For years, companies have sent old flourescent tubes for recycling.  Generally, this involves recovery of the end caps, glass and mercury vapor.  Elm recently observed an emerging technology at a client location that goes a step further by recovering additional high-value materials from other – less obvious – components of these tubes and CFLs.  The details remain confidential at this point (we even obtained specific authorization from the client to post this).  But once fullly operational, this process will greatly expand the universe of materials recovered from fluorescent tube/CFL recycling.  And with the use of fluorescents continuing to grow, this is good news.

May 10 at 10 a.m.  
The International Monetary Policy and Trade Subcommittee will hold a hearing on the consequences of requiring Securities and Exchange Commission (SEC) registrants to provide disclosures about the use of minerals from the Congo region.

As our client base consists more of heavy industry, hard metals and non-electronics consumer products, some of our predictions stand in contrast to “conventional wisdom.”

1. Especially for US companies subject to DF1502, there is an increasing recognition that the makeup of the downstream pilot participants is heavily skewed toward the electronics industry, and the results of the pilot are therefore not representative of heavy manufacturing or other non-electronics sectors.  At the same time, we expect an increased awareness of conflict minerals (CM) issues in pilot participants which means a related increase in uptake of basic program elements such as company policies on conflict minerals.
2. Many companies (arguably most companies (a) outside the electronics industry and (b) not participating in the Pilot Program) are still awaiting the final SEC regulations before moving forward on CM program development/implementation.
3. There continue to be significant questions about how to engage/influence smelters in situations where business relationships do not directly include the smelters.
4. Confidentiality remains a major concern with no clear solution.
5. Adoption of the EICC-GeSI Common Reporting template continues to be held back due to its stand alone, non-integrated nature as a simple spreadsheet.  This is especially the case for companies with very large/ complex supply chains, although technological solutions are being developed to bridge this gap.
6. Validation of information from suppliers is a complex exercise with no simple answer.
7. Communications with suppliers and customers are not just “one and done” – different types of communications are being used depending on the requests, and sometimes multiple/labor-intensive follow-ups are required.
8. The tension between CFS, OECD and the anticipated SEC requirements is growing, especially related to the definitions of  “conflict free” and the applicability of audits under Step 4 of the OECD, CFS and the Conflict Minerals Report.
9. There is increasing uncertainty as to how upstream verifications are conducted within smelter (or other downstream) audits.
10. Some companies in the supply chain – especially those not under SEC jurisdiction and not in the electronics industry – are not required to address CM and are not integrating CM requirements in their procurement.  Concern is growing that CM program costs are creating financial disadvantage in the short term and may continue to do so until CM matters are fully embedded throughout all supply chain actors across all sectors and geographies.
11. The CFS program is viewed as having major shortcomings, such as:

• Only 11 smelters have been approved since the program’s inception 2 years ago.
• The tin, tungsten and gold sectors have not been supportive of the program.
• Only three audit firms are approved by EICC to conduct all CFS audits.
• There is no transparency or published standards for CFS auditor qualifications or selection criteria.  Other industries are seeking “approval” of auditors they have already screened for their purposes (ie., LBMA gold).
• The CFS program only publishes “approved” smelters, and does not provide an indication of specific smelters that are in corrective action mode, or that do not pass.
• The CFS program does not allow for risk mitigation under OECD.  Passing a CFS audit requires 100% conflict free materials at the time of the audit as well as verification that smelter purchasing processes ensure that only 100%  conflict free materials continue to be purchased.

12.  Finally, there continues to be an emphasis on third party auditors providing critical information verification and program credibility in the myriad national and industrial traceability frameworks, process stages and reporting steps.  However, there is almost universal lack of recognition about the importance of the quality of auditors or need for oversight/accreditation.  Even further, questions are already arising as to what constitutes an “audit” versus other types of less formalized reconnaissance, investigations and assessments.

an independent audit of the operations was conducted to evaluate conformance of the operation to the OECD Due Diligence Guidance. This work was conducted by Gregory Mthembu-Salter, a consultant to the United Nations Group of Experts.

This audit document, which forms the basis of SfH’s conflict-free mine claims, is available on the SfH website.  (NOTE:  When we began writing this piece, the link to this audit report functioned properly.  At the time of our publication, the link appears to have become corrupted, therefore we include the document in its exact form as originally downloaded from the SfH website on April 5, 2012.  SfH OECD audit report)

With the world carefully watching the SfH project, one expects the highest attention to detail and scrutiny at each step in the process.  However, with all due respect to Mr. Mthembu-Salter (whom Elm will be meeting at the end of this month at the ITRI Conflict Minerals Programme in Cape Town South Africa), it is unlikely that an SEC Conflict Minerals Report (CMR) auditor would be willing to rely on this document in its current form presented by SfH.

The audit document raises potential concerns of “reliance risk” on the part of SfH participants/supply chain, and “audit risk” under US audit standards expected for SEC CMR audits under Section 1502 of Dodd-Frank.  In our opinion (shared by others in the audit profession), the document is decidedly informal and lacks credibility as an audit report – or as a document on which an audit professional should rely – in that it, for example:

• Does not specifically identify the name of the auditor/report author, and contains no signature.
• Is written on a blank page with no letterhead or other indication of a professional provenance.
• Does not discuss the specific information reviewed, audit or sampling methodology.
• Contains no indication of the time period under review.
• Appears to be an excerpt from a larger report that may contain key information relevant to the audit scope, limitations and credibility, although the larger report is not available.
• Lacks clarity on the audit standard applied.  OECD Guidance Step 4 (the only audit framework directly incorporated into the Guidance) applies to smelters/refiners, not upstream companies.  If the SfH document is part of the upstream supply chain risk assessment/management plan under Step 2 or 3 of the OECD Guidance, that is not an “audit” and should be clearly indicated.

