting companies), the rule permits issuers to describe products containing conflict minerals as DRC conflict undeterminable. However, this determination can only be made after the issuer exercises due diligence on the source and chain of custody of its conflict materials. An issuer that concludes that its conflict minerals are "DRC conflict undeterminable" during the temporary period must still include a Conflict Minerals Report as an exhibit to Form SD. What must the audit cover? The rule states that the audit has two objectives: 1) to express an opinion or conclusion as to whether the design of the issuer s due diligence framework as set forth in the Conflict Minerals Report, is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework, and 2) whether the issuer s description of the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook. It is not required to cover the issuer's ultimate conclusion about their products' DRC conflict status. What is the penalty for non-compliance? Issuers contemplating this question should speak with SEC counsel. However, at a high level, compliance with the conflict minerals rule is required by the Exchange Act of If an issuer is not in compliance with the Exchange Act of 1934, then it cannot raise new capital under the Exchange Act of In addition, issuers are subject to Section 18 liability if they do not comply in good faith. Outside of the legal implications of not complying, issuers may also face pressure from human rights activists, non-governmental organizations, consumer or other market forces to prove they are conflict free. PwC 26

27 Questions? PwC 27