Conflicted Feelings About Conflict Minerals

Don’t die of shock, but a new government report finds that compliance with the Conflict Minerals Rule is still sputtering.

That’s the overall conclusion of the latest Government Accountability Office review of conflict minerals compliance, which is pretty much the same conclusion as last year’s GAO report. Companies are marginally better at determining where their conflict minerals come from. They are not any better at determining whether their conflict minerals somehow fund African warlords.

For whatever it’s worth, the government isn’t faring any better. The Commerce Department is now three years behind schedule to develop plans for auditing the accuracy of companies’ conflict minerals reports. Even better, Commerce admits that its team “does not have the knowledge, skills, or expertise to conduct reviews or to establish best practices”—best practices for all the conflict minerals work that your company is doing.

So, yeah. Here we are.

The GAO report, 56 pages long, goes into a fair bit of detail about the history of conflict minerals in Central Africa and what companies are doing to comply with the Conflict Minerals Rule. Let me give you the key points here:

Companies are going through the motions of compliance more effectively. Almost all filers subject to the rule send questionnaires to their suppliers, and almost all then submit their Form SD filing to the Securities and Exchange Commission as the Conflict Minerals Rule dictates.

• Companies are getting better at determining the country where their conflict minerals come from. And as they improve, more often they find that those countries are among the 10 covered by the Conflict Minerals Rule.
• Companies are not getting any better at determining exactly where their conflict minerals come from. Sixty-seven percent said they couldn’t identify the precise source of their minerals; 97 percent couldn’t determine whether their minerals somehow benefitted warlords in Central Africa.

How are companies trying to improve the situation? The GAO report listed all the usual ideas: shifting supply chains toward conflict-free suppliers, strengthening contract language, sending more supplier questionnaires, conducting more training. Those are nice words, to be sure, but as the GAO report noted, “We did not verify any actions companies reported having taken.”

Well, don’t ask the question when you don’t want to know the answer.

Chipping Away at the Stone

Back to all the usual ideas to improve the situation. Almost all companies now survey at least some of their suppliers; that’s good. According to the GAO report, roughly 75 percent of them use a template survey from the Conflict-Free Sourcing Initiative, an industry consortium trying to build a community of conflict-free smelters and manufacturers. Even if the CFSI effort isn’t perfect, it’s serious and it’s emerging as standard practice, and those are necessary ingredients for progress.

Response rates from suppliers back to corporations ranged from 22 to 100 percent, with the average at 81 percent. How many companies are then following up with suppliers who ignore them? That’s unclear, but those who do follow up get higher response rates.

The more fundamental challenge to conflict minerals compliance is that we here in the United States and Europe, we at the “downstream” end of the production chain, imposing all these rules and searching so diligently for conflict-free materials—we’re simply not close enough to the source of the problem to solve it.

Let’s remember what we’re talking about here: piles of dirt. That’s what conflict minerals look like. Techniques to determine the origin of those dirt piles do exist; chemical fingerprinting is one. But those technologies are still young and not widely used.

So instead we rely on data collection and documentation. The risk of fraud is high. The closer you get to African countries that are the source of conflict minerals, the higher the risk. We won’t get true clarity on source materials until governments there apply a vigorous certification scheme to the whole region, and that’s not going to happen soon.

And to complicate matters even more, the GAO report says we may have conflicting terminology for what a conflict minerals “processing center” actually is. The OECD and CFSI define “processing facility” one way, the U.S. Geological Survey another—and the Commerce Department’s list of conflict-free smelters is now based on USGS data. That can be confusing for a company trying to certify.

Meltdown Point

You have to ask whether the Conflict Minerals Rule is worth the effort. Or rather, is the opportunity cost of compliance here worth the effort? We have all manner of misconduct in our supply chain: human trafficking, money-laundering, forced labor, counterfeit goods, and more. Of course warlords in Africa are an awful group who should be stopped. But to create this much compliance apparatus, to attack so specific a problem—was that the smartest way to muster Corporate America’s overwhelming power?