oversight

Conflict Minerals Disclosure Rule: SEC's Actions and Stakeholder-Developed Initiatives

Published by the Government Accountability Office on 2012-07-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Committees




July 2012
             CONFLICT
             MINERALS
             DISCLOSURE RULE
             SEC’s Actions and
             Stakeholder-
             Developed Initiatives




GAO-12-763
                                                 July 2012

                                                 CONFLICT MINERALS DISCLOSURE RULE
                                                 SEC’s Actions and Stakeholder-Developed
                                                 Initiatives
Highlights of GAO-12-763, a report to
congressional committees




Why GAO Did This Study                           What GAO Found
In eastern DRC, armed groups                     The Securities and Exchange Commission (SEC) has taken some steps toward
continue to commit severe human                  developing a conflict minerals disclosure rule, but it has not issued a final rule.
rights abuses and profit from                    For example, SEC published a proposed rule in December 2010 and has
exploitation of minerals and other               gathered and reviewed extensive input from external stakeholders through
trades. In 2010, Congress included a             comment letters and meetings. SEC has also announced, on several occasions,
provision in the Dodd-Frank Wall                 new target dates for the publication of a final rule, as shown in the table below. In
Street Reform and Consumer                       July 2012, SEC announced that the Commission will hold an open meeting in
Protection Act to address the trade of           August 2012 to consider whether to adopt a final rule. According to SEC officials,
conflict minerals—tin, tantalum,
                                                 various factors have caused delays in finalizing the rule beyond the April 2011
tungsten, and gold. Section 1502(b) of
                                                 deadline stipulated in the act, including the intensity of input from stakeholders
the act requires SEC to issue a
disclosure rule for companies using
                                                 and the public; the amount of time required to review this input; and the need to
these minerals in their products. The            conduct a thorough economic analysis for rule making.
act also requires GAO to assess the              SEC Announcements of Target Publication Dates for Final Conflict Minerals Disclosure Rule
rule’s effectiveness and the rate of
sexual violence in war-torn areas of              Date of announcement             New target date for publication of final rule
DRC and neighboring countries.                    April 2011                       August 2011-December 2011
                                                  November 2011                    November 2011-December 2011
Since a rule has not been issued, this
                                                  Mid-December 2011                December 2011
report examines (1) steps SEC has
taken toward issuing a conflict minerals          End of December 2011             January 2012-June 2012
disclosure rule; and (2) stakeholder-            Source: SEC.
developed initiatives that may help
                                                 Various stakeholders have developed initiatives that may help covered
covered companies comply with the
                                                 companies comply with the anticipated rule, but some initiatives have been
anticipated rule. This report also
examines (3) any additional
                                                 hindered by SEC’s delay in issuing a final rule. Industry associations, multilateral
information available on the rate of             organizations, and other stakeholders have developed global and in-region
sexual violence in eastern DRC and               sourcing initiatives, which include the development of guidance documents, audit
neighboring countries since GAO’s                protocols, and in-region sourcing systems. These initiatives may support
2011 report on that subject.                     companies’ efforts to conduct due diligence and to identify and responsibly
                                                 source conflict minerals. In the absence of SEC’s final rule, however,
GAO reviewed and analyzed reports                stakeholders note that uncertainty regarding SEC’s reporting and due diligence
and documents from SEC, other U.S.               requirements has complicated their efforts to expand and harmonize their
agencies, industry associations and              initiatives. For example, in the absence of a final rule, one initiative is facing
other nongovernmental stakeholders;
                                                 difficulty engaging additional participants, while stakeholders’ efforts to
and interviewed representatives from
                                                 harmonize two initiatives have been hindered.
those organizations.
                                                 Little additional information on the rate of sexual violence in eastern Democratic
What GAO Recommends                              Republic of the Congo (DRC) and neighboring countries has become available
                                                 since GAO’s 2011 report on that subject. For example, only one population-
GAO recommends that the Chairman                 based survey has been published on sexual violence in Rwanda, and it reports
of SEC identify remaining steps and              that 22 percent of women ages 15-49 have experienced sexual violence there in
associated time frames to issue a final
                                                 their lifetimes. No additional surveys have been conducted in eastern DRC;
rule. SEC neither agreed nor disagreed
                                                 however, one organization is currently conducting a survey and another is
with the recommendation, but noted
that it will expedite the completion of its      planning to conduct a survey there in 2012.
rule making to provide certainty.

View GAO-12-763. For more information,
contact Michael J. Courts at (202) 512-8980 or
courtsm@gao.gov.

                                                                                              United States Government Accountability Office
Contents


Letter                                                                                         1
               Background                                                                      3
               SEC Has Taken Some Steps toward Developing a Rule but Has
                  Delayed Issuing a Final Rule                                               11
               Stakeholder-Developed Initiatives May Facilitate Compliance with
                  the Anticipated Rule, but Efforts to Improve Some Initiatives
                  Have Been Hindered by the Absence of a Final Rule                          16
               Little Additional Information on the Rate of Sexual Violence in
                  Eastern DRC and Neighboring Countries Has Become Available
                  since GAO’s 2011 Report                                                    24
               Conclusions                                                                   28
               Recommendation for Executive Action                                           28
               Agency Comments and Our Evaluation                                            29

Appendix I     Objectives, Scope, and Methodology                                            32



Appendix II    Descriptions of Global and In-Region Sourcing Initiatives                     35



Appendix III   Comments from the Securities and Exchange Commission                          49



Appendix IV    GAO Contact and Staff Acknowledgments                                         51



Tables
               Table 1: SEC Announcements of Target Publication Dates for Final
                        Disclosure Rule                                                      14
               Table 2: Stakeholder-Developed Global and In-Region Sourcing
                        Initiatives                                                          17
               Table 3: Population-Based Surveys That Estimate the Rate of
                        Sexual Violence in Rwanda, Eastern DRC, and Uganda                   25




               Page i                                GAO-12-763 Conflict Minerals Disclosure Rule
Figures
          Figure 1: The DRC, including Eastern DRC (North and South Kivu
                   Provinces and the Ituri District of Orientale Province),
                   and Adjoining Countries                                               4
          Figure 2: Simplified Conflict Minerals Supply Chain                            8
          Figure 3: Artisanal Gold Mining Site in Eastern DRC                            9
          Figure 4: Timeline of Steps SEC Has Taken toward Developing a
                   Rule                                                                11
          Figure 5: Segments of Conflict Minerals Supply Chains Supported
                   by Stakeholder-Developed Initiatives                                21
          Figure 6: A Processing Machine in a Certified Conflict-Free
                   Tantalum Smelting Facility                                          22
          Figure 7: Gold Bars Produced by LBMA Accredited Refiners                     41
          Figure 8: Artisanal Miners Panning Tin Ore at a Rwandan Mine Site            45




          Page ii                              GAO-12-763 Conflict Minerals Disclosure Rule
Abbreviations
BGR               German Federal Institute for Geosciences and Natural
                  Resources
DHS               Demographic and Health Survey
DRC               Democratic Republic of the Congo
EICC              Electronic Industry Citizenship Coalition
G-8               Group of 8
GeSI              Global e-Sustainability Initiative
ICGLR             International Conference on the Great Lakes Region
iTSCi             ITRI Tin Supply Chain Initiative
LBMA              London Bullion Market Association
MONUSCO           United Nations Organization Stabilization Mission in the
                  Democratic Republic of the Congo
NGO               nongovernmental organization
OECD              Organisation for Economic Co-operation and Development
PPA               Public-Private Alliance for Responsible Minerals Trade
RJC               Responsible Jewellery Council
SEC               Securities and Exchange Commission
UNSC              United Nations Security Council
UNGoE             United Nations Group of Experts
USAID             United States Agency for International Development
WGC               World Gold Council

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Page iii                                      GAO-12-763 Conflict Minerals Disclosure Rule
United States Government Accountability Office
Washington, DC 20548




                                   July 16, 2012

                                   Congressional Committees:

                                   The eastern portion of the Democratic Republic of the Congo (DRC) has
                                   long been the site of one of the world’s worst humanitarian crises, and
                                   violence there continues. Large numbers of civilians in war-torn areas of
                                   the DRC have been the victims of horrific sexual violence, including rape,
                                   mutilation, and sexual slavery carried out by armed groups. In addition, as
                                   we previously reported, 1 illegal armed groups, as well as some units of the
                                   Congolese national military, have continued to commit severe human rights
                                   abuses, including mass killings. The illegal armed groups and units of the
                                   Congolese national military committing these atrocities also profit from the
                                   illegal mining of minerals and the illicit taxation of other trades, such as
                                   charcoal and timber. Citing the continuing urgency of the human rights
                                   situation and the need to take action, in July 2010, Congress included in
                                   the Dodd-Frank Wall Street Reform and Consumer Protection Act
                                   (hereafter in this report referred to as the Dodd-Frank Act, or the Act)
                                   provisions pertaining to the trade of conflict minerals. The Act defines
                                   conflict minerals as columbite-tantalite (coltan), cassiterite, wolframite, and
                                   gold ores, or their derivatives. 2 When these ores are processed they yield
                                   the following metals used in industrial and other applications: tantalum, tin,
                                   tungsten, and gold, respectively. Hereafter in this report, the term “conflict
                                   minerals” will refer to either these ores or these metals. Section 1502(b) of
                                   the Act requires the Securities and Exchange Commission (SEC) to issue a
                                   conflict minerals disclosure rule (hereafter referred to as a rule) for
                                   “persons” 3 (hereafter referred to as covered companies) that must file
                                   reports with SEC to disclose whether necessary conflict minerals used in
                                   their products originated in the DRC or in an adjoining country and, if they



                                   1
                                    GAO, The Democratic Republic of the Congo: U.S. Agencies Should Take Further Actions
                                   to Contribute to the Effective Regulation and Control of the Minerals Trade in Eastern
                                   Democratic Republic of the Congo, GAO-10-1030 (Washington, D.C.: Sept. 30, 2010).
                                   2
                                    The Act also allows the Secretary of State to name any other mineral or its derivatives as
                                   a conflict mineral.
                                   3
                                    While SEC has not issued a final rule, in its proposed rule it has interpreted “persons” in
                                   section 1502(b) to apply only to issuers of securities that file reports with SEC under
                                   section 13(a) or section 15(d) of the Securities Exchange Act of 1934, including domestic
                                   companies, foreign private issuers, and smaller reporting companies. See 75 Federal
                                   Register at 80951 (Dec. 23, 2010).




