Conflict Minerals Compliance Mining Benefits With Proactive Disclosure Crowe Conflict Minerals Tracker™ Solution
Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four ®
From cellphones to toothpaste, vehicle parts to medical devices, manufacturers both large and small are affected by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Securities and Exchange Commission’s (SEC’s) conflict minerals rule. This law requires SEC registrants to disclose the presence of tantalum, tin, tungsten, or gold (3TG) in their manufactured products. The rule is intended to cut off funding to armed rebels responsible for human rights abuses in the Democratic Republic of the Congo (DRC) and adjoining countries where these precious minerals are mined. Thousands of companies in many industries, including aerospace, automotive, defense, electronics, and jewelry must perform some level of due diligence to determine the use of 3TG in their products, identify the sources of 3TG throughout their supply chain, and proactively report their findings to customers and regulatory agencies. Guidance from regulatory and trade groups is evolving with new mandates from states and countries and adds to the already complex due diligence requirements.
2
Conflict Minerals Compliance: Mining Benefits With Proactive Disclosure
www.crowehorwath.com/conflict-minerals
3
Crowe Horwath LLP
Digging Deep Into SEC Disclosure While the conflict minerals rule applies to approximately 6,000 registered companies worldwide (according to SEC estimates), it also significantly affects tens of thousands of direct or indirect suppliers of components or raw materials. In most cases, companies are unfamiliar with the extent and origins of conflict minerals present in their products since they may rely on a multitiered supply chain. Organizations with many intermediate steps between extraction of raw materials and completion of a final product can find tracking the origins of minerals extremely difficult.
4
Getting to the point of disclosure requires an extensive supply chain due diligence effort to identify the source of 3TG minerals in a company’s products. Many companies discover that the lack of available company resources to carry out the due diligence process becomes a hindrance. The process is further complicated by the inevitable roadblocks associated with collecting data from suppliers, tracking supplier response status, and consolidating responses including:
■■ Reviewing material content data forms, declaration forms, engineering specifications, bills of materials, product part codes, and other necessary information ■■ Determining if conflict minerals are necessary to product functionality ■■ Identifying and documenting product-part-supplier linkages ■■ Querying every level and type of supplier up and downstream ■■ Generating consistent communication about requirements and expectations ■■ Addressing intellectual property and privacy concerns
Conflict Minerals Compliance: Mining Benefits With Proactive Disclosure
Exploring Layers of Compliance Requirements The Organisation for Economic Co-Operation and Development’s “Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas” (OECD guidance) provides a framework for companies to consider when planning and executing their conflict minerals due diligence process. Currently, the OECD’s “Five-Step Framework for Risk-Based Due Diligence in the Mineral Supply Chain” is the only nationally or internationally recognized framework companies can follow when planning and implementing their due diligence procedures.
Crowe Horwath LLP conflict minerals specialists mapped the OECD guidance to our proven risk management framework to develop a step-by-step, repeatable approach to compliance. The framework includes the following general steps: 1. Use the SEC flowchart in SEC Final Rule, “Conflict Minerals,” Release No. 34-67716, Flowchart Summary of the Final Rule, page 33 (shown on the following page) to determine if the conflict minerals rule applies. 2. Form a team of internal and external specialists to develop a response plan.
3. Conduct a reasonable countryof-origin inquiry (RCOI) to determine materials sourcing. ■■ If 3TG is not sourced from the DRC or other covered countries, file Form SD. ■■ Otherwise, conduct due diligence to determine the source and chain of custody for use. 4. Prepare and file an independently audited Conflict Minerals Report. 5. Make the appropriate public disclosures.
OECD Five-Step Framework for Risk-Based Due Diligence in the Mineral Supply Chain Step 1. Establish strong company management systems. Step 2. Identify and assess risk in the supply chain. Step 3. Design and implement a strategy to respond to the identified risk. Step 4. Carry out independent third party audits of supply chain due diligence at identified points of the chain. Step 5. Report on supply chain due diligence. Source: www.oecd.org/daf/inv/mne/ GuidanceEdition2.pdf
www.crowehorwath.com/conflict-minerals
5
Crowe Horwath LLP
Flowchart Summary of the Final Rule – Conflict Minerals START Does the issuer manufacture or contract to manufacture products?
Y
Does the issuer file reports with the SEC under Sections 13(a) or 15(d) of the Exchange Act?
File a Form SD that discloses the issuer’s determination and briefly describes the RCOI and due diligence measures taken and the results thereof.
N
END
N
Rule does not apply.
Were the conflict minerals outside the supply chain prior to January 31, 2013?
Y
END
Exercise due diligence on the source and chain of custody of its conflict minerals following a nationally or internationally recognized due diligence framework, if such framework is available for a specific conflict mineral.
Y
N
Y
In exercising this due diligence, does the issuer determine the conflict minerals are not from the covered countries or are from scrap or recycled?
Y
Are conflict minerals necessary to the functionality or production of the product manufactured or contracted to be manufactured?
