Sources of Misery

A controversial new rule requires companies to peer deep into their supply chains to see if they are unwittingly supporting violence in Africa.

As a compliance manager at TriQuint Semiconductor, John Sharp has spent much of the past year focused on one little-known compliance rule before it goes into effect. To satisfy it, he must query hundreds of suppliers to figure out the origin of some 450 materials used in his company’s products. It’s an unusual burden, he says, because “we’ve never had to go back through our supply chain to determine the source of something.”

Until now. A provision in the Dodd-Frank financial reform law requires publicly traded companies to scour their supply chains for so-called conflict minerals mined in the Democratic Republic of Congo (DRC) and surrounding countries. If a company finds that minerals used in its products or components come from the area, it will need to dig even deeper to determine whether its purchases indirectly help fund ongoing violence in the region. The final version of this rule will likely require that companies publish their findings every year and explain their due-diligence process.

These conflict minerals are used in the manufacture of a variety of everyday products, such as smart phones, laptops, hearing aids, and jewelry. If the Securities and Exchange Commission regulation passes as currently written, public companies that make products containing tin, tantalum, tungsten, and gold will be subject to the rule, no matter how much, or how little, of these metals they use. The estimated 5,550 companies that need to comply include electronics manufacturers, original equipment manufacturers, jewelers, and some retailers that sell private brands.

While they wait for the SEC to finalize its rule, companies hoping to get a start on the process, such as TriQuint and Caterpillar, have surveyed their suppliers for information but haven’t always had luck getting all the data they need. Some smaller suppliers are either unaware of the provision, lack the resources to comply, or are convinced it doesn’t apply to them. “As you go down your tiers of suppliers, you’re going to get very small companies that have not heard about the rule,” says Sheryl Toby, a partner at law firm Dykema.

That may change soon. The SEC plans to vote on the regulation by the end of this year, possibly as early as August. Most likely, companies with December 31 fiscal-year ends will make the required disclosures in the early part of 2013, meaning they will need to start their due diligence in fiscal 2012.

How to follow the SEC's proposed rule for disclosing conflict minerals.

Those efforts will have a ripple effect on privately held suppliers when their publicly held customers push them for information. “Even if you think this is an SEC thing that you don’t have to worry about, chances are it will end up on your doorstep if you want to sell to the big players,” says Frank Murray, senior counsel for Foley & Lardner.

Cost of Compliance

The new disclosure requirement will be a costly, time-consuming project for firms that deal with thousands of suppliers around the globe. The National Association of Manufacturers estimates that public companies and their suppliers will incur a total of $9 billion to $16 billion in compliance costs. Businesses may need to pay employees to travel overseas to scrutinize suppliers firsthand, or join organizations scrambling to get the facilities that process these minerals classified as “conflict-free” by auditors (as of late May, only three smelters fit that description).

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