                                   Page 1                                         GAO-12-763 Conflict Minerals Disclosure Rule
did, to provide an additional report with certain disclosures. 4, 5 The Act also
requires us to report on the effectiveness of SEC’s rule and on the rate of
sexual violence in war-torn areas of the DRC and adjoining countries. We
issued our first report on sexual violence in these areas in July 2011. 6

This report examines (1) steps SEC has taken toward issuing a conflict
minerals disclosure rule; (2) stakeholder-developed initiatives that may
help covered companies comply with the anticipated rule; and (3) any
additional information available on the rate of sexual violence in eastern
DRC and neighboring countries since our 2011 report. 7, 8

To address the first two objectives, we reviewed and analyzed the
provisions of the Securities Exchange Act of 1934 as added by section
1502(b) of the Dodd-Frank Act; documents, comment letters, and
memos—including SEC’s proposed rule—from SEC; documents and
reports from the Department of State (State) and the United States
Agency for International Development (USAID); as well as documents
and reports from multilateral organizations such as the Organisation for
Economic Co-operation and Development (OECD), nongovernmental
organizations (NGOs), and industry associations. We interviewed officials
from relevant U.S. agencies, as well as representatives from multilateral



4
 The countries adjoining the DRC are Angola, Zambia, Tanzania, Burundi, Rwanda,
Uganda, South Sudan, the Central African Republic, and the Republic of the Congo.
5
 Section 1502(b) also requires that private sector audits of conflict minerals reports
submitted by covered companies to SEC be conducted in accordance with standards
established by the Comptroller General of the United States. Before we started work on
this report, SEC officials contacted GAO to discuss GAO’s audit standards and we
explained our audit standards to SEC.
6
 GAO, The Democratic Republic of the Congo: Information on the Rate of Sexual
Violence in War-Torn Eastern DRC and Adjoining Countries, GAO-11-702 (Washington,
D.C.: July 13, 2011).
7
 In this report we are not reporting on the effectiveness of SEC’s conflict minerals
disclosure rule, as required under the Act, because SEC had not yet issued its final rule at
the time of our audit. In the interim, to meet our mandated reporting time frame of July
2012 under the Act, we are reporting on steps SEC has taken toward issuing a rule and
on industry and other stakeholders’ initiatives that may help covered companies comply
with the anticipated disclosure rule. We will report on the effectiveness of SEC’s final
conflict minerals disclosure rule after such a rule is issued and covered companies submit
their conflict minerals disclosure reports.
8
 As specified in our 2011 report, we will identify any additional information available from
eastern DRC and the neighboring countries of Burundi, Rwanda, and Uganda.




Page 2                                         GAO-12-763 Conflict Minerals Disclosure Rule
                          organizations—including the International Conference on the Great Lakes
                          Region (ICGLR), NGOs, consulting firms, industry associations,
                          companies—including five smelters and one refiner encompassing all four
                          minerals—and a gold industry expert. We traveled to the United Kingdom,
                          France, Belgium, and Germany to interview representatives from the
                          OECD Secretariat, foreign government officials, and representatives from
                          foreign companies—including smelters, industry associations, and
                          consulting firms. To address the third objective, we conducted interviews
                          with representatives from State, USAID, the Department of Defense,
                          relevant NGOs, and researchers, and gathered and analyzed relevant
                          documents from these organizations, to determine if any new data on
                          sexual violence were available. We also conducted Internet literature
                          searches to identify new academic articles containing any additional data.
                          See appendix I for a complete description of our scope and methodology.

                          We conducted this performance audit from August 2011 to July 2012 in
                          accordance with generally accepted government auditing standards.
                          Those standards require that we plan and perform the audit to obtain
                          sufficient, appropriate evidence to provide a reasonable basis for our
                          findings and conclusions based on our audit objectives. We believe that
                          the evidence obtained provides a reasonable basis for our findings and
                          conclusions based on our audit objectives.


Background

History of the DRC: War   The DRC is a vast, mineral-rich nation with an estimated population of
and Instability           approximately 72 million to 74 million people in an area that is roughly
                          one-quarter the size of the United States. 9 It was colonized in 1885 as a
                          personal possession of Belgian King Leopold II and administered by the
                          Belgian government starting in 1907. It achieved independence from
                          Belgium in 1960. For almost 30 years of the postindependence period,
                          the DRC was known as Zaire and was ruled by an authoritarian regime
                          under Mobutu Sese Seko. Following the 1994 genocide in Rwanda, some
                          perpetrators of the genocide and refugees fled into eastern DRC. See
                          figure 1 for a map of the DRC and adjoining countries.


                          9
                           According to the 2012 State Department Background Notes, the estimated population for
                          the DRC is 71.7 million, while the 2012 CIA World Factbook estimates DRC’s population
                          at 73.6 million.




                          Page 3                                     GAO-12-763 Conflict Minerals Disclosure Rule
Figure 1: The DRC, including Eastern DRC (North and South Kivu Provinces and the Ituri District of Orientale Province), and
Adjoining Countries




                                         Page 4                                     GAO-12-763 Conflict Minerals Disclosure Rule
                  The Mobutu regime was toppled in 1997 by Laurent Kabila, who led a
                  rebel group from eastern DRC with the assistance of Rwanda and
                  Uganda. Kabila was assassinated in 2001 and leadership shifted to his
                  son, Joseph Kabila. During the period of the senior Kabila’s regime, the
                  nation experienced a period of civil war during which numerous rebel
                  groups, with the assistance of Rwanda, Uganda, and other neighboring
                  countries, captured significant parts of the DRC. The war continued into
                  the regime of Joseph Kabila, and resulted in the deaths of an estimated
                  5.4 million people by 2007. 10 As we reported in 2010, illegal armed
                  groups and some Congolese national military units are consistently and
                  directly involved in human rights abuses against the civilian population in
                  eastern DRC and are involved in the exploitation of conflict minerals and
                  other trades. We also reported that there is a culture of impunity in
                  eastern DRC in which those who have committed human rights abuses
                  do not face justice for the crimes they have committed. After decades of
                  instability and war, the central government in the capital, Kinshasa,
                  currently has little administrative capacity and control over remote
                  regions, including eastern DRC. The long distances between the capital
                  and eastern DRC and the rudimentary infrastructure, which make
                  transportation and communication difficult, further limit the central
                  government’s control in eastern DRC.


U.S. Government   In 2006, Congress passed the Democratic Republic of Congo Relief,
Response          Security, and Democracy Promotion Act of 2006. 11 The act stated that it is
                  the policy of the United States to engage with governments working for
                  peace and security throughout the DRC and hold accountable individuals,
                  entities, and countries working to destabilize the country. According to
                  State officials, improving security in the eastern portion of the DRC is
                  central to U.S. efforts. In August 2009, the Secretary of State traveled to
                  the eastern portion of the DRC where, after seeing the consequences of
                  the conflict firsthand, she called for action to assist victims of sexual
                  violence. Recognizing that the exploitation and trade of conflict minerals
                  originating in the DRC is helping to finance conflict, in July 2010


                  10
                    This number is based on an estimate by the International Rescue Committee, which
                  conducted a series of population-based surveys to determine the conflict-related mortality
                  rate in the DRC. Although we did not evaluate these studies, it should be noted that the
                  challenges and limitations that exist generally for population-based surveys are relevant to
                  this series of surveys and resulting estimates.
                  11
                    Pub. L. No. 109-456, sec.102(14).




                  Page 5                                        GAO-12-763 Conflict Minerals Disclosure Rule
                              Congress included a provision in section 1502(b) of the Dodd-Frank Act
                              that requires SEC to issue a rule for covered companies to disclose
                              whether necessary conflict minerals used in their products originated in
                              the DRC or in an adjoining country and, if they did, to provide an
                              additional report with certain disclosures. 12 The United States is the
                              largest donor to the United Nations Organization Stabilization Mission in
                              the Democratic Republic of the Congo (MONUSCO), 13 contributing
                              almost one-third of MONUSCO’s $1 billion annual budget. Furthermore,
                              in November 2011, State and USAID, in collaboration with NGOs,
                              industry, and other governments, launched the Public-Private Alliance for
                              Responsible Minerals Trade (PPA) to support supply chain solutions to
                              conflict minerals challenges in the DRC and neighboring countries. 14


Minerals Covered by the       The four conflict minerals covered by section 1502(b) of the Dodd-Frank
Conflict Minerals             Act are mined in various locations around the world; for example, tin is
Legislation: Origins, Uses,   mined in China, Indonesia, Peru, Bolivia, as well as the DRC. Similarly,
                              tantalum is reportedly mined in areas such as Australia, Brazil, Canada,
and Supply Chains             and the DRC. While the majority of tungsten—reportedly 77 to 84 percent
                              of global production from 2006 through 2009—is mined in China and a
                              very small amount is mined in the DRC, gold is mined in many different
                              countries, including the DRC. Our review of United States Geological
                              Survey data on tantalum, tin, tungsten, and gold mined in the DRC
                              showed that about 17 percent of the global tantalum supply, about 4
                              percent of the global tin supply, less than 1 percent of the global tungsten
                              supply, and less than 1 percent of the global gold supply, was mined in
                              the DRC in 2009. 15 However, according to a December 2011 report by


                              12
                                Section 1502(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
                              Pub. L. No. 111-203, 124 stat. 1376 at 2213-2218, added section 13(p) to the Securities
                              Exchange Act of 1934, 15 U.S.C. § 78m(p).
                              13
                                From its creation in 1999 to July 2010, the United Nations’ deployment was called the
                              United Nations Organization Mission in the Democratic Republic of the Congo. On July 1,
                              2010, the deployment’s name was changed to the United Nations Organization
                              Stabilization Mission in the Democratic Republic of the Congo.
                              14
                                PPA intends to demonstrate that it is possible to secure conflict-free minerals from the
                              DRC and neighboring countries. PPA issued its request for proposals on June 15, 2012
                              and it expects to award up to $800,000 in two or more grants to support the goals of the
                              alliance.
                              15
                                To the extent that mined minerals are misreported and/or smuggled out of the DRC,
                              these estimates could be incorrect.




                              Page 6                                         GAO-12-763 Conflict Minerals Disclosure Rule
the United Nations Group of Experts on the DRC (UNGoE), 16 mineral
production and exports from eastern DRC have recently fallen. 17

Various industries, in particular manufacturing, use these minerals in a
wide variety of products and in varying amounts. Tin is utilized by a
multitude of industries in tin solder, which is used to join metal pieces
together. 18 According to company representatives, tin is also found in
food packaging, in steel coatings on automobile parts, and in some
plastics. According to industry association and company representatives,
the majority of tantalum is used to manufacture tantalum capacitors,
which enable energy storage in electronics products such as cell phones
and computers. 19 Tungsten is used in drill bits and cutting tools and other
industrial manufacturing tools; it is also the primary component of
filaments in light bulbs. In addition to its use as currency and in jewelry,
gold is also used by other industries, such as the electronics industry.

