Dodd-Frank and supply chain assurance
January 21, 2014
Suzan R. Flamm, Esq. (firstname.lastname@example.org) is senior counsel of the Jewelers Vigilance Committee, which provides general educational resources and jeweler-specific advice. The advice is strictly the opinion of the JVC.
Beginning this year, companies that file with the Securities and Exchange Commission, and that use gold or tungsten, will need to publicly disclose if their products contain “conflict minerals” from the Democratic Republic of the Congo or any adjoining country. They will also need to disclose if any of their products are not “conflict free.” This is a result of Section 1502 of the 2010 Dodd-Frank Act, designed to stop the funding of rebel violence in the region with conflict minerals, which include gold and tungsten. To meet Dodd-Frank obligations, some SEC-listed companies in our industry will seek information from their direct and indirect suppliers about the origin of the minerals that they use, as well as assurances that the minerals were not used to finance conflict. Cooperation by suppliers on this issue may be a condition of continuing a commercial relationship. Fortunately, tools exist to implement supply chain systems to meet this need and thus, over time, to provide the information and assurances required to maintain valued customers. JVC’s Supply Chain Assurance Kit, now available to the industry, contains the templates and guidance suppliers need to accomplish this task.
The impact of Dodd-Frank on the mineral supply chain
Companies that use conflict minerals and file with the SEC are mandated by Dodd-Frank to find out where the minerals originated and, in some circumstances, to exercise “due diligence” over their supply chains. In this context, due diligence refers to an assurance system implemented by a company to prevent the use of conflict minerals in its products. Entities covered by the law -- for the most part public companies -- will require that their direct and indirect suppliers also implement an assurance system for their supply chain, as that is the only way the entities can comply with Dodd-Frank and ensure responsible sourcing. Thus, even though Dodd-Frank imposes direct legal obligations on only a limited number of companies in our industry, it has already impacted a variety of businesses throughout the gold and tungsten supply chain. Affected businesses include mines, traders, exporters, metal processors, manufacturers, wholesalers and retailers.
Supply chain assurance for gold and tungsten
The process to create an assured supply chain for minerals, including gold and tungsten, is based on a risk assessment: specifically, the risk that particular minerals may have funded conflict. Should that risk exist, then the next step is to develop a strategy to manage it, appropriate to the level of risk.
The details of the risk assessment for a particular business depend on several factors, including where the business is located on the mineral supply chain and which mineral is involved, gold or tungsten. The supply chain begins at the mine and ends with the retailer. Gold purifiers and tungsten smelters are critical points on the chain, as determining origin is very difficult after mineral processing. Thus, for many businesses, an important part of the risk assessment will be to identify where gold was purified, or where tungsten was smelted. Once a business has that information, it will then need to find out if the purifier or smelter has a system in place to ensure a responsible supply chain. If so, this is a low-risk supply chain, meaning that the business can assure its customers that their minerals have not funded conflict.
This may sound daunting, but there are several industry validation programs to help with the task. For example, the London Bullion Market Association has designated a list of Good Delivery purifiers that have been successfully audited against exacting standards. Another helpful initiative is the Conflict-Free Smelter Program, which identifies conflict-free metal processors, including tungsten smelters and gold purifiers. Metal processors on the Conflict-Free list have taken robust measures to keep conflict minerals out of their supply chain and have also been audited for compliance to applicable standards. Sourcing gold or tungsten, either directly or indirectly, from purifiers or smelters that participate in these programs helps ensure a conflict-free supply chain.
Nonetheless, some businesses will find that there are risks in their supply chains. This could be, for example, because their own suppliers are unable to identify the companies that purified their gold. Or the risk might be that their tungsten originated in the DRC and the smelter that processed it does not take adequate steps to ensure that those metals did not fund conflict. These companies will need to develop a strategy to manage these risks. In the alternative, the businesses might elect to find other suppliers of gold or tungsten, ones that can not only identify purifiers or smelters, but have verified their commitment to responsible supply chains.
JVC’s Supply Chain Assurance Kit
JVC has developed a do-it-yourself Supply Chain Assurance Kit to help suppliers with these new challenges. The kit has the templates and guidance you need to gather necessary information, as well as to assess and manage risk. These include:
-- Sample letters requesting information about the gold or tungsten that you buy
-- Sample logs to track information you receive
-- A sample policy showing your commitment to responsible mineral supply chains
-- Sample language to include in vendor contracts, indicating your requirements regarding responsible supply chains
-- Templates to use to assess risk, and manage risk if any is found
Because assurance systems differ, depending on where a company is on the mineral supply chain, and whether it is supplying gold or tungsten, JVC’s kit offers customized guidance and templates to meet the obligations created by Dodd-Frank. The kit also includes an explanation, and examples, to help users determine their position on the supply chain and exactly which kit materials to use.
Protection against legal and financial risk requires up-to-date information on laws that impact the mineral supply chain, and other laws and regulations pertinent to the industry. JVC is available to help with this task by providing educational resources and legal information to the trade, such as our Supply Chain Assurance Kit. For information about membership, or to order the kit or a copy of any other JVC publication, please visit our web site at JVCLegal.org.