Finding the 3TG in Dodd-Frank

Part I in a Two Part Series

The Dodd-Frank Act put Consumer Protection into the headlines with the creation of the Consumer Financial Protection Bureau (CFPB), triggering a large restructuring of consumer financial laws and regulations. However, not all parts of Dodd Frank deal with the marketing practices of financial services companies. Dodd-Frank is the shortened name of the “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010”, and contains significant provision related to corporate governance. While the financial and capital provision are getting the headlines in the finance boardrooms; compliance teams in many publicly traded companies are preparing for initial Securities and Exchange Commission (SEC) filings related to Section 1502 of Dodd-Frank Act related to Conflict Minerals.

The simplest starting point for understanding Conflict Minerals, I started with the Wikipedia citation that Conflict resources are natural resources extracted in a conflict zone and sold to perpetuate the fighting. The concept is broad, due to the nature of international trade and the nature of monitoring the sourcing of conflicts in specific countries In the case of Dodd-Frank, conflict minerals are defined as cassiterite, columbite-tantalite, gold wolframite, and their derivatives which are limited to tin, tantalum, and gold (“3TG”) .

While visions of raw materials and mines evoke historical references and movie scenes, the reality is that 3TG minerals can be used in many everyday consumer products including: hearing aids, pacemakers, GPS, Mobile phones, fishing weights, cosmetics, dart tips and golf club heads. Even the vibration from your ubiquitous cell phone can be derived from a 3TG mineral.

The corporate governance changes driven by Section 1502 require full transparency for certain manufacturers to provide assurance on if 3TG minerals are present in their products and to audit their supply chains and report conflict minerals usage in the Democratic Republic of the Congo, and adjoining countries (“Covered countries”).

What’s Required?

Under Dodd-Frank, companies would be required to submit an annual conflict minerals report to the SEC if they either are:

      1. Required to file reports with the SEC under the Exchange Act of 1934
      2. Necessary to the functionality or production of a product that they manufacture or contract to be manufactured. That sounds simple, but the reality is far from simple, and creates a sourcing complexity for supply chain management

The reporting requirements trigger the organization to have conducted a thorough review of their products and process, including the controls within the manufacturing process. U.S. manufacturers may determine they are in scope if they have obvious 3TG in a product that meets the necessary to the functionality definition, but they also can be affected based on how they outsource or source the manufacturing of a product. If the manufacturer exerts influence over the manufacturing process or even specifically contracts to have the product manufactured for itself, can trigger the conflict minerals requirements.

The process to assess the supply chain and to conduct reasonable country of origin inquiries is challenging as sourced materials do not come with simple bar-coded “Made in a Covered Country Label.” Metals are produced from ores through a smelting process Conflict minerals supply chain assessments require organizations to trace the origin of the source material to not only the smelter that processed the materials, but back to the mine itself to determine if that mine is financially sourcing the conflict in the covered country. Depending on the results of the assessments, SEC reporting requirements may trigger external audits of the due diligence process.

The industry cost and expense for conflict minerals compliance is estimated to be in the billions as manufacturers work to assess the usage of 3TG in their products and supply chains. Initial filings are required by the end of May, for the June 2014 effective date, however due to the complexity, many organizations may have to initially file Conflict Minerals Status as “undeterminable”, a status that the SEC rules allows during the initial years of filing. As organizations continue to follow the trail of the 3TG minerals, conflict minerals reports will be updated and filed for diverse set of publicly held companies.

The elevator speech version is that Conflict Minerals Compliance is a lot like “Blood Diamonds” but without the blockbuster movie version. Finding the 3TG in your organization if applicable, is an important first step in Dodd Frank Compliance. Check out Part II to this blog to learn about how to assess and review adequate reporting and build compliance programs in supply chain management for Conflict Minerals Compliance.

Linnea Solem is the Chair of the Shared Assessments Program and is Chief Privacy Officer, Vice President Risk and Compliance for Deluxe Corporation. Linnea is a management professional with 20+ years financial services experience in areas eCommerce, technology, business development, marketing, information practices and risk management. She is a Certified Information Privacy Professional and led Deluxe’s compliance initiatives for Y2K, GLB, Check 21, and Red Flags Legislation. You can connect with Linnea on LinkedIn.

Reposted with permission from Deluxe Blogs