(August 4, 2010) — The recently signed Financial Reform Bill (HR 4173) contains Sec. 1502, which requires manufacturers to report annually to the SEC if their products contain "conflict minerals" from the Democratic Republic of Congo (DRC). The new law will apply to manufactured goods containing tin, tantalum, gold and tungsten, used in electronics manufacturing.

Companies will also be required to submit a due diligence plan with the company’s annual SEC report.The SEC has 270 days to finalize regulations to implement these requirements. IPC — Association Connecting Electronics Industries is monitoring the development of these regulations and advocating for its members’ interests in this area.

The Organization for Economic Co-Operation and Development (OECD), a 32 country organization, is currently developing a framework on "Due Diligence Guidance for Responsible Supply Chain Management of Minerals From Conflict-Affected and High Risk Areas (http://www.oecd.org/document/36/0,3343,en_2649_34889_44307940_1_1_1_1,00.html)." The United States is a member of the OECD. As a result, these developing guidelines may be considered by the SEC as they draft regulations to implement the requirements under Section 1502. The OECD aims to finalize its framework by the end of September at an international meeting in Nairobi on conflict minerals.

This proposed guideline defines a risk-based due diligence framework throughout a supply chain. Due diligence in the supply chain refers therefore to company efforts to clarify its chain of custody and the qualitative circumstances involved in the mineral extraction, trading and handling in order to identify and manage actual or potential risks associated with the activities and relationships of all upstream actors.

The guideline distinguishes between the roles and due diligence requirements of upstream companies and downstream companies.

Upstream companies include local traders from country of origin, local exporters, international concentrate traders, processors and smelters. The guidance calls on these companies to establish a system of traceability and internal control over the minerals in their possession and establish a joint on-the-ground assessment team for generating and sharing verifiable, reliable, up-to-date information on the conditions of mineral extraction, trade, handling and export from conflict-affected and high-risk areas. These upstream companies then carry out risk assessments of suppliers as well as the circumstances of mineral extraction, trading and handling.

The guideline calls on downstream companies to identify and conduct an in-depth review of the due diligence process of the smelters in their supply chain and assess whether they adhere to due diligence measures put forward in this guidance. These downstream companies include metal traders, component manufacturers and brand end users.

This distinction reflects the fact that internal control mechanisms based on tracing minerals in a company’s possession are generally unfeasible after processing, with refined metals entering the consumer market as small parts of various components in end products. By virtue of these practical difficulties, downstream companies should establish internal controls over their suppliers and focus their risk assessments thereon.

The proposed guideline is based on the supply chain of cassiterite, tantalum and wolframite as a case-study. It is expected that the principles, standards and procedural steps will be applicable to other minerals as well (e.g. gold) and to supply chain aspects of minerals from both artisanal and industrial origin as appropriate.

The proposed guideline is also intended to pave the way for the development and implementation of comprehensive certification schemes of mineral resources, the implementation of which requires the performance of due diligence.

The process for conducting supply chain due diligence includes the following steps for all companies regardless of their position in the supply chain:

• Establish strong company management systems: Companies should commit to and implement a supply chain policy for minerals from conflict-affected and high-risk areas as outlined in Annex I structure management to facilitate supply chain due diligence, establish control over the mineral supply chain (either by introducing a chain of custody and traceability tracking system over minerals or by identifying and tracking upstream actors in the supply chain), strengthen company engagement with suppliers and introduce a company-level grievance mechanism.
• Identify and assess risk in the supply chain: Companies should clarify the scope of their risk assessment by identifying the potential conflict-affected and high-risk areas of mineral origin and transit, identify the chain of custody and the qualitative circumstances of mineral extraction, trading, and handling in conflict-affected and high-risk areas, and assess risk by evaluating those facts against applicable standards.
• Design and implement a strategy to respond to identified risks: Companies should manage risk by (i) continuing trade throughout the course of measurable risk mitigation efforts; (ii) temporarily suspending trade while pursuing ongoing measurable risk mitigation; or (iii) disengaging with a supplier in cases where risk mitigation proves not feasible or unacceptable.
• Ensure independent third-party audit of smelter’s due diligence practices: Companies should co-operate to ensure independent third-party audits of the due diligence practices of smelters and their suppliers.
• Publish an annual report on supply chain due diligence: Companies should report on their supply chain due diligence and disclose findings.
• Control Systems
• Record keeping system
• Methods for disclosing supply chain payments and involved parties.

For more information on conflict minerals and the electronics sector, e-mail [email protected]