GAO Study: SEC Conflict Minerals Rule Case Study

by Source Intelligence

on July 25, 2013

A company’s supply chain for products containing tin, tantalum, tungsten, and gold can be complex and can vary considerably in the way it operates, according to industry association and company representatives. Generally, however, the supply chain for companies using conflict minerals begins at the mine site, where tin, tantalum, and tungsten ore are extracted from the ground using mechanized or artisanal mining techniques.²³

 The figure below provides additional information on a simplified supply chain for all four conflict minerals:


GAO conflict minerals study: simplified supply chain for all four conflict minerals


Information on Responsible Sourcing and Companies Affected


For artisanal mining, the local processor or trader (which may be an individual or company) purchases minerals directly from the mine sites and typically processes or upgrades them before selling them to an exporter. The exporter may also purchase minerals directly from mine sites rather than going through a local processor or trader. Exporters may carry out further processing or upgrading before exporting materials to a smelter or refiner, where they are either converted into metals or purified into a higher-purity metal.

Smelters primarily provide high-purity tin, tantalum, and tungsten directly to component parts manufacturers, although some sell high-purity metals through traders or exchanges.²⁴ Gold refiners typically sell high-purity gold to banks, for use as a store of value, or to international exchanges, where gold is bought and sold.²⁵ However, some gold refiners sell gold directly to manufacturers as well. Banks and traders may sell gold to manufacturers, including jewelry and component parts manufacturers.

The component parts manufacturers construct individual parts—such as capacitors, engine parts, or clasps for necklaces—that they sell to original equipment manufacturers. The original equipment manufacturers complete the final assembly of a product and sell the final product to the consumer.

Even companies that are not required to file disclosures under SEC’s conflict minerals rule will likely be affected by the rule. These companies may supply components or parts that contain conflict minerals to companies reporting to SEC under the rule and may be asked by such companies to provide information specifying the origin of the minerals.

Aside from the supply chain relationship, while information is publicly available about some smelters and refiners, there is little aggregated information available about companies that do not report to SEC under the rule but may trade in conflict minerals.

Companies that are not required to report to SEC under the rule may supply products that contain conflict minerals to SEC-reporting companies under the rule. SEC relied on estimates provided by a commentator indicating that 278,000 suppliers—most of which would be companies that would not report to SEC under the rule—could be indirectly impacted by the rule.

Moreover, the release contains an estimate that each of the nearly 6,000 companies that could be directly impacted by the rule has roughly 1,000 first-tier suppliers, on average.³⁵ These suppliers, including first-tier suppliers, could provide products that contain conflict minerals to companies required to report to SEC under the rule.

Examples of these products include tin solder for joining metal, tantalum capacitors for storing energy in cellular phones, tungsten carbide for hardened cutting tools, or gold plating for wires to increase durability and resistance to corrosion. The first-tier supplier has a direct commercial relationship with the original equipment manufacturer, meaning the first-tier supplier sells materials or component parts, which have been aggregated by suppliers throughout the supply chain, to the original equipment manufacturer for final assembly. According to an industry official, in general, component parts manufacturers construct individual parts—such as capacitors, engine parts, circuit boards, and other components—and assemble them into more complex components.

Using an electronics company as a model, processed metals move through several suppliers that manufacture component parts after the smelter—first to circuit board and computer chip manufacturers, then to cellular phone and other electronics manufacturers, and finally to the brand-name electronics company, which is the original equipment manufacturer that manufactures products recognizable to the consumer, such as cellular phones, tablets, and laptop computers.

Beyond the first- tier supplier, there are tier 2-, 3-, 4-, or higher-tiered suppliers that, beginning with the raw materials from the smelter or refiner, manufacture component parts that are assembled into more complex component parts as they move from higher- to lower-tiered suppliers in the supply chain, to the first-tier supplier, and finally to the original equipment manufacturer.³⁷ 


See figure 4 for a simplified version of the supply chain, and the tiered structure of suppliers:


GAO conflict minerals study: simplified version of the supply chain and the tiered structure of suppliers

While many companies will likely be directly or indirectly impacted by the rule, some companies that use conflict minerals may not be, partly because

  1. The companies are not issuers that are required to file with SEC under the Securities Exchange Act, and
  2. These same companies potentially do not sell components or parts to a company that will be required to report to SEC under the rule. Industry and consulting firm representatives have differing views on the number of companies that purchase conflict minerals from the DRC and adjoining countries but may not be impacted by the rule.