Figure 2 below depicts a simplified conflict minerals supply chain for all
four conflict minerals. For the purposes of this report, it provides a basic
overview of how conflict minerals move from the mine of origin to the end
consumer. 20




16
 UNGoE, Letter dated 29 November 2011 from the Chair of the Security Council
Committee established pursuant to resolution 1533 (2004) concerning the Democratic
Republic of the Congo addressed to the President of the Security Council. S/2011 (S/738).
Official Record. New York, 2011.
17
  According to an USAID official, as of late 2011 all exporters from the DRC must process
their minerals to a 60 percent mineral content level, which increases the value added for
the DRC.
18
  For example, tin solder is used to attach individual components on circuit boards.
19
  Tantalum is also used to produce alloy additives, which can be found in turbines in jet
engines; mill and chemical products; thin films, which are used in semiconductors; and
other products.
20
  We note, however, that the supply chain for each conflict mineral is distinct. In particular,
according to gold industry representatives, the supply chain for gold is significantly
different from the supply chains for tin, tantalum, and tungsten because of the following
factors: (1) the role of bullion banks in the gold supply chain; (2) the role of gold in
investment markets; (3) the high level of recycled gold utilized in the gold supply chain; (4)
the portability and high value of small amounts of gold; (5) the role of gold as a currency
and a store of value; and (6) the ease with which gold can be refined.




Page 7                                          GAO-12-763 Conflict Minerals Disclosure Rule
Figure 2: Simplified Conflict Minerals Supply Chain




At mines throughout the world, mineral ores are extracted using
mechanized industrial or artisanal mining techniques. 21 While industrial
mining occurs in some provinces in the DRC, such as the Katanga
province, artisanal mining is the dominant type of mining used in eastern




21
  In contrast to mechanized industrial mining, artisanal mining is a form of mining that is
characterized by a lack of mechanization or capital investment.




Page 8                                         GAO-12-763 Conflict Minerals Disclosure Rule
DRC where conflict is most prevalent.22 See figure 3 for a picture of an
artisanal mining site in eastern DRC.

Figure 3: Artisanal Gold Mining Site in Eastern DRC




For artisanal mining, the local processor or trader—an individual or
company—purchases minerals directly from mine sites and typically
processes or upgrades the material before selling it to the exporter, but
the exporter may also purchase minerals directly from mine sites rather
than going through a local processor or trader. Also, exporters may carry
out further processing or upgrading before exporting the materials to a
smelter or refiner. At the most basic level, smelting involves converting a
mineral into a metal and refining involves purifying a metal into a higher-



22
  According to a December 2011 UNGoE report, Banro, a Canadian-based mining
company, began operating the first industrial gold mine in South Kivu in October 2011. In
addition, according to a gold industry representative, it is anticipated that other industrial
gold mining companies will invest in industrial mining operations in DRC by 2015.




Page 9                                          GAO-12-763 Conflict Minerals Disclosure Rule
purity metal.23 Although some smelters of tin, tantalum, and tungsten sell
high-purity metals through traders or exchanges, smelters primarily sell
high-purity tin, tantalum, and tungsten directly to component parts
manufacturers. Component parts manufacturers construct individual
parts—such as capacitors, engine parts, clasps for necklaces, and other
items—that they sell to original equipment manufacturers. Original
equipment manufacturers complete the final assembly of a product and
sell their products to consumers.24,25

The supply chain for industrially mined gold, which is the dominant form
of mining conducted outside of eastern DRC, is different. Industrially
mined gold is typically shipped from mine sites directly to refiners,
bypassing local traders and exporters. Gold refiners typically sell high-
purity gold to banks, for use as a store of value, or to international
exchanges and traders, where gold is bought and sold. Banks and traders
may sell gold to manufacturers, including jewelry or electronics
component parts manufacturers and some gold refiners sell gold directly
to manufacturers.

According to industry association and company representatives, in
practice, a company’s supply chain for products containing tin, tantalum,
tungsten, and gold can be complex and can vary considerably. For
example, a company’s conflict minerals supply chains may involve
several different entities taking different actions to help develop products
and move them through the supply chain. In addition, the supply chains
for some companies’ products may contain a small number of component
parts, whereas the supply chains for other companies’ products may
contain thousands of component parts, which may be sourced from
hundreds of different suppliers.



23
  In this report, the term “smelter” refers to those facilities that process or refine columbite-
tantalite (coltan), cassiterite, or wolframite ores and/or recycled materials into high-purity
tantalum, tin, and tungsten, respectively. The term “refiner” refers to those facilities that
process mined and recycled gold into high-grade gold.
24
 Original equipment manufacturers may also sell their products to retailers or distributers,
who in turn sell the products to final end-user consumers.
25
  Companies operating in the first four phases of the supply chain are typically referred to
as “upstream companies,” while those companies operating in the remaining phases are
referred to as “downstream companies.” Most U.S. companies that may be affected by
section 1502(b) of the Dodd-Frank Act are generally downstream companies.




Page 10                                          GAO-12-763 Conflict Minerals Disclosure Rule
                                       SEC has published a proposed conflict minerals disclosure rule and has
SEC Has Taken Some                     taken steps to gather input from various stakeholders. However, it has
Steps toward                           delayed issuing a final rule due to a number of factors, such as
                                       addressing intense stakeholder input and dealing with a heavy rule-
Developing a Rule but                  making workload.
Has Delayed Issuing a
Final Rule

SEC Has Published a                    SEC did not meet the deadline in the Dodd-Frank Act to issue a final
Proposed Rule and                      conflict minerals disclosure rule by April 2011, but it has taken some
Gathered Stakeholder                   steps toward developing a rule, including publishing a proposed rule in
                                       December 2010 (see fig. 4).
Input

Figure 4: Timeline of Steps SEC Has Taken toward Developing a Rule




                                       a
                                        The proposed rule also extended the comment period to March 2, 2011 from the original comment
                                       due date of January 31, 2011.
                                       b
                                        SEC’s notice on the October 2011 roundtable reopened the comment period until November 1, 2011.




                                       Page 11                                          GAO-12-763 Conflict Minerals Disclosure Rule
According to SEC officials, following the passage of the Dodd-Frank Act in
July 2010, SEC announced that it would develop a rule and called for
public comments on the upcoming rule. In September 2010, SEC posted
on its website an estimated issuance date for the proposed disclosure rule
of between October 2010 and December 2010; at this time SEC also
posted on its website an estimated issuance date for the final rule of
between January 2011 and March 2011. In October 2010, SEC revised its
estimated issuance date for a final rule to between April and July 2011. On
December 15, 2010, SEC issued a proposed rule that reflected the
complicated and technical nature of the issues it covered. The proposed
rule was over 100 pages and included over 70 questions in which SEC
requested feedback from the public on specific technical issues, such as
whether reporting standards should apply to all conflict minerals equally,
whether certain companies should be exempt from reporting, and whether
there should be a de minimis threshold for the amount of conflict minerals
used in a product. 26

According to agency officials, in developing a proposed rule, SEC
consulted with its internal experts and State, and gathered extensive input
from external stakeholders through comment letters and meetings. 27 After
SEC published a proposed rule in December 2010, it hosted a roundtable
in October 2011 to obtain additional public input to help inform the
development of a final rule. SEC officials also said that since July 2010—
when it announced it intended to develop a rule—SEC has received a
large and steady volume of comment letters from individuals and groups
of external stakeholders, including various types of companies; industry
associations; international organizations; international NGOs and local
NGOs working in Central Africa; U.S. and foreign officials; private
individuals; and others, with over 400 distinct comment letters posted to
its website. 28 According to SEC officials, SEC has reviewed these


26
  Examples of other issues on which the proposed rule requests feedback from the public
include whether the proposed rule would present undue costs to smaller companies;
whether to prescribe the type of due diligence required; and how to handle existing
stockpiles of conflict minerals or minerals from recycled or scrap sources.
27
  As stated earlier in this report, before we started work on this report, SEC officials
contacted GAO to discuss GAO’s audit standards and we explained our audit standards to
SEC.
28
  This number is as of April 20, 2012 and counts distinct comment letters posted to SEC's
website. “Form” comment letters with identical content—but sent from different
individuals—are counted as a single, distinct comment letter submitted to and posted by
SEC.




Page 12                                      GAO-12-763 Conflict Minerals Disclosure Rule
comment letters and is taking them into account as it develops a final
rule.

SEC officials said that they have also received a large number of meeting
requests from external stakeholders to further discuss issues and
concerns about the proposed rule. Since July 2010, SEC Commissioners,
officials, and staff have held and documented approximately 140 separate
meetings with external stakeholders and posted brief memorandums of
the meetings on SEC’s website. 29 According to SEC officials,
approximately 60 of those meetings involved SEC Commissioners and/or
their counsels engaging directly with external stakeholders. SEC officials
said that they are considering information and input gained from their
meetings with stakeholders as they continue to develop a final rule.

Partly in response to the volume of comments received and meetings
requested, SEC held a public roundtable in October 2011 to discuss the
proposed rule. The roundtable featured panelists from companies that will
likely be affected by a final rule, such as reporting companies, investment
companies, audit firms (which may support covered companies in their
efforts to comply with a final rule), NGOs, and affected issuers. The SEC
Chairman, three other SEC Commissioners, and relevant SEC officials
hosted the roundtable with U.S. Senator Richard Durbin and U.S.
Congressman James McDermott (via videotape) serving as guest speakers.
SEC officials said that the SEC roundtable was a helpful tool for gathering
more information as it continues its work toward developing a final rule.




29
  This number is as of April 20, 2012 and counts individual memorandums on meetings
held with SEC officials which were posted to SEC’s website.




Page 13                                    GAO-12-763 Conflict Minerals Disclosure Rule
SEC’s Final Rule Delayed   Since SEC issued a proposed rule in December 2010, it has announced,
                           on several occasions, new target dates for the publication of a final rule,
                           as shown in table 1 below:

                           Table 1: SEC Announcements of Target Publication Dates for Final Disclosure Rule

                            Date of announcement                New target date for publication of final rule
                            April 2011                          August 2011-December 2011
                            November 2011                       November 2011-December 2011
                            Mid-December 2011                   December 2011
                            End of December 2011                January 2012-June 2012
                           Source: SEC.



