The Government Accountability Office (“GAO”) examined (i) company disclosures filed in 2015 in response to the SEC conflict minerals regulations, (ii) challenges to companies’ due diligence efforts concerning the processing facilities in conflict minerals supply chains, and efforts to mitigate those challenges, and (iii) actions by the Department of Commerce (“Commerce”) regarding its conflict minerals-related requirements under the Dodd-Frank Act.
In a report titled: “SEC Conflict Minerals Rule: Companies Face Continuing Challenges in Determining Whether Their Conflict Minerals Benefit Armed Groups,” the GAO determined that:
- as a result of country-of-origin inquiries, the number of companies that filed specialized disclosure forms (“Forms SD”) with the SEC and reported that they knew or had reason to believe they knew the source of the conflict minerals in their products rose in 2015 by an increase of 19% over the previous year (based on a generalizable GAO-reviewed sample of filings);
- after an estimated 79 percent of the companies that filed a Form SD performed due diligence, an estimated 67 percent reported they were unable to confirm the source of the conflict minerals in their products, and about 97 percent reported they could not determine whether the conflict minerals financed or benefited armed groups in the Democratic Republic of the Congo (“DRC”) and adjoining countries;
- facilities that process conflict minerals pose challenges to the disclosure efforts of companies filing Forms SD because (i) these facilities rely generally on documentary evidence about the origin of conflict minerals, which evidence can be susceptible to fraud, and (ii) processing operations involve multiple levels that can introduce the risk of fraud and increase costs associated with disclosures;
- industry and other stakeholders have developed or are pursuing methods for mitigating these risks, such as chemical “fingerprinting” to verify documentary evidence; and
- as of July 2016, the Department of Commerce had not submitted a report, as required in January 2013, assessing the accuracy of the Independent Private Sector Audits (“IPSA”) filed by some companies that filed Forms SD, nor had it developed a plan to do so.
The GAO urged the Secretary of Commerce to submit a plan to the appropriate congressional committees that would outline steps to be taken within associated timeframes. Those steps included the following:
- assessing the accuracy of IPSAs and other due diligence processes described under Section 13(p) of the Securities Exchange Act;
- developing recommendations for processes to be used when executing such audits, including ways to improve the accuracy of and establish standards of best practices for such audits; and
- acquire the necessary knowledge, skills and abilities to carry out these responsibilities.
Lofchie Comment: If ever a rule were designed to fail cost-benefit analysis, the SEC manifesto on conflict minerals is it. When 97% of companies are not sure where the money is going, chances are that the data is useless.