Conflict Minerals Rule: Filing statistics released – How does your company stack up?

This week, the U.S. Government Accountability Office (GAO) released its annual conflict minerals report. By statute, GAO is required to annually assess the effectiveness of the SEC’s Conflict Minerals Rule in promoting peace and security in the Democratic Republic of the Congo and its adjoining countries.

The Conflict Minerals Rule requires U.S. public companies to file a specialized disclosure report (Form SD) if they manufacture, or contract to have manufactured, products that contain tin, tantalum, tungsten or gold (3TG) necessary to the functionality or production of the products. These companies must file an additional conflict minerals report, as an exhibit to the Form SD, if, after exercising due diligence, they have reason to believe the 3TG minerals may have come from covered countries and may not be from scrap or recycled sources.

In its most recent report, GAO examined companies’ Conflict Minerals Rule filings, looking at a sample of 100 filings made in 2022 (i.e., for calendar 2021). Companies have since made their 2023 filings (for calendar 2022). However, 2023 filings were largely consistent with 2022. The GAO report therefore provides useful data points for companies that want to know how they compare to other filers.

The headline takeaway for 2022 is that reporting and program results looked similar to prior years. This does not come as a surprise. 3TG traceability programs have largely been static for the last several years. 

Number of filers

• GAO indicated that, in 2022, 1,005 companies filed conflict minerals disclosures with the SEC, reflecting a continued decrease since 2014, when 1,321 companies filed. GAO indicated that, according to SEC officials, this 24% decrease may be due at least in part to M&A activity and changes in business practices by prior filers.
• GAO noted that some of the industry stakeholders they spoke to believe that a contributing factor may also be that some companies perceive enforcement risk to be low.
• We concur that all of these factors have likely contributed to the decrease. In our own experience, we have also come across SEC registrants that were unaware of, or misunderstood, the filing and other requirements of the Conflict Minerals Rule. In the early years, there was intense focus on the Rule in the issuer community, resulting in significant in-house expertise at many companies. Over time, as personnel that built out the programs have moved on, their successors (and their successors’ successors and so on) have in many cases not achieved the same level of subject matter fluency. 

Reasonable country of origin inquiry

• Almost all filers in 2022 reported that they conducted the “reasonable country of origin inquiry” (RCOI) required by the Rule. This percentage was similar to GAO’s findings for the prior two years.
• The percentage of companies that reported determinations regarding the origins of their 3TG minerals following their RCOI increased significantly from 2014 to 2015. However, the percentage has not changed significantly since then. For 2022, GAO found that 51% of companies reported preliminary determinations regarding the source of their 3TG minerals, down from a peak of 66% in 2021, but similar to its findings from 2015 through 2020.
• 35% of companies that reported conducting an RCOI in 2022 disclosed they had determined preliminarily that some or all of their 3TG minerals may have originated in covered countries. This percentage has not changed significantly from the prior two years.
• 41% of companies reported in 2022 that they were unable to determine after their RCOI whether any of their 3TG minerals may have originated in covered countries, which also was not a significant change from 2021 or 2020.
• 8% of companies did not report a clear RCOI determination in 2022, although the majority of these reported conducting due diligence. However, GAO noted that, according to SEC staff, companies that report conducting due diligence are not required to report an RCOI determination, so this was not an incidence of noncompliance with the Rule.
• 12% of companies reported in 2022 that they had determined, after their RCOI, that none of their 3TG minerals originated in covered countries or they had no reason to believe that their minerals originated in covered countries. GAO noted that this finding was statistically different from 2021 but similar to 2020.
• 3% of companies reported after conducting an RCOI that they had determined that their 3TG minerals were from scrap or recycled sources, which was similar to the prior two years’ findings.

Due diligence

• 89% of filers reported conducting due diligence after conducting an RCOI, an increase from 81% in 2021 and 78% in 2020.
• 96% of filers that conducted due diligence reported using the OECD due diligence framework.
• 53% of the filers that conducted due diligence in 2022 reported that they ultimately could not determine whether any of the 3TG minerals used in their products may have originated in covered countries. An estimated 35% of companies reported that their 3TG minerals may have originated in covered countries. An estimated 9% of companies did not clearly report that they had determined whether their 3TG minerals may have originated in covered countries. An estimated 3% reported after conducting due diligence that they had determined that their 3TG minerals did not originate in covered countries.
• As in prior years, very few companies – 3% of those conducting due diligence in 2022 – reported that they could determine whether the 3TG minerals in their products financed or benefitted armed groups in the covered countries. All of the companies that made that determination reported that their 3TG minerals did not finance or benefit armed groups.

Supplier surveys

• 89% of 2022 filings stated that companies conducted a preliminary survey of suppliers to determine whether 3TG minerals may have originated in covered countries.
• 78% of companies reported using the Conflict Minerals Reporting Template as their survey tool.
• 43% of 2022 filings mentioned lack of access to suppliers and complex supply chains as a challenge, the same as in 2021.
• 56% of the 2022 filings indicated that some of the companies’ suppliers provided incomplete or inaccurate information in their surveys.
• 48% of filings submitted in 2022 stated that not all of the suppliers had responded to survey requests.

 Independent Private Sector Audit

• Of the universe of 1,005 filers, seven submitted an Independent Private Sector Audit (IPSA) of their due diligence process and activities.
• In GAO’s sample of 100 filings, one company identified its products as “DRC conflict free” but did not file an IPSA.

Cobalt

• Cobalt is not a “conflict mineral” within the meaning of the Rule, However, of the 1,005 companies that filed with the SEC in 2022, 42 mentioned cobalt in their filings. For example, one company indicated in its filing that it had commenced due diligence procedures on its products that contain cobalt.

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