N if newly mined
N
if potentially scrap or recycled
Based on a reasonable country of origin inquiry (RCOI), does the issuer know or have reason to believe that the conflict minerals may have originated in the DRC or an adjoining country (the covered countries)?
Y
Based on the RCOI, does the issuer know or reasonably believe that the conflict minerals come from scrap or recycled?
N
N
Y
N File a Form SD that discloses the issuer’s determination and briefly describes the RCOI and the results of the inquiry.
File a Form SD with a Conflict Minerals Report as an exhibit, which includes a description of the measures the issuer has taken to exercise due diligence. ln exercising the due diligence, was the issuer able to determine whether the conflict minerals financed or benefitted armed groups?
Y
END
N
Is it less than two years after effectiveness of the rule (four years for Smaller Reporting Companies)?
Y
N
The Conflict Minerals Report must also include a description of products that are “DRC Conflict Undeterminable” and the steps taken or that will be taken, if any, since the end of the period covered in the last Conflict Minerals Report to mitigate the risk that the necessary conflict minerals benefit armed groups, including any steps to improve due diligence. No audit is required.
END The Conflict Minerals Report must also include an independent private sector audit report, which expresses an opinion or conclusion as to whether the design of the issuer’s due diligence measures is in conformity with the criteria set forth in the due diligence framework and whether the description of the issuer’s due diligence measures is consistent with the process undertaken by the issuer. Also, include a description of the products that have not been found to be DRC Conflict Free, the facilities used to process the necessary conflict minerals in those products, the country of origin of the minerals and the efforts to determine the mine or location of origin of those minerals with the greatest possible specificity.
6 6
END
Source: SEC Final Rule, “Conflict Minerals,” Release No. 34-67716, Flowchart Summary of the Final Rule, page 33
Conflict Minerals Compliance: Mining Benefits With Proactive Disclosure
Crowe Conflict Minerals Tracker Solution Streamlining Compliance Through Innovation Crowe conflict minerals specialists developed the Crowe Conflict Minerals Tracker solution as a tool for assisting companies with RCOI surveys and supplier due diligence. The solution is designed to provide an efficient and thorough method for administering the supplier query, data collection, and reporting processes. Using the Crowe Conflict Minerals Tracker solution as part of a comprehensive approach to conflict minerals compliance simplifies data collection, analysis, and reporting to enhance efficiency and strengthen results. The solution includes: ■■ A disciplined and automated approach to centralized data collection – designed to reduce duplicative requests, large spreadsheets, and repetitive tasks ■■ Functionality to integrate productpart-supplier relationships ■■ A “parts wizard” function to identify products or components requiring an RCOI
■■ A risk analysis dashboard to help you easily delegate assignments, track progress, and review progress in real time ■■ Export capabilities to facilitate the transfer of data to the Form SD and the Conflict Minerals Report
The Crowe Conflict Minerals Tracker solution provides: ■■ Dynamic survey and review ■■ Real-time progress reporting and statistics ■■ Selective and expandable questions with multiple formats available ■■ Back-end capture and analysis ■■ Risk analysis dashboards ■■ Easy data export and ad-hoc reporting ■■ Built-in training video tutorials to educate users
■■ Roll-up reporting to prepare for audit, as needed
■■ Peer-group benchmarking to establish a framework to initiate risk analysis ■■ User-friendly, straightforward questions to help expedite supplier responses ■■ Web-based questionnaire distribution to simplify tracking and communication
www.crowehorwath.com/conflict-minerals
7
Crowe Horwath LLP
Advantages of the Crowe Conflict Minerals Tracker Solution Reasonable Country of Origin Inquiry (RCOI) and Supply Chain Due Diligence Without Crowe What are conflict minerals?
I wish there was a better way.
Where do we start?
Where do we start? The SEC’s final rule is 356 pages! internal 2 Collect data. which employees 1 Determine will devote their time to implementing the process. Consider hiring additional employees.
Did you read the guidance I sent you? which products 3 Determine will be affected by issuing internal requests for data. complete 7 Suppliers questionnaires.
should receive CMrelated communication.
We need more information.
for completion.
information 9 Additional requests are sent to suppliers.
We’ve received responses from half of our suppliers. Of those, only half of the questionnaires were complete.
supplier 5 Create questionnaires. progress of supplier 10 Track responses manually. Determine if an in-house software tool can be used to store suppliers’ responses. If so, manually import each questionnaire that is received.
Data overload!
supplier responses 12 Update and supporting documentation
Adjoining Countries all supporting 11 Save documentation in a location
as new information is provided from suppliers. Track the changes made manually. how you will perform 13 Decide due diligence to validate and assess the risk associated with suppliers’ responses and supporting documentation.
Request additional information from suppliers based on the due diligence performed.
8
Project Manager
supply parts for the affected product.
8 Questionnaires are received. Check
14
We don’t have contact information for half of these suppliers!
questionnaires 6 Send to suppliers that
You already asked us for that information!
What’s the status on supplier responses and our due diligence efforts?
a listing of 4 Establish supplier personnel that
A key customer is asking if our products contain conflict minerals.
additional 15 Gather internal data and perform additional procedures to answer customers’ requests for CM-related information on supplied products.