                           In its December 2011 announcement concerning the target publication
                           date for a final rule, SEC estimated that it would issue a final rule by June
                           2012; however, SEC did not issue a final rule by the end of June 2012.
                           On July 2, 2012, SEC announced that the Commission will hold an open
                           meeting on August 22, 2012 to consider whether to adopt a final conflict
                           minerals disclosure rule. 30, 31 SEC officials said that various factors have
                           caused delays in developing, modifying, and finalizing a rule, as follows:

                           •    Significant learning curve. According to SEC officials, the process of
                                developing a rule required their staff to become familiar with several
                                areas that were relatively new to them. For example, they told us that
                                their staff had to

                                •     develop contextual understanding about recent events in the DRC
                                      and adjoining countries (including learning about the relevant in-
                                      region political and economic actors, economic arrangements
                                      between these actors, and other evolving issues in these countries);


                           30
                             The Commission consists of five presidentially-appointed Commissioners, with
                           staggered five-year terms. One of them is designated by the President as Chairman of the
                           Commission—the agency’s chief executive. It is the responsibility of the Commission to:
                           (1) interpret federal securities law; (2) issue new rules and amend existing rules; (3)
                           oversee the inspection of securities firms, brokers, investment advisors, and ratings
                           agencies; (4) oversee private regulatory organizations in the securities, accounting, and
                           auditing fields; and (5) coordinate U.S. securities regulation with federal, state, and foreign
                           authorities.
                           31
                             According to SEC, pursuant to the provisions of the Government in the Sunshine Act,
                           Pub. L. No. 94-409, SEC will hold an open meeting in which the Commission will discuss
                           this and other rules.




                           Page 14                                         GAO-12-763 Conflict Minerals Disclosure Rule
    •     learn about complex supply chains and sourcing for conflict
          minerals, which includes various U.S. and international companies
          that can range in size from very small-scale enterprises to major
          multinational corporations;
    •     stay abreast of external stakeholder efforts to develop and
          implement their own responsible supply chain initiatives for conflict
          minerals; and
    •     understand the implications of using securities law to influence the
          behavior of covered companies in a way that would impact the
          situation in central African countries.

•   Intense stakeholder interest and input. SEC officials said that
    responding to intense public and stakeholder interest and input on the
    rule has contributed to delays. According to agency officials, the original
    comment period on the proposed rule closed on January 31, 2011, but
    at the request of a wide range of external stakeholders the Commission
    extended the comment period to March 2, 2011. Officials also noted
    that, in response to requests from some external stakeholders, the SEC
    hosted a roundtable on the conflict minerals disclosure rule and the
    Commission re-opened the comment period until November 1, 2011.
    SEC officials further noted that the Commission continues to receive
    comment letters and cited the over 400 distinct comment letters that it
    has received. In addition, SEC officials said that the approximately 140
    meetings between the agency and external stakeholders, the
    complicated and technical nature of the issues in these letters and
    discussions, and the effort required to consider and address these
    issues in rule making, has also contributed to delays.

•   Heavy rule-making workload. SEC officials noted that Commissioners
    have a heavy workload, given that they produce many rules in
    addition to the conflict minerals disclosure rule. In April 2012, the SEC
    Chairman testified that under the Dodd-Frank Act, SEC is mandated
    to write almost 100 rules, while on average the Commission might
    normally write about 20 rules in a given year.
•   Rigorous economic analysis in rule-making process. To support their
    rule making, SEC officials said that they are working closely with SEC
    economists and legal experts to develop rigorous economic analysis,
    which is a complex and time-consuming process. In her April 2012
    testimony statement, the SEC Chairman noted that the agency
    considers economic analysis to be a critical element in the rule-
    making process. SEC officials also noted that some of the delays in
    finalizing a disclosure rule have been necessary to make sure the final
    rule appropriately addresses significant cost concerns raised by


Page 15                                  GAO-12-763 Conflict Minerals Disclosure Rule
                             external stakeholders. In her testimony statement, the SEC Chairman
                             also pointed out that recent court decisions and communications from
                             members of Congress have raised concerns about certain aspects of
                             SEC’s economic analysis in rule making, and that SEC staff recently
                             developed specific guidance for staff engaged in rule making to
                             further improve the economic analysis SEC employs in its rule
                             making.


                        Various stakeholders have developed and implemented initiatives that
Stakeholder-            may help covered companies and their suppliers comply with the
Developed Initiatives   anticipated rule. 32 However, due to the uncertainty regarding potential due
May Facilitate          diligence and disclosure requirements stemming from SEC’s delay in
                        issuing a final rule, some stakeholders’ efforts to improve their initiatives
Compliance with the     through expansion and harmonization have been hindered. 33
Anticipated Rule, but
Efforts to Improve
Some Initiatives Have
Been Hindered by the
Absence of a Final
Rule


                        32
                          According to industry association and company representatives, the anticipated
                        disclosure rule could impact any U.S. or foreign company that is a supplier to those
                        covered companies that produce products containing conflict minerals, because covered
                        companies required to disclose the use of conflict minerals in their products will need to
                        obtain conflict minerals sourcing information from their suppliers. Consequently, U.S. and
                        foreign companies across the conflict minerals supply chains may also need to conduct
                        due diligence and trace their supply chains to provide sourcing information to covered
                        companies. Hence, many of the initiatives may help both covered companies comply with
                        the anticipated disclosure rule and may help U.S. and foreign suppliers meet the
                        information needs of their customers, which may be covered companies.
                        33
                          According to State, other factors have also impacted the progress of eastern DRC-
                        centered initiatives, including the DRC government’s September 2010-March 2011 mining
                        ban in eastern DRC and on-going security challenges throughout the Kivu provinces.
                        State also noted that, while the issuance of SEC’s final rule will have a significant impact
                        in clarifying what is expected of covered companies, some challenges for implementing
                        initiatives will still exist even after a final rule is issued; in particular, the development of
                        initiatives to support the traceability of minerals along the supply chain will require
                        continued progress once SEC’s final rule is issued.




                        Page 16                                          GAO-12-763 Conflict Minerals Disclosure Rule
Stakeholders Have                          Although SEC has not issued a final rule, industry associations, multilateral
Developed Initiatives                      organizations, and other stakeholders have developed and implemented
                                           initiatives that may help covered companies and their suppliers comply with
                                           the anticipated rule. Stakeholders began work on most of these initiatives
                                           before the Dodd-Frank Act was passed, but according to agency officials,
                                           stakeholders’ interest in ensuring that initiatives will be compatible with
                                           SEC’s anticipated final rule appears to have provided a substantial impetus
                                           to further develop initiatives. Stakeholder-developed initiatives—which
                                           include the development of guidance documents, audit protocols, and in-
                                           region sourcing systems—support covered companies’ efforts to (1)
                                           conduct due diligence of their conflict minerals supply chains, (2) identify
                                           the source of conflict minerals within their supply chains, and (3)
                                           responsibly source conflict minerals. Table 2 summarizes global and in-
                                           region sourcing initiatives developed by various stakeholders (see app. II
                                           for more details about each of these initiatives). The global initiatives may
                                           support covered companies’ efforts to minimize the risk of conflict minerals
                                           entering their supply chains and to identify the source of their conflict
                                           minerals across conflict minerals supply chains and around the world, while
                                           the in-region sourcing initiatives may support responsible sourcing of
                                           conflict minerals from Central Africa and the identification of specific mines
                                           of origin for those minerals.

Table 2: Stakeholder-Developed Global and In-Region Sourcing Initiatives

                        Primary organizations                                    Participation   Independent       Status of
Initiative              involved                Purpose                          type            audit required    initiative
Global initiatives
OECD Due                Organisation for        Establishes practical guidance    Voluntary      Yes               Implementation
Diligence Guidance      Economic Co-Operation   to enable companies to                                             phase
for Responsible         and Development         responsibly operate in and
Supply Chains of        (OECD)                  source from conflict areas and
Minerals from                                   promotes accountability and
Conflict-Affected and                           transparency in conflict minerals
High-Risk Areas                                 supply chains.
UNGoE Due            United Nations Group of    Establishes practical guidance    Mandatory      Yes               Implementation
Diligence Guidelines Experts (UNGoE) on the     to enable companies to                                             phase
                     DRC                        responsibly operate in and
                                                source from conflict areas and
                                                promotes accountability and
                                                transparency in conflict minerals
                                                supply chains.




                                           Page 17                                     GAO-12-763 Conflict Minerals Disclosure Rule
                     Primary organizations                                                             Participation   Independent      Status of
Initiative           involved                     Purpose                                              type            audit required   initiative
Conflict-Free        Global e-Sustainability      Verifies that the sources of   Voluntary                             Yes              Implementation
Smelter Program      Initiative (GESI);           conflict minerals processed by                                                        phase
                     Electronic Industry          smelters are conflict-free.
                     Citizenship Coalition        Enables downstream companies
                     (EICC)®                      to identify and source from
                                                  conflict-free smelters.
WGC Conflict-Free    World Gold Council           Establishes a common approach Voluntary                              Yes              Development
Gold Standard and    (WGC)                        for mining companies to                                                               phase
Tools                                             responsibly mine gold and
                                                  demonstrates that their mining
                                                  operations do not fuel conflict or
                                                  the abuse of human rights.
LBMA Responsible     London Bullion Market        Ensures that all gold feed stock                     Mandatory for   Yes              Development
Gold Guidance        Association (LBMA)           and all gold produced by refiners                    LBMA                             phase
                                                  are conflict-free.                                   accredited
                                                  Enables downstream companies                         refiners
                                                  to identify and source from
                                                  conflict-free refiners.
RJC Chain-of-         Responsible Jewellery       Supports the identification and                      Voluntary       Yes              Implementation
Custody Certification Council (RJC)               tracking of conflict-free gold                                                        phase
Program                                           throughout gold supply chains
                                                  with the transfer of chain-of-
                                                  custody documentation.
In-region sourcing initiatives
ITRI Tin Supply      ITRI; Tantalum Niobium       Supports responsible sourcing   Voluntary                            Yes              Implementation
Chain Initiative     International Study          from Central Africa through the                                                       phase
(iTSCi)              Center; Pact; Channel        development of (1) a physical
                     Research                     chain-of-custody system that
                                                  tracks and monitors minerals
                                                  from mine to smelter and (2) a
                                                  due diligence system that
                                                  includes independent audits and
                                                  mine site and transportation
                                                  route assessments.
Certified Trading    German Federal Institute     Supports responsible sourcing                        Voluntary       Yes              Implementation
Chains               for Geosciences and          from Central Africa through the                                                       phase
                     Natural Resources            creation of a certification
                     (BGR)                        framework for artisanal mining
                                                  sites.
ICGLR’s Regional     International Conference     Establishes a certification                          Mandatory for   Yes              Development
Certification        on the Great Lakes           mechanism for the mining and                         member                           phase
Mechanism            Region (ICGLR)               trading of conflict minerals from                    countries
                                                  the Great Lakes Region.
                                           Source: GAO analysis of information from various sources.




