By Emily Chasan
Hundreds of U.S. public companies are coming up short as they
face a deadline to reveal whether their supply chains contain even
trace amounts of minerals linked to violence in Africa.
In all, companies shelled out roughly $709 million and six
million staff hours last year to comply with rules to disclose
"conflict minerals" in their supply chains, according to recent
research by Tulane University and Assent Compliance, a New York
consulting firm. And next year, they will need to have their
results audited.
"Conflict minerals" include tin, tantalum, tungsten and gold
originating from the Democratic Republic of the Congo. The
conflict-torn country holds vast reserves of these four minerals,
which are widely used in a flurry of products, from electronic
devices to engagement rings to auto parts.
Some companies, including microchip-maker Intel Corp., sent
employees overseas to verify their products were conflict-free.
Yet 90% of the 1,262 companies that filed conflict mineral
reports with U.S. securities regulators last year said they
couldn't determine whether their products are conflict-free,
according to Tulane University's research.
The finding illustrates the challenges companies face in keeping
tabs on all of the players and materials in their global supply
chains.
Rules arising from the 2010 Dodd-Frank Act mandate that
companies begin to disclose in reports filed with the U.S.
Securities and Exchange Commission whether any tin, tantalum,
tungsten or gold, in their supply chains is connected to violent
militia groups in the Democratic Republic of the Congo. The
companies so far enjoyed a two-year phase-in period during which
they could declare that they couldn't determine if these minerals
were in their products. But that phase-in has now expired, and
large companies will need to be more specific when they next file
by end-June 2016, and will have to hire outsider auditors to
inspect these reports.
"It's a herculean task," said Chris Bayer, an independent
research consultant who studied the latest reports filed with the
Securities and Exchange Commission for Tulane University. Tracking
materials from more than 2 million artisanal miners in the Eastern
Congo that smelt small amounts of metals--and determining their
links to guerrilla operations--is like trying to "apply modern
supply-chain logistics to the equivalent of the 1849 California
gold rush," Mr. Bayer said.
"We have no reason to believe there are conflict minerals in any
of our products, but we're spending an enormous amount of money
trying to prove it," said Brian Cooper, chief financial officer of
communications and safety-equipment maker Federal Signal Corp. in
Oak Brook, Illinois.
Twelve percent of the world's supply of tantalum stems from
miners in the DRC, according to the U.S. Geological Survey. The
hard blue-gray metal is essential in companies' ability to build
smaller and lighter cellphones, laptops, hard drives, and other
devices. But to track the origin of tantalum, companies often have
to dig four or five layers deep into their supply chains, as the
material travels across the globe to various parts
manufacturers.
With the money and manpower to conduct extensive examinations of
their supply chains, several major technology companies including
Microsoft Corp., Apple Inc., and Intel Corp. topped the list in
terms of compliance with the law and providing additional
information on their processes. But even Microsoft and Apple said
that they were "conflict undeterminable" last year. Intel says its
products are "conflict free," but sent employees to 90 mineral
smelters around the world to gather that information.
Most companies struggled to comply with the rules already in
place when they filed conflict mineral reports--without
audits--before the June deadline.
Only 314 companies, or fewer than 24% of the total, reached full
compliance with the law. Two-thirds, including Google Inc. and
Amazon.com, didn't describe the country of origin of their metals,
as required, and about 43% failed to disclose the framework they
used to conduct due diligence, according to Mr. Bayer.
Companies' ability to find conflict minerals in their products
largely depends on where they sit in the supply chain, Mr. Bayer
said.
Federal Signal has about 60 staff members from its technology,
legal and procurement departments involved, Mr. Cooper said. They
bought specific conflict minerals software to track its supply
chain, and followed up with suppliers who didn't respond. Still, a
handful of suppliers couldn't, or wouldn't, answer its queries, he
said.
Apple told suppliers last year that if they weren't getting
their minerals audited by the end of 2014 they would be kicked out
of the company's supply chain. Apple has verified 135 of its
smelters are conflict-free and another 64 are in the process of
verification.
Under Dodd-Frank, the U.S. Commerce Department was supposed to
publish a world-wide list of refiners and smelters that are being
used to fund militia groups, but it said in September that the task
was impossible. Companies still have to comply with the SEC
reporting rules. The SEC declined to comment.
Only six companies, including Intel and capacitor maker Kemet
Corp., have managed to submit their conflict minerals reports to a
voluntary external audit so far.
"The cost of doing a bad job isn't much," said Jeff Schwartz,
professor of law at the University of Utah's law school. "Companies
can kind of just check the boxes in the rule, send out a survey,
report the results, and I don't think the SEC is really going to do
anything about it."
Just after Dodd-Frank was passed into law, Kemet, which is the
world's largest producer of tantalum capacitors, decided it was
better off opening its own tantalum mine in the DRC village of
Kisengo, in the country's conflict-free Katanga province in 2011.
Kemet has strict rules for production and tracing, and has invested
in building the town's infrastructure through roads, bridges and
new wells.
"Our tantalum supply is 100% clean right now," said Joel
Sherman, director of social responsibility at Kemet.
Kristin Lin contributed to this article.
Write to Emily Chasan at emily.chasan@wsj.com
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