The SEC’s conflicts minerals disclosure rules, promulgated as required under provisions of the Dodd-Frank Act, became effective on January 1, 2013, requiring companies to make their first conflict minerals disclosures on or before May 31, 2014 for the 2013 reporting year, as I detailed in a recent post. But though it is widely recognized that the conflicts minerals disclosure requirements impose challenging compliance requirements on reporting companies, many companies have yet to commence their efforts to be prepared for the reporting deadline. In addition, there is some suggestion that the very existence of the requirements may be having the perverse effect of exacerbating the conditions that the disclosure requirements were intended to address.


The conflict mineral disclosure requirements are intended to identify the use in manufactured products of certain specified minerals from the Democratic Republic of Congo and adjacent countries. The four specific conflict minerals are tin, tantalite, tungsten and gold (the so-called 3TGs). The minerals are found in many high tech products. For example, tantalite is an essential part of most cellphones. The countries covered by the disclosure rules are, in addition to the DRC, Angola, Burundi, Central African Republic, the Republic of Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia (the “Covered Countries”)


On a positive note, some companies are in fact undertaking aggressive efforts to try to be able to determine whether its parts suppliers on rely on conflicts minerals. For example, as described in an April 15, 2013 post on the New York Times Bits blog (here), Hewlett-Packard has identified ore smelters around the world that are identified with its products in order to enable its part suppliers to ensure that their minerals were not obtained from conflict zones. (H-P’s April 15, 2013 announcement regarding the ore smelters can be found here.) H-P intends to rely on a third-party to audit the smelters documentation as a way to monitor the possible presence of conflicts minerals.


However, a recent article in the Wall Street Journal suggests how difficult it may be for companies to rely on documentation to monitor their parts suppliers’ compliance. In an April 14, 2013 article entitled “Inside Congo’s Link in the Gold Chain” (here), the Journal showed how easily smugglers are able to obtain false documentation for gold smuggled out of the DRC. Smuggler networks ferry gold out of the DRC to neighboring counties (such as Uganda or the South Sudan), where it is recertified and then flown to key entry points around the Middle East (particularly Dubai). As the Journal notes, “the faint paper trail disappears as soon as it arrives in Dubai.” In Dubai, the smuggled minerals are mixed into scrap bars, which are then sold for cash or smuggled into other countries.


Even worse, these highly profitable smuggling operations may be a direct result of the new disclosure requirements.  The disclosure requirements are built on the belief that if minerals’ source of origin is identified and disclosed, buyers can avoid minerals from the conflict regions. Because the flow of minerals is helping to finance the conflict within the DRC, the hope is that reducing the global market for the minerals will create incentives for peace there. However, as the Journal article shows, “the opportunities for illicit gains only increased” after Congress created the disclosure requirements with the Dodd-Frank Act. The smugglers’ potential profits are significantly boosted because the new disclosure requirements have “squeezed the legitimate market for the Congolese minerals.” Perversely, the requirements could actually increase the profits available for those trading in the conflict minerals.


Just to add to the confusion, the SEC’s conflicts minerals disclosure rules have been challenged in the courts. As I discussed previously, on October 19, 2012, the U.S. Chamber of Commerce and the National Association of Manufacturers filed a petition for review with the Court of Appeals for the District of Columbia requesting that the SEC’s rule be set aside in whole or in part. The challenge remains pending.


As if that were not enough, the situation could be even further complicated with the introduction of additional conflicts minerals rules from other countries and organizations. For example, Canada and the European Union are both considering new disclosure requirements that may differ from the U.S. requirements. The requirements under consideration in Canada could be broad than those in the U.S. and could include additional countries and minerals, raising the possibility of overlapping yet inconsistent rules, which has the potential to create confusion and inefficiencies.


With all of the murkiness surrounding the situation, many companies are slow of the mark in getting ready to meet the new disclosure guidelines. As discussed in an April 16, 2013 Compliance Week article (here), a recent PwC survey determined that many company have “intentionally delayed” conflicts minerals compliance efforts. Though of course there are companies (such as H-P) that are actively working to be able to meet the initial disclosure mandates, many other companies are, according to the PwC study, are “playing the waiting game.” Nearly 17 percent of respondents in the PwC survey “haven’t done much or are waiting to see what happens” with the legal challenge. As noted by a PwC representative in the article, “waiting until the legal challenge is resolved to begin compliance efforts is a huge gamble and n unwise approach.” There is a real concern that “many companies are getting too late a start to adequately meet the May 2014 deadline.”


In short, the landscape surrounding the conflict minerals disclosure requirements is fraught with peril. On the one hand, companies taking a more passive approach run a significant risk of being unable to meet the initial disclosure deadline. On the other hand, murky and potentially changing or conflicting requirements make it difficult for the companies to proceed efficiently. And finally, the complex and uncertain circumstances surrounding the global distribution of conflict minerals present significant challenges for all of the process participants to make the source of origin determinations that underlie the disclosure requirements mandate.


In other words, there is a great deal of risk surrounding the new disclosure requirements. The murkiness and confusion surrounding the requirements and the challenging nature of the compliance obligations suggest that, unless the courts set the requirements aside, the conflicts mineral disclosure requirements will become an increasing source of concern as the first disclosure deadline approaches.


I expect that conflicts minerals disclosure is going to an increasingly important source of comment and concern in the months ahead.