                                           Page 18                                                          GAO-12-763 Conflict Minerals Disclosure Rule
To support companies’ efforts to conduct due diligence of their conflict
minerals supply chains, which span the globe, OECD developed the
OECD Due Diligence Guidance for Responsible Supply Chains of
Minerals from Conflict-Affected and High-Risk Areas (hereafter referred to
as OECD Due Diligence Guidance). The guidance establishes a five-step
framework for detailed, risk-based due diligence, 34 which is intended to
promote accountability and transparency in the supply chain of minerals
from conflict-affected and high-risk areas. Covered companies may use
the OECD Due Diligence Guidance to identify appropriate due diligence
actions necessary for obtaining and disclosing conflict mineral sourcing
information in accordance with the anticipated SEC rule. The guidance
may also help U.S. and foreign suppliers put due diligence processes in
place, which may help them generate conflict mineral sourcing
information for those of their customers that are covered companies.

Other global initiatives may support covered companies’ efforts to identify
the source of conflict minerals. For example, the Conflict-Free Smelter
Program and the LBMA Responsible Gold Guidance are initiatives
designed to ensure that no minerals in the smelter or refiner supply chains
have contributed to conflict through an independent audit process, and
ultimately, the aim of these programs is to enable downstream companies
to source conflict-free minerals. According to company and industry
association representatives, the smelter or refiner represents the “choke-
point” in the conflict minerals supply chain—meaning that after minerals are
processed by the smelter or refiner, the origin of these minerals cannot be
verified. According to GeSI, EICC, and LBMA representatives, companies
that can trace their conflict minerals supply chains back to smelters or
refiners certified through these programs can claim that the minerals in
their products are conflict-free, which may help covered companies and
their suppliers comply with the anticipated rule.

Finally, in-region sourcing initiatives that rely on chain-of-custody systems
may help covered companies responsibly source conflict minerals from


34
  OECD furnishes the following definition of due diligence: “Due diligence is an on-going,
proactive and reactive process through which companies can ensure that they respect
human rights and do not contribute to conflict. Due diligence can also help companies
ensure they observe international law and comply with domestic laws, including those
governing the illicit trade in minerals and United Nations sanctions. Risk-based due
diligence refers to the steps companies should take to identify and address actual or
potential risks in order to prevent or mitigate adverse impacts associated with their
activities or sourcing decisions.”




Page 19                                       GAO-12-763 Conflict Minerals Disclosure Rule
Central Africa. 35 For example, to support the responsible sourcing of tin,
tantalum, and tungsten from Central Africa, ITRI, a tin industry association,
developed the ITRI Tin Supply Chain Initiative (iTSCi). The initiative is
currently operating in Katanga—a province in southern DRC—and
Rwanda, and through iTSCi ITRI and its partners created a physical chain-
of-custody system for tracking and monitoring minerals from the mine to the
smelter. Figure 5 shows the particular segments of the conflict minerals
supply chains that specific stakeholder-developed initiatives support to
ensure that the minerals are conflict-free (see app. II for more details
concerning each initiative). According to ITRI and NGO representatives,
iTSCi is a traceability and due diligence program that creates auditable and
verifiable chains of custody for tin, tantalum, and tungsten through the (1)
tagging of bagged materials and the collection of tagging data and (2)
regular incident reporting and the continuous monitoring of mines and
companies participating in the program. 36 iTSCi’s traceability and due
diligence program results in mineral chain-of-custody information that
covered companies and their suppliers may use to meet due diligence
requirements; smelters may also use the information in their efforts to
comply with the Conflict-Free Smelter Program. 37




35
  Chain of custody refers to the paper trail that documents the sequence of entities that
have custody of minerals as they move through a supply chain.
36
  The initiative’s traceability and due diligence program uses uniquely numbered tags to
trace mineral shipments from the mine of origin to the smelter, which allows companies to
confirm the actual source and trading chain of the minerals they purchase.
37
  As previously noted, companies that can trace their supply chains to a smelter certified
through the Conflict-Free Smelter Program can claim that the minerals in their products
are conflict-free.




Page 20                                       GAO-12-763 Conflict Minerals Disclosure Rule
Figure 5: Segments of Conflict Minerals Supply Chains Supported by Stakeholder-Developed Initiatives




                                        Page 21                                  GAO-12-763 Conflict Minerals Disclosure Rule
Efforts to Improve Some   Some stakeholders’ efforts to improve their initiatives through expansion
Initiatives Have Been     and harmonization have been hindered by the uncertainty regarding
Hindered                  potential due diligence and disclosure requirements stemming from
                          SEC’s delay in issuing a final rule. For example, while 12 of the
                          approximately 25 tantalum smelting companies world-wide have been
                          certified as conflict-free through the Conflict-Free Smelter Program to
                          date (see fig. 6), 38 company representatives said GeSI and the EICC are
                          facing challenges engaging tin and tungsten smelters in the absence of a
                          final rule.

                          Figure 6: A Processing Machine in a Certified Conflict-Free Tantalum Smelting
                          Facility




                          According to company representatives, GeSI and EICC representatives
                          are finding it difficult to convince Asian—particularly Chinese—smelters to
                          participate in the program because the electronics industry has limited


                          38
                            As of July 2012, 12 companies that represent 18 tantalum smelters had been certified
                          as conflict-free through the Conflict-Free Smelter Program. A list of conflict-free smelters
                          can be viewed on the CFS Program website, accessed July 5, 2012, at
                          http://www.conflictfreesmelter.org/CFSindicators.htm




                          Page 22                                        GAO-12-763 Conflict Minerals Disclosure Rule
leverage over Chinese smelters in the absence of a final SEC rule. In
addition, according to one EICC member company representative,
Chinese smelters and the Chinese government are not concerned with
improving the transparency of supply chains in the absence of any
business incentives. The limited participation by Chinese smelters may
affect the scalability of the Conflict-Free Smelter Program as Chinese
smelters processed an estimated 43 to 48 percent of the global tin supply
between 2006 and 2009, and Chinese companies mined and processed
an estimated 77 to 84 percent of the global tungsten supply between
2006 and 2009. To address this issue, GeSI and the EICC are working
with representatives from other industries that use more tin and tungsten
to expand GeSI and the EICC’s leverage over and outreach efforts to tin
and tungsten smelters. In addition, according to company
representatives, the issuance of SEC’s final rule may provide business
incentives to Chinese smelters. Specifically, the issuance of a final SEC
rule may result in covered companies’ widespread demand for conflict
mineral sourcing information from their suppliers, and the leverage
applied by all impacted covered companies may create the necessary
business incentives for Chinese and other foreign companies to
participate in initiatives such as the Conflict-Free Smelter Program.

Some stakeholders have discussed efforts to harmonize their initiatives to
further improve them, but some of these efforts have been hindered by the
absence of SEC’s final rule. For example, according to an industry
association representative, iTSCi may experience difficulty attracting
additional customers, such as smelters, and expanding the initiative until
it is successfully harmonized with the Conflict-Free Smelter Program.
Although GeSI, EICC, and ITRI representatives said their organizations
are working together to harmonize the documentation and audit systems
for the Conflict-Free Smelter Program and iTSCi, the absence of a final
rule has hindered discussions to harmonize the two initiatives. As of June
2012, only one smelter purchased tin through the program, four smelters
purchased tantalum, and no smelters purchased tungsten. While ITRI and
its partners intend to expand iTSCi into eastern DRC, without additional
customers and the resulting funding from customers, it may be
challenging to implement this expansion. In addition, according to an
industry association representative, the unstable security situation in
eastern DRC contributes to ITRI and its partners’ delay in expanding




Page 23                              GAO-12-763 Conflict Minerals Disclosure Rule
                      iTSCi to the region. 39 Although smelters participating in the Conflict-Free
                      Smelter Program are allowed to accept conflict-free minerals from the
                      DRC, an ITRI representative said that some smelters have been unwilling
                      to purchase minerals through iTSCi’s traceability and due diligence
                      program, because the initiative has not been harmonized with the
                      Conflict-Free Smelter Program. iTSCi is closely aligned with the OECD
                      Due Diligence Guidance and supports continuous trading and the
                      implementation of risk mitigation efforts when certain risks at a supplier’s
                      mine site are identified through the program. However, the Conflict-Free
                      Smelter Program may require smelters to disengage from that supplier if
                      the same risks are identified at the mine site, because according to GeSI
                      and EICC representatives, the program’s requirements were developed to
                      be consistent with section 1502(b) of the Dodd-Frank Act. In particular,
                      section 1502(b) of the Act does not discuss mitigation efforts, while the
                      OECD Due Diligence Guidance endorses implementation of risk
                      mitigation efforts for certain risks. In the absence of SEC’s final rule, it is
                      unclear if the initiatives, which were developed to meet different
                      requirements, can or will be successfully harmonized.


                      Since our 2011 report, one population-based survey has been conducted
Little Additional     in Rwanda, while none have been conducted in eastern DRC, Uganda, or
Information on the    Burundi. Also, we found some additional case file data available on
                      sexual violence for these areas; however, as we reported in 2011, case
Rate of Sexual        file data on sexual violence are not suitable for estimating a rate of sexual
Violence in Eastern   violence.
DRC and Neighboring
Countries Has
Become Available
since GAO’s 2011
Report



                      39
                        As we reported in 2010, U.S. and foreign officials and others said that lack of security,
                      weak governance, and lack of infrastructure in eastern DRC are significant challenges that
                      impede efforts to control the conflict minerals trade in eastern DRC. The most recent
                      reports by UNGoE and Global Witness have confirmed that these challenges remain.




                      Page 24                                       GAO-12-763 Conflict Minerals Disclosure Rule
Since Our 2011 Report,                     In our 2011 report on sexual violence, we found five population-based
One Population-Based                       surveys that provided data on the rate of sexual violence in eastern DRC
Survey Has Been                            and Uganda. During our current review, we identified one new population-
                                           based survey—a 2010 Demographic and Health Survey (DHS) conducted
Conducted in Rwanda and                    in Rwanda that estimates that 22 percent of women ages 15 to 49 have
None in Eastern DRC,                       experienced sexual violence in that country in their lifetimes. 40, 41 Table 3
Uganda, or Burundi                         provides further details on these six surveys.