SEC’s proposed rules refer to the US Government Accountability Office Government Auditing Standard (known as GAGAS or the “Yellow Book”) as the applicable CMR audit framework.  During the Commission’s October 2011 Roundtable, SEC staffers and industry panelists (such as ourselves and the Chair of AICPA’s Auditing Standards Board) supported the use of the Performance Audit standard within the Yellow Book.

A performance audit reviews the quality/credibility of information relied upon by an issuer and would almost certainly call into question the credibility and provenance of the SfH audit document in the form that it is currently available.  In the performance audit framework, the audit could go further into information management controls of the project – questioning how/why the project would be willing to rely on such an informal document as the critical and fundamental basis for the project’s conflict-free claims, and whether information management controls create risks.  An auditor’s assessment of information management controls and risks are discussed extensively in Chapter 6 (Field Work Standards for Performance Audits) of the Yellow Book.

These concerns can create the basis of an audit finding and be part of the “audit risk” disclosure, reverberating to entities relying on SfH and its information – especially those subject to CMR reporting.  Of course, until the SEC finalizes their regulation, the timing for such reporting is not known and should be far enough in the future for SfH to address these concerns.

What can be learned?

As companies develop conflict minerals due diligence processes, they should anticipate being subject to additional scrutiny by customers and the general public.  In many cases (especially suppliers to issuers filing a CMR), this will take the form of proving the veracity/quality of information as well as the credibility of experts relied upon.  Viewing conflict minerals due diligence planning, execution and information through the eyes of an audit professional may yield valuable insights to help prevent audit findings and reduce reliance risk.  Contact us to learn how our auditing expertise can help you.

The objective of the Standard is to create absolute trust that the gold produced under its guidelines neither fuels armed conflict, nor funds armed groups, nor contributes to human rights abuses associated with these conflicts.

The WGC press release, which contains a link to the draft, is available here.

In just over a month, Elm’s Lawrence Heim will be presenting at ITRI’s Conflict Minerals Programme in Cape Town South Africa as part of ITRI’s International Tin Conference 2012.

He is joining a panel of world renowned experts from Central African countries including DRC, the United Nations (UN), US Agency for International Development (USAID) and more.  These recognized experts, covering a range of topics relevant to cultural and business implications of conflict minerals in Africa, include (alphabetically):

• Patrick Amisi, Minister of Mines, Maniema, DRC
• Banny Banza, Vice President Stakeholders Committee Katanga, Head of SAESSCAM Katanga
• Bali Barume – BGR
• Yves Bawa – Pact
• Cyprien Birhingingwa, South Kivu civil society
• Assheton Carter, Senior Vice President, Pact
• Joseph Ikoli – DRC
• Eric Kajemba, OGP (civil society) (to be confirmed)
• John Kanyoni, FEC & Association des Comptoirs, North Kivu and DRC
• Bob Leet – EICC/Intel
• Gilbert Leya – Katanga
• Paul Mabolia, ICGLR Committee on Illegal Exploitation of Natural Resources, DRC
• Joseph Mbaya – Rwanda
• Kay Nimmo – ITRI
• Henry Nkeng – MONUSCO – Centre de Negoce
• Dr Emmanuel Nkurunziza, President of Stakeholders Committee Rwanda, Director General 
Rwanda Natural Resources Authority
• Richard Robinson, Extractive Industry Technical Advisor, USAID (invited)
• Gregory Mthembu Salter, consultant to UN Group of Experts on due diligence
• Graham Smith , RSDIP Program Coordinator, Development Bank of Southern Africa
• Vincent Songe – Kivus (connection with other initiatives)
• Representatives from the ICGLR data team and Audit Committee

Elm is offering you the opportunity to submit questions directly to these subject matter authorities.  Click here to submit written questions.  Please include the name of the specific individual to whom the question is addressed.  Answers will be consolidated and posted to our blog within two weeks after the ITRI Conflict Minerals Programme has concluded.

Mr. Heim will attempt to present all questions, but please be aware we can’t guarantee that all questions submitted to us will be presented, or that answers will be provided to all that are presented to the experts.  Further, we reserve the right to screen the questions and exclude any that we determine to be inappropriate or inflammatory.

Since that time, we launched a multi-faceted effort to locate and obtain this document.  Today we received some surprising news from a US Senate office staffer who contacted SEC as a result of one of our requests:

The SEC directly denies that any form of a final conflict minerals regulation is complete, and no version of a final regulation has been officially submitted to any elected officials.

Did Senator Leahy simply use poorly chosen wording in his letter, or is there more to it?  Certainly we don’t know and won’t speculate.  However, it now appears that the wait and political obfuscation will continue.

Substantive comments made in the short letter include:

•  “Congress did not intend for Section 1502 to provide companies with an option to report that the origin of materials cannot be identified.  If a company cannot affirm that the minerals are “conflict-free”, the only other conclusion that could be reported would be that the product may contain materials the directly or indirectly finance armed groups in the DRC.”
• “… we strongly urge you to issue strong regulations with no phase-ins or delays…”

The letter is co-signed by Senators Barbara Boxer, Frank Lautenberg, Barbara Mikulski, Sheldon Whitehouse and Ron Wyden.