That type of information will take weeks!
16
W
that only can be accessed by those associated with the compliance program. Ensure that the data is maintained in a way to preserve its integrity. Where is all of our documentation saved?
Prepare Form SD and Conflict Minerals Report, if applicable, based on the aggregated data.
Tungsten
17 Ifauditan independent is required, work with the auditors to provide necessary information for them to conduct the audit.
Conflict Minerals Compliance: Mining Benefits With Proactive Disclosure
The Crowe Solution When does Crowe arrive? Parts wizard used to filter on parts that will require a RCOI.
Parts Parts Data Data
Supplier Listing
Peer groups established for the subsequent risk analysis.
Bills of Materials
is provided with 1 Crowe requested raw data.
Dynamic survey Delegation feature EICC-GeSI compatible Multiple languages supported Built-in training video and resources User friendly
2
A listing of affected parts, suppliers, and products is developed and uploaded to the platform.
Project Manager
surveys are 3 Supplier transmitted electronically.
Secure Central Data Repository
Democratic Republic of the Congo
All the documentation is here!
Ta
n Tantalum
of suppliers’ 5 Progress responses is
on expectations and complete survey.
monitored through the response dashboard.
Web-based platform automates manual, time-intensive and nonvalue-added activities.
Perfect! It’s on track!
results of a risk-based 6 The assessment of supplier responses are reported in a risk analysis dashboard by risk categories and in scorecards.
Real-time progress reporting and statistics Easy export of data offers flexibility for later use
That was easy!
Sn Au Tin
the platform, 4 From suppliers are educated
Gold applicable, independent 8 Ifauditors are provided with information neccessary to form an opinion.
Based on the recommended OECD due diligence guidance Auditable, scalable and repeatable process
Form SD and Conflict 7 The Minerals Report, if applicable, are exported from the platform.
Roll-up reports. Ability to prepare and export the following reports based on the aggregated supplier responses: Form SD Conflict Minerals Report EICC-GeSI template (companywide and by product) Product-specific conflict minerals reports Progress reports 9
10
Conflict Minerals Compliance: Mining Benefits With Proactive Disclosure
Gaining Efficiency Through Smarter Approaches Complying with the conflict minerals rule is not easy, but a structured and risk-based approach can help make the task more efficient and lead to short- and long-term benefits including: ■■ Preparing for enforcement and reducing the risk of penalties or damage to reputation ■■ Demonstrating social responsibility for customers and investors ■■ Leveraging the process to improve supply chain transparency and performance ■■ Enhancing your brand and reputation as a conflict-free organization As one of the largest public accounting and consulting firms in the United States, Crowe Horwath LLP provides services to public and private sector organizations and works with a variety of manufacturers, across multiple industries, to address the compliance requirements created by conflict minerals disclosure requirements. With more than seven decades of delivering credible, independent, and objective audit services, Crowe is experienced in the management of complex and multifaceted assignments, and we understand the time-sensitive and confidential nature of regulatory compliance.
Our skills in forensic investigations provide a foundation for assisting clients with their conflict minerals-related needs – from planning to data collection, due diligence, and reporting. And our industry expertise includes serving more than 1,000 domestic and international manufacturing organizations. Crowe conflict minerals compliance expertise is enhanced through daily discussions with companies about best practices for responding to due diligence requirements and preparing for an independent private sector audit (IPSA) of compliance programs. Our professionals share their expertise by crafting white papers, publishing articles, and participating in professional organizations such as the IPC – Association Connecting Electronics Industries and International Council on Mining and Metals (ICMM). For more information about the Crowe Conflict Minerals Tracker solution, conflict minerals thought leadership, and links to regulations, industry insights, and best practices, visit the Crowe Conflict Minerals Resource Center at www.crowehorwath.com/conflict-minerals.
11
Contact Information
Crowe Horwath LLP, The Unique Alternative®
For guidance on an effective, efficient, and comprehensive solution to the challenges presented by conflict minerals investigations and disclosure, please contact:
Crowe Horwath LLP (www.crowehorwath.com) is one of the largest public accounting and consulting firms in the United States. Under its core purpose of “Building Value with Values,®” Crowe uses its deep industry expertise to provide audit services to public and private entities while also helping clients reach their goals with tax, advisory, risk, and performance services. With a total of more than 3,000 personnel, Crowe and its subsidiaries have offices coast to coast. The firm is recognized by many organizations as one of the country’s best places to work. Crowe serves clients worldwide as an independent member of Crowe Horwath International, one of the largest global accounting networks in the world, consisting of more than 150 independent accounting and advisory services firms in more than 100 countries around the world.
Vicky Ludema 800.599.2304 vicky.ludema@crowehorwath.com
www.crowehorwath.com/conflict-minerals When printed by Crowe Horwath LLP, this piece is printed on Mohawk Color Copy Premium, which is manufactured entirely with Green-e certified wind-generated electricity. ®
Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. © 2014 Crowe Horwath LLP FOR14020