Table 3: Population-Based Surveys That Estimate the Rate of Sexual Violence in Rwanda, Eastern DRC, and Uganda

                                                                                                                   New data since
Author/                Dates of data     Time period       Survey            Reported experience of sexual         GAO’s 2011
publication date       collection        evaluated         participants      violence (time period)                report?
DHS for Rwanda           2010          Lifetime of         Females ages 15- • During lifetimes of participants,    Yes
                                       participant         49                  22 percent of females
                                                                               experienced sexual violence
McGill University        March 2010    Prior 1 year; prior Males and females • During the prior 1 year, 9          No
(DRC) (August 2010)                    2 years; 1994-      ages 18+            percent experienced sexual
                                       2010                                    violence
                                                                             • During the prior 2 years, 13
                                                                               percent experienced sexual
                                                                               violence
                                                                             • For the time period 1994-
                                                                               2010, 33 percent experienced
                                                                               sexual violence
University of California September to  1993 through        Males and females • 16 percent experienced sexual       No
Berkeley (DRC)           December 2007 2007                ages 18+            violence
(August 2008)
DRC Ministry of          January to    In 1 year prior to Females ages 15- • During 1 year prior to data           No
Planning (August         August 2007   data collected;     49                  collected, 8 percent of females
2008)                                  lifetime of                             in North Kivu experienced
                                       participant                             sexual violence and 6 percent
                                                                               of females in South Kivu
                                                                               experienced sexual violence
                                                                             • During lifetimes of participants,
                                                                               25 percent of females in North
                                                                               Kivu experienced sexual
                                                                               violence and 18 percent of
                                                                               females in South Kivu
                                                                               experienced sexual violence




                                           40
                                             The report, which was released in February 2012, shows that the main perpetrator of
                                           sexual violence is often a current or former partner of the victim.
                                           41
                                            DHS is largely supported by USAID and is conducted in over 90 countries.




                                           Page 25                                      GAO-12-763 Conflict Minerals Disclosure Rule
                                                                                                                                       New data since
Author/                    Dates of data    Time period              Survey             Reported experience of sexual                  GAO’s 2011
publication date           collection       evaluated                participants       violence (time period)                         report?
University of California   April to May     Prior 1 year;            Males and females • During the prior 1 year, less                 No
Berkeley (Uganda)          2010             1987 to 2005             ages 18+             than 0.5 percent experienced
(December 2010)                                                                           sexual violence
                                                                                        • For the time period 1987 to
                                                                                          2005, 2 percent experienced
                                                                                          sexual violence
Uganda Bureau of           May to October   Lifetime of              Females ages 15- • During lifetimes of participants,              No
Statistics (August         2006             participant              54; males ages 15-   39 percent of females
2007)                                                                49                   experienced sexual violence
                                                                                        • During lifetimes of
                                                                                          participants,11 percent of
                                                                                          males experienced sexual
                                                                                          violence
                                              Source: GAO 2011 report on sexual violence (GAO-11-702) and GAO analysis of DHS study.



                                              We found no new survey data on sexual violence in eastern DRC. The
                                              authors of the McGill study, a population-based survey conducted in
                                              eastern DRC that was highlighted in our 2011 report, have no plans to
                                              conduct a follow-up survey. McGill’s 2010 report was intended to serve as
                                              a baseline study, but a lack of funding has prevented another round of data
                                              collection. 42

                                              Other organizations have plans to conduct population-based surveys in
                                              eastern DRC. Researchers at ICF International told us that the next DHS
                                              survey in DRC is expected to launch in 2012 with preliminary findings
                                              expected at the end of the year; the researchers project that the final
                                              report will be issued sometime in 2013. In our 2011 report, we also
                                              discussed a population-based survey conducted in eastern DRC in 2008
                                              by researchers at the University of California, Berkeley; those researchers
                                              are now at the Harvard Humanitarian Initiative and are conducting a
                                              follow-up survey. The results from the follow-up survey, however, will not
                                              be available until November 2012.



                                              42
                                                One of the researchers associated with the McGill study emphasized that, even if
                                              funding was currently available, a follow-up survey would not be scheduled to be
                                              conducted until 2013 (at the earliest) because yearly analysis on the rate of sexual
                                              violence in eastern DRC does not, by itself, provide much relevant data. According to this
                                              researcher, a follow-up survey timed to assess the impact of specific programming on the
                                              ground would provide more relevant data (in this case, conducting a follow-up survey after
                                              grants to NGOs to conduct sexual violence education and outreach activities in eastern
                                              DRC is scheduled to be completed in 2013).




                                              Page 26                                                        GAO-12-763 Conflict Minerals Disclosure Rule
Some Additional Case File   Following up on our 2011 report, we asked the United Nations Population
Data Has Become             Fund, the International Rescue Committee, and other organizations if
Available on Sexual         they had any updated case file data, but representatives from the United
                            Nations Population Fund reported that no new case file data were
Violence since GAO’s 2011   available and we received no response from the International Rescue
Report                      Committee. Our 2011 report also referenced case file data from the 2010
                            Report of the Secretary-General on the implementation of Security
                            Council resolutions 1820 and 1888, as well as State’s 2009 and 2010
                            Human Rights Reports. In a 2012 Report of the Secretary-General that
                            included an update on the implementation of Security Council resolutions
                            1820 and 1888, it was reported that, between December 2010 and
                            November 2011, 625 sexual violence assaults committed by armed
                            groups were documented in eastern DRC. Further, from October 2010 to
                            August 2011, the report notes that 9,534 sexual violence victims in
                            eastern DRC received medical and psychosocial assistance; however, as
                            the report acknowledges, the number of assisted victims does not
                            represent the number of new sexual violence cases during the reporting
                            period. In addition, the 2011 Department of State Human Rights Reports
                            found the following:

                            •   In DRC, between January 2010 and September 2011, the United
                                Nations Children’s Fund reported that approximately 21,395 sexual
                                violence victims received medical care, of which 12,829 were in
                                eastern DRC.

                            •   In Rwanda, 1,056 cases of adult rape were reported in 2010; the
                                police reported that they investigated 287 cases. Of those 1,056
                                cases, 433 were filed in courts, 201 were dropped and 422 were
                                pending investigation.

                            •   In Uganda, 709 cases of rape were reported in 2010 of which 252
                                were tried. In November 2010, the United Nations Population Fund
                                reported that 24 percent of women said their first sexual encounter
                                was violent.

                            •   In Burundi, 3,781 cases of gender-based violence were reported in
                                2010. In addition, according to the United Nations Children’s Fund,
                                approximately 60 percent of reported rapes were of children under age
                                18 and 20 percent of reported rapes were of children under age 12.

                            Also, the International Medical Corps reported that in 2011 it provided
                            medical and psychosocial counseling at 60 health clinics in North and
                            South Kivu to 1,200 sexual violence victims. As we reported in 2011, case



                            Page 27                              GAO-12-763 Conflict Minerals Disclosure Rule
                     file data on sexual violence are not suitable for estimating a rate of sexual
                     violence.


                     As part of U.S. efforts to address sexual violence and other human rights
Conclusions          abuses perpetrated by armed groups in the DRC, Congress enacted and
                     the President signed into law legislation requiring that SEC issue a
                     conflict minerals disclosure rule, which would require covered companies
                     to disclose whether necessary conflict minerals used in their products
                     originated in the DRC or an adjoining country and, if they did, to provide
                     an additional report with certain disclosures. SEC has taken some
                     important steps in its effort to issue a rule, including issuing a proposed
                     rule that generated a large volume of public comments. However, SEC
                     has not yet finalized and issued a rule as stipulated in the Act, largely due
                     to the time and effort required for the Commission to understand the
                     complexities of the four conflict minerals’ supply chains, review the large
                     volume of comment letters, and hold the numerous meetings requested
                     by stakeholders.

                     The continued delay in issuing a final rule, however, has contributed to a
                     lingering uncertainty among industry and other stakeholders who expect
                     their actions to be guided by a final rule. Some of these industry and other
                     stakeholders have engaged in the development of various initiatives that
                     they hope may help covered companies comply with the anticipated rule,
                     in part by helping foreign and domestic suppliers of those covered
                     companies trace minerals in their supply chains. Without a final rule, it is
                     unclear to what extent the initiatives currently being developed or
                     implemented by industry and other stakeholders will achieve results
                     consistent with those anticipated under the conflict minerals legislation.
                     Moreover, in part because of the delay in the rule’s issuance, many
                     companies across the tin, tantalum, tungsten, and gold supply chains are
                     reluctant to participate in or support the global and in-region initiatives
                     currently being developed or implemented because they are uncertain
                     whether or not the initiatives will align with the anticipated rule.


                     To address the delay and uncertainty in finalizing a conflict minerals
Recommendation for   disclosure rule regarding what covered companies will be required to do,
Executive Action     we recommend that the Chairman of SEC identify the remaining steps it
                     needs to take and the associated time frames to finalize and issue such a
                     conflict minerals disclosure rule.




                     Page 28                                GAO-12-763 Conflict Minerals Disclosure Rule
                     We provided a draft of this report to SEC, State, Department of Defense,
Agency Comments      and USAID, for their review and comment. We received written comments
and Our Evaluation   from SEC that are reprinted in appendix III. While SEC neither agreed nor
                     disagreed with our recommendation, in its comment letter, SEC said that
                     it would continue its endeavor to complete the rule making expeditiously
                     to provide certainty. It noted that, having issued a proposed rule, the
                     required steps for adopting a final rule are determined by the majority of
                     the Commission’s five members, whose deliberations are subject to the
                     requirements of the Government in the Sunshine Act. On July 2, 2012,
                     SEC announced, on its website, that the conflict minerals disclosure rule
                     would be on the agenda for consideration at the Commission’s “Sunshine
                     Act meeting” scheduled for August 22, 2012. SEC and State also
                     provided technical comments, which we incorporated in this report as
                     appropriate. The Department of Defense and USAID had no comments
                     on this report. We also provided relevant portions of the draft of this report
                     to relevant external stakeholders for their technical comments. We
                     received technical comments from these stakeholders, which we
                     incorporated throughout this report as appropriate. In addition, based on
                     the technical comments we received from agencies and external
                     stakeholders, we revised the title of our draft report to better capture the
                     most recent developments.


                     We are sending copies of this report to interested congressional
                     committees. In addition, this report is available at no charge on GAO’s
                     website at http://www.gao.gov.

                     If you or your staffs have any questions about this report, please contact
                     me at (202) 512-8980 or courtsm@gao.gov. Contact points for our Offices
                     of Congressional Relations and Public Affairs may be found on the last
                     page of this report. GAO staff who made key contributions to this report
                     are listed in appendix IV.