Suppliers that provide products that may contain conflict minerals to companies required to report to SEC under the rule may provide information on the minerals’ origins to those reporting companies that request it.

The SEC release does not specify the steps and outcomes for the reasonable country of origin inquiry, and indicates that such a determination depends on each issuer’s facts and circumstances. However, in conducting a country of origin inquiry, issuers may inquire of their suppliers the origin of any conflict minerals in the products.

According to the release, the issuer’s inquiry must be reasonably designed to determine whether any of its conflict minerals originated in the DRC and adjoining countries, and must be performed in good faith. If, after this inquiry, the issuer has a reason to believe that its conflict minerals may have originated in the DRC and adjoining countries, the issuer proceeds to exercising due diligence.

Industry associations such as the EICC and GeSI have created templates for companies to use when contacting suppliers to inquire about the types and origins of conflict minerals in a given product.³⁸ 

For example, companies required to report under the rule could submit the inquiries to their first-tier suppliers. Those suppliers could either provide the reporting company with sufficient information or initiate the inquiry process up the supply chain, such as by distributing the inquiries to suppliers at the next tier—tier 2 suppliers. The tier 2 suppliers could inquire up the supply chain to additional suppliers, until the inquiries arrive at the smelter. Smelters then could provide the suppliers with information about the origin of the conflict minerals.


Figure 5 illustrates the flow of information up the supply chain:


GAO conflict minerals study figure 5: flow of information up the supply chain


Why GAO Did This Conflict Minerals Study


Initial company disclosure reports to SEC that would enable GAO to assess the effectiveness of the rule will not be due until May 2014. GAO reviewed and analyzed documents and interviewed representatives from SEC, the Department of State, the U.S. Agency for International Development, industry associations, NGOs, consulting firms, and international organizations. GAO also analyzed smelter and refiner information. 

This report describes, among other issues:

  1. Factors that may impact whether SEC’s rule denies armed groups in the DRC benefits from conflict minerals 
  2. Information about companies that use conflict minerals and are not required to report to SEC under the rule. 

This report does not contain recommendations.


Download the Report


23. Artisanal mining is a form of mining that is characterized by a lack of mechanization or capital investment.

24. According to OECD, in many instances smelters and refiners do not actually take ownership of the mineral but provide a service and charge a fee based on the amount of 

minerals smelted. Ownership of the minerals may remain with the mineral trader, bank, or component parts manufacturer. 

25. According to a World Gold Council representative, in most cases refiners are paid a fee to refine gold and the transaction is conducted between the miner, trader, and the bank. 

35. The actual number of first-tier suppliers is unknown, and organizations that commented on the release provided varying estimates on the number of first-tier suppliers that could potentially be affected by the SEC rule. As cited in the SEC release, commentators provided estimates indicating that SEC-reporting companies under the rule averaged nearly 160 to 10,000 first-tier suppliers, each. In addition, another commentator estimated that SEC-reporting companies averaged 1,060 first-tier suppliers each. After accounting for redundancies, because a supplier may be in more than one supply chain, SEC revised the number of potentially affected suppliers, provided by one commentator, to 278,000 suppliers.

37. SEC estimates that a number of SEC-reporting companies under the rule may be original equipment manufacturers and first-tier suppliers, although SEC-reporting companies under the rule could exist anywhere on the supply chain.

38. According to EICC and GeSI, as of April 30, 2013, the EICC and GeSI activities are now under the Conflict Free Sourcing Initiative, which is an expanded initiative of the EICC and GeSI Extractives Work Group that includes more stakeholders and a wider range of industry sectors supporting the sourcing of conflict-free minerals.

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