The Dodd Frank Conflict Minerals Certification Provision

Conflicts, What Conflicts?

One of the more obscure provisions of the Dodd Frank Act that’s coming up on a lot of organizations is the conflict minerals certification provision found at section 1502.

This provision requires companies subject to SEC reporting to certify whether minerals used in the manufacture of their products come from the Republic of Congo and some surrounding countries; and are otherwise conflict free, in the sense of not having financed the activities of an armed group in one of the covered countries.

The purpose of this provision is to discourage the use of minerals mined by the warring parties in the ongoing conflict in that region, used for the funding of their hostilities. This doesn’t seem to have much to do with the financial regulation that is ostensibly the point of the Dodd Frank Act, but we’re talking the U.S. Congress and one of its 1000 page laws here (I’m exaggerating – it’s only 848), so of course anything is possible.

So What Do You Have to Do?

For the moment, we’ll leave aside companies that do mining and mineral extraction. Their situation is much more complex case. For everybody else, on or before May 31, 2014, and yearly thereafter, you need to file a form SD with the SEC. The requirement of the rule is itself essentially short and sweet, in that, if you happen to be conflict free, you need only provide on form SD a short certification to that effect, along with a description of the due diligence used to arrive at the certification.  You also have to make the form SD or a link to it available on a website.

If Only It Were That Simple

The devil is, however, in the details. In order to make that certification, you must make a “reasonable inquiry.” What’s reasonable? Good question. If you’re a large manufacturing company, you’re getting a lot of mineral-based products from a lot of places and a lot of suppliers. And you’re getting many of them through an extended supply chain, not directly from whoever originally produced then. So, the due diligence, and the trail of due diligence, that supports that short and simple certification becomes a nontrivial matter. Oh, and of course, since this is required reporting, there are penalties, including criminal penalties, for making a false disclosure and certification.

The Smell of Old SoX

In this sense, the Conflict Minerals certification requirement is very similar to the Sarbanes-Oxley certification of financial controls requirement. That’s also a simple certification – all you have to do is certify that your financial controls are accurate. But again, the process and audit trail required to make that simple certification turned into a massive internal audit process companies subject to the provision. And with that came a very large amount of expense.

The Conflict Minerals provision is also like the Sarbanes-Oxley financial controls certification in that there is no indication either in the law itself or in the regulatory rulemaking about what constitutes a reasonable inquiry and reasonable diligence. In the case of Sarbanes-Oxley, this created a great deal of angst and uncertainty, and as a result, a lot of overkill, since you didn’t know where the line was. The Conflict Minerals requirement appears to be going the same path. In the absence of some regulatory guidance as to what constitutes “reasonable”, you could end up building an awfully large compliance process and paper trail in an abundance of caution.

Meanwhile, you also have to have your report audited in accordance with standards established by the Comptroller General of the United States, notwithstanding the fact that the Comptroller General of the United States hasn’t yet promulgated any such standards.

So, it’s Sarbanes-Oxley redux. Get used to it – this is the 21st century, and this is what 20th-century lawmaking looks like.

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