                     Michael J. Courts
                     Acting Director
                     International Affairs and Trade




                     Page 29                                GAO-12-763 Conflict Minerals Disclosure Rule
List of Congressional Committees

The Honorable Tim Johnson
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable Max Baucus
Chairman
The Honorable Orrin G. Hatch
Ranking Member
Committee on Finance
United States Senate

The Honorable John F. Kerry
Chairman
The Honorable Richard G. Lugar
Ranking Member
Committee on Foreign Relations
United States Senate

The Honorable Spencer Bachus
Chairman
The Honorable Barney Frank
Ranking Member
Committee on Financial Services
House of Representatives

The Honorable Ileana Ros-Lehtinen
Chairman
The Honorable Howard L. Berman
Ranking Member
Committee on Foreign Affairs
House of Representatives

The Honorable Dave Camp
Chairman
The Honorable Sander Levin
Ranking Member
Committee on Ways and Means
House of Representatives


Page 30                             GAO-12-763 Conflict Minerals Disclosure Rule
The Honorable Patrick Leahy
Chairman
The Honorable Lindsey Graham
Ranking Member
Subcommittee on State, Foreign Operations,
  and Related Programs
Committee on Appropriations
United States Senate

The Honorable Kay Granger
Chairman
The Honorable Nita Lowey
Ranking Member
Subcommittee on State, Foreign Operations,
  and Related Programs
Committee on Appropriations
House of Representatives




Page 31                            GAO-12-763 Conflict Minerals Disclosure Rule
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              To examine the steps the Securities and Exchange Commission (SEC)
              has taken to issue a conflict minerals disclosure rule, we reviewed
              Section 1502(b) of the Dodd-Frank Wall Street Reform and Consumer
              Protection Act (Pub. L. No. 111-203), SEC’s proposed rule, comment
              letters regarding the rule submitted to and posted by SEC to its website,
              and other documents from SEC. 1 In addition, we interviewed officials from
              SEC working on the rule and attended a public roundtable in October
              2011, which was convened by SEC to discuss the proposed rule. To
              understand the role of the Department of State (State) in supporting
              SEC’s efforts to develop the rule, we interviewed officials from SEC and
              State.

              To identify and examine initiatives developed by industry, multilateral
              organizations, and other stakeholders that may help covered companies
              comply with the anticipated SEC rule, we reviewed documents from State
              and the United States Agency for International Development (USAID),
              such as press releases and a presentation; reports issued by the United
              Nations Group of Experts on the Democratic Republic of the Congo
              (UNGoE); guidance documents and reports from the Organisation for
              Economic Co-operation and Development (OECD); and guidance
              documents, reports, and presentations from the International Conference
              on the Great Lakes Region (ICGLR). We also reviewed numerous
              documents and reports by industry associations, companies,
              nongovernmental agencies (NGOs), and consulting firms.

              Throughout the course of our review, we met and corresponded with over
              40 U.S. and foreign government officials and other representatives,
              including representatives from ICGLR and several NGOs, to discuss the
              actions relevant stakeholders have taken to develop and implement
              initiatives that may help covered companies comply with the anticipated
              rule. Specifically, we met with officials from State, USAID, the United
              Kingdom Foreign and Commonwealth Office, the European Union, and the
              German Federal Institute for Geosciences and Natural Resources (BGR).
              We also interviewed and corresponded with representatives from 4
              multilateral organizations; 11 industry associations, including


              1
               In this report we are not reporting on the effectiveness of SEC’s conflict minerals
              disclosure rule, as required under the Act, because SEC had not yet issued its final rule at
              the time of our audit. In the interim, to meet our mandated reporting time frame of July
              2012 under the Act, we are reporting on steps SEC has taken toward issuing a rule and
              on industry and other stakeholders’ initiatives that may help covered companies comply
              with the anticipated disclosure rule.




              Page 32                                       GAO-12-763 Conflict Minerals Disclosure Rule
Appendix I: Objectives, Scope, and
Methodology




manufacturing, electronic, automotive, gold, and jewelry industry
associations; 10 companies, including component parts manufacturers and
original equipment manufacturers from various industries; 5 smelters,
including companies processing tin, tantalum, and tungsten, and 1 gold
refiner; 4 NGOs; 3 consulting firms; and 1 gold industry expert. To help
gather information for the review, we traveled to the United Kingdom,
France, Belgium, and Germany to interview representatives from the
OECD Secretariat, foreign government officials, and representatives from
foreign companies—including smelters, industry associations, and
consulting firms. Where company names were used in the report, we
obtained permission from said companies.

In response to a requirement in the Dodd-Frank Wall Street Reform and
Consumer Protection Act that GAO submit an annual report that assesses
the rate of sexual violence in war-torn areas of the Democratic Republic of
the Congo (DRC) and adjoining countries, we identified and assessed any
additional information available on sexual violence in war-torn eastern
DRC, as well as three neighboring countries that border eastern DRC—
Rwanda, Uganda, and Burundi—since our 2011 report on sexual violence
in these areas. 2 During the course of our review, we interviewed officials
from State, USAID, and the Department of Defense and interviewed NGO
representatives and researchers to discuss the collection of sexual
violence-related data—including population-based surveys and case file
data—in the DRC and adjoining countries. Specifically, we followed up with
researchers and representatives from those groups we interviewed for our
prior review on sexual violence rates in eastern DRC and neighboring
countries, including a researcher from the Department of Defense (Office of
the Assistant Secretary of Defense for Health Affairs), officials from the
United Nations Population Fund, representatives from the International
Rescue Committee and the Harvard Humanitarian Initiative, and others. In
addition, we interviewed representatives from the International Medical
Corps for this review, a group with which we had not previously met. We
also conducted thorough Internet literature searches to identify new
academic articles containing any additional data on sexual violence.




2
GAO-11-702.




Page 33                               GAO-12-763 Conflict Minerals Disclosure Rule
Appendix I: Objectives, Scope, and
Methodology




We conducted this performance audit from August 2011 to July 2012 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 34                              GAO-12-763 Conflict Minerals Disclosure Rule
Appendix II: Descriptions of Global and In-
                     Appendix II: Descriptions of Global and In-
                     Region Sourcing Initiatives



Region Sourcing Initiatives

                     Various stakeholders have developed and implemented initiatives that
                     may help covered companies and their suppliers comply with SEC’s
                     anticipated conflict minerals disclosure rule. Some of these initiatives can
                     be characterized as global because they may support covered
                     companies’ efforts to identify the source of their conflict minerals across
                     conflict minerals supply chains around the world. Other initiatives can be
                     described as in-region sourcing initiatives because they may support
                     responsible sourcing of conflict minerals from Central Africa and the
                     identification of those minerals’ specific mines of origin.


Global Initiatives
OECD Due Diligence   In consultation with a multi-stakeholder workgroup, OECD developed the
Guidance             OECD Due Diligence Guidance for Responsible Supply Chains of
                     Minerals from Conflict-Affected and High-Risk Areas (hereafter referred to
                     as OECD Due Diligence Guidance) to promote accountability and
                     transparency in conflict minerals supply chains. In July 2009, prior to the
                     passage of the Dodd-Frank Act, Leaders of the Group of 8 (G-8) 1
                     reaffirmed their commitment to the implementation of initiatives that help
                     reduce conflict that is fuelled by revenues from natural resources;
                     supported the ICGLR’s efforts to address illegal exploitation of natural
                     resources; and encouraged the OECD and other multilateral
                     organizations to work with the ICGLR to further develop practical
                     guidance for businesses operating in countries with weak governance. In
                     response, OECD began consulting with various stakeholders in
                     December 2009 to learn about conflict minerals supply chains, and in
                     April 2010, OECD created a multi-stakeholder workgroup—consisting of
                     representatives from the UNGoE, ICGLR, NGOs, companies, industry
                     associations, and others—to develop due diligence guidance. The
                     workgroup endorsed the draft OECD Due Diligence guidance in
                     November 2010 and OECD formally adopted it as an OECD Council
                     Recommendation in May 2011. Several organizations, including some
                     industry associations and companies, and individuals have submitted
                     letters to SEC recommending that SEC’s final rule suggest the use of the
                     OECD Due Diligence Guidance. In addition, in December 2010 the heads
                     of states from the 11 member countries of the ICGLR endorsed the



                     1
                      The G-8 nations include the United States, United Kingdom, France, Germany, Italy,
                     Japan, Canada, and Russia.




                     Page 35                                       GAO-12-763 Conflict Minerals Disclosure Rule
Appendix II: Descriptions of Global and In-
Region Sourcing Initiatives




OECD Due Diligence Guidance and called upon companies sourcing
minerals from the Great Lakes Region to comply with the guidance; in
July 2011 State endorsed the framework set forth in the guidance and
encouraged companies within the conflict minerals supply chains to
exercise due diligence in accordance with the framework; and an UNGoE
report noted that in September 2011 the DRC Ministry of Mines issued a
law requiring all mining operators in the country to comply with the
guidance. Moreover, various stakeholders have shown their support for
the OECD Due Diligence Guidance by aligning their own global and in-
region sourcing initiatives with it.

The OECD Due Diligence Guidance and the corresponding supplements
provide detailed guidance for companies operating in and sourcing
minerals from conflict areas. For example, steps two and three of OECD’s
Five-Step Framework call for the implementation of a strategy to identify
risks and support the development of risk mitigation efforts to respond to
risk, when appropriate. The guidance allows a company to continue
trading with suppliers during the implementation of risk mitigation efforts. 2
In addition to the basic five-step framework, OECD developed two
supplements—the Supplement on Tin, Tantalum and Tungsten and the
Supplement on Gold—to provide companies with specific guidance
relevant to the conflict minerals supply chains. 3

To increase awareness of and to develop emerging practices for
implementing the OECD Due Diligence Guidance and the Supplement on



2
 The OECD Due Diligence Guidance recommends the immediate suspension of trade
with suppliers linked to any party either committing serious human rights abuses or
supporting non-state armed groups; in contrast, to continue to support sourcing from the
conflict-affected country, the guidance recommends the adoption of a risk management
plan, rather than suspension of trade, to prevent direct or indirect support to public or
private security forces when those entities are present at mining sites.
3
 According to representatives of the OECD Secretariat, OECD staff, in consultation with
various stakeholders, identified similarities between the tin, tantalum, and tungsten supply
chains, and identified significant differences between these supply chains and the supply
chain for gold. In addition, they identified distinct challenges to conducting due diligence
for the tin, tantalum, and tungsten supply chains versus the supply chain for gold. Hence,
OECD developed one supplement for tin, tantalum, and tungsten and a separate
supplement for gold. However, Annex I of the OECD Due Diligence Guidance applies to
the tin, tantalum, tungsten and gold supply chains and both supplements maintain the
same five-step framework. The Supplement for Tin, Tantalum, and Tungsten was adopted
by the OECD Council in May 2011; the Supplement on Gold will be reviewed by the
OECD Council in July 2012.




Page 36                                       GAO-12-763 Conflict Minerals Disclosure Rule
Appendix II: Descriptions of Global and In-
Region Sourcing Initiatives




Tin, Tantalum, and Tungsten, OECD is conducting an implementation
pilot project. The project began in May 2011 and includes companies
spanning the entire supply chain from the mine site to the original
equipment manufacturers that use some of the derivatives of conflict
minerals in the products they sell. Approximately 100 companies—
including mining companies, traders, smelting companies, component
manufacturers, product manufacturers, original equipment manufacturers,
and industry associations—are voluntarily participating in the pilot project.
Participating companies are completing surveys to report on their
progress and any challenges faced while implementing the OECD Due
Diligence Guidance. According to representatives from the OECD
Secretariat and representatives from two consulting firms, at the end of
the project emerging practices will be identified to assist companies in
implementing the OECD Due Diligence Guidance. OECD launched a
similar implementation pilot project for the Supplement on Gold in May
2012.

The first two phases of the implementation pilot project have
demonstrated positive developments in participants’ efforts to implement
the OECD Due Diligence Guidance. For example, recently, mining
cooperatives, local traders, and other groups involved in mining activities
in the DRC have started collaborating with civil society to create SAVE
ACT MINE/DRC, a non-profit organization that aims to increase
understanding of the OECD Due Diligence Guidance by translating the
guidance into local languages and by hosting workshops. One
representative from the OECD Secretariat opined that, although this is
still a nascent effort, SAVE ACT MINE/DRC represents a significant
development because the private sector in the DRC has begun to
recognize that they are responsible for their supply chains and should
take ownership over the implementation of international standards. 4 In
addition, some original equipment manufacturers participating in the
project are putting pressure on other companies within their own conflict
minerals supply chains to implement due diligence standards through



4
 According to a representative from the OECD Secretariat, the changing attitudes in the
DRC can also be attributed to (1) the emerging demand for minerals from Central Africa
that are conflict-free and (2) the steps the DRC government is taking to integrate the
OECD Due Diligence Guidance into and to monitor implementation of the guidance. For
example, in May 2012 the government of the DRC suspended two Chinese-owned trading
companies’ export licenses for failing to carry out due diligence over their operations in
North Kivu.




Page 37                                       GAO-12-763 Conflict Minerals Disclosure Rule
                                Appendix II: Descriptions of Global and In-
                                Region Sourcing Initiatives




                                contractual clauses, which will support the companies’ efforts to collect
                                sourcing information from suppliers.

UNGoE Due Diligence             United Nations Security Council (UNSC) resolution 1896 (2009) called on
Guidelines                      UNGoE to provide recommendations for due diligence guidelines for
                                importers, processors, and consumers of minerals originating from the
                                DRC. UNGoE participated in the OECD Due Diligence Guidance multi-
                                stakeholder workgroup, and in a November 2010 report provided a
                                recommendation to the UNSC that companies adopt the five-step
                                framework for detailed due diligence that the OECD workgroup
                                developed. UNSC resolution 1952 supported UNGoE’s due diligence
                                guidance recommendations; UNGoE’s recommended due diligence
                                guidelines are similar to and fully consistent with the OECD Due Diligence
                                Guidance. Individuals and entities may be subject to UN sanctions for not
                                applying the due diligence guidelines.



Conflict-Free Smelter Program   The Global e-Sustainability Initiative (GeSI) and the Electronic Industry
                                Citizenship Coalition (EICC) have co-developed the Conflict-Free Smelter
                                Program to verify the sources of conflict minerals processed by smelters
                                and refiners. 5, 6 The aim of this program is to enable companies—both
                                covered companies and their suppliers—to source conflict-free minerals.
                                Companies that can trace their conflict minerals supply chains back to a
                                conflict-free smelter can claim the minerals in their products are
                                conflict-free.

                                The Conflict-Free Smelter Program is a voluntary program in which
                                smelters undergo an independent third party audit, in accordance with the
                                OECD Due Diligence Guidance, to verify the origin of minerals processed
                                at their facilities. GeSI and the EICC have also developed audit protocols


                                5
                                 GeSI and EICC representatives began designing the concept for a smelter validation
                                program in 2009. In April 2010, GeSI and EICC representatives presented the proposal for
                                the Conflict-Free Smelter Program and the audit protocol for tantalum smelters.
                                6
                                 GeSI and the EICC also released the Conflict Minerals Reporting Template to
                                standardize the collection of information from suppliers. This tool may reduce the burden
                                on suppliers that may receive numerous requests for information from different customers.
                                The template may be used by covered companies to help (1) trace their conflict minerals
                                supply chains and (2) collect sourcing information for conflict minerals used in their
                                products. GeSI and the EICC developed another tool, the Dashboard, to aggregate the
                                responses companies receive from suppliers.




                                Page 38                                       GAO-12-763 Conflict Minerals Disclosure Rule
                                 Appendix II: Descriptions of Global and In-
                                 Region Sourcing Initiatives




                                 for the program in consultation with a number of stakeholders—including
                                 NGOs, smelters, component manufacturers, original equipment
                                 manufacturers, and industry associations within and outside the
                                 electronics industry—to ensure wide-spread support for the program. 7 In
                                 December 2010, the first tantalum smelter was certified conflict-free
                                 through the program after successfully completing an audit, and as of July
                                 2012, 12 of approximately 25 tantalum smelting companies had been
                                 certified as conflict-free. As of July 2012, two tin smelting companies had
                                 been certified as conflict-free, five tungsten smelting companies had
                                 begun discussions with representatives of the program, and five gold
                                 refining companies had been certified as conflict-free through the
                                 program. 8

World Gold Council’s Conflict-   Representing top gold mining companies, the World Gold Council (WGC)
Free Gold Standard and Tools     is developing a global initiative to help support gold mining companies in
                                 their efforts to responsibly mine gold worldwide. For this initiative, WGC is
                                 creating the Conflict-Free Gold Standard, an assurance framework, and a
                                 toolkit, with the input from mining companies, refiners, and other relevant
                                 stakeholders. The Conflict-Free Gold Standard establishes a common
                                 approach for gold mining companies to demonstrate that the gold they
                                 extract does not fuel conflict or human rights abuses. The standard is
                                 aligned with the OECD Due Diligence Guidance, 9 and covers the
                                 industrial mining supply chain from the mine to the refiner. However, the
                                 standard does not cover gold from recycled sources or gold mined by
                                 artisanal miners. WGC is also developing an assurance framework, which
                                 can be used by third-party auditors to monitor mining companies’
                                 compliance with the standard, and tools to support mining companies
                                 through the audit process. According to WGC representatives, WGC


                                 7
                                  To be compliant with the audit protocols, smelters must be able to demonstrate that they
                                 have (1) a conflict minerals policy, (2) a mechanism for tracing goods sold back to the
                                 purchased material source, and (3) documentation verifying that the conflict minerals are
                                 from non-conflict sources.
                                 8
                                  A list of conflict-free smelters can be viewed on the CFS Program website, accessed July
                                 5, 2012, at http://www.conflictfreesmelter.org/CFSindicators.htm.
                                 9
                                  According to the OECD Due Diligence Guidance, the individual company must exercise
                                 judgment to determine if conflict exists in the country in which it conducts business.
                                 According to WGC representatives, WGC took steps to help mining companies avoid
                                 pressure from host governments that may be averse to being designated as “conflict-
                                 affected or high risk” by an individual mining company by including a requirement in the
                                 standard that a mining company rely on external sources—such as sanctions or reports
                                 from authoritative NGOs—to determine if conflict exists.




                                 Page 39                                       GAO-12-763 Conflict Minerals Disclosure Rule
                          Appendix II: Descriptions of Global and In-
                          Region Sourcing Initiatives




                          plans to release the final standard, the assurance framework, and other
                          tools before the end of 2012. Although the standard only covers gold
                          mining companies, it may support certification programs at the refiner
                          level. For example, according to gold industry representatives, the
                          standard was developed with input from the London Bullion Market
                          Association (LBMA), and it will support the efforts of those refiners
                          purchasing gold from mining companies in compliance with the WGC
                          Conflict-Free Gold Standard to comply with the LBMA Responsible Gold
                          Guidance.

LBMA’s Responsible Gold   Distinct from WGC, whose standard covers the gold supply chain from
Guidance                  mine to refiner, the LBMA has developed its own Responsible Gold
                          Guidance to ensure that the gold refiners it accredits only purchase
                          conflict-free gold. 10 In January 2012, LBMA finalized and published its
                          guidance, which is based on the OECD Due Diligence Guidance, 11 and
                          plans to develop and finalize audit protocols and other tools for use with
                          the standard by July 2012. According to an LBMA representative, by
                          December 2013 LBMA gold refiners will need to comply with the LBMA
                          guidance and pass a third-party audit verifying their compliance to
                          maintain their accreditation. Similar to the Conflict-Free Smelter Program,
                          the goal of the LBMA initiative is to enable companies to say that the gold
                          in their products is conflict-free if they can trace their gold supply chains
                          to an LBMA accredited gold refiner (see fig. 7). According to industry
                          representatives, in May 2012 LBMA, GeSI, and the EICC began the
                          process to harmonize the two smelter and refiner certification programs to
                          avoid duplicative efforts and any unnecessary burden on refiners.




                          10
                            LBMA is the overseer for the London Good Delivery List, a list of 63 accredited gold
                          refiners that meet a specific standard for the quality of their refined gold and silver bars.
                          According to LBMA representatives, most banks and exchanges will only contract with
                          refiners on the Good Delivery List.
                          11
                            The LBMA also incorporated existing anti-money laundering and “know your customer”
                          due diligence practices into the Responsible Gold Guidance.




                          Page 40                                         GAO-12-763 Conflict Minerals Disclosure Rule
                                 Appendix II: Descriptions of Global and In-
                                 Region Sourcing Initiatives




                                 Figure 7: Gold Bars Produced by LBMA Accredited Refiners




Responsible Jewellery Council    The Responsible Jewellery Council (RJC)—a diamond and precious
Chain-of-Custody Certification   metals industry association—created a chain-of-custody certification
Program                          program in March 2012 to help its member companies identify and track
                                 conflict-free gold throughout their supply chains. 12, 13 RJC designed a
                                 certification standard and developed several tools for the program—
                                 including a certification handbook, guidance, and an assessment toolkit—
                                 in collaboration with industry associations, companies, NGOs, and
                                 independent experts. According to RJC representatives, RJC began
                                 developing the program in early 2010 to support responsible sourcing,
                                 and after the passage of the Dodd-Frank Act, RJC incorporated
                                 measures into the program to support covered companies’ compliance
                                 with section 1502(b) of the Dodd-Frank Act. Conflict-free mined, recycled,
                                 and grandfathered gold is tracked through the supply chain from mine to


                                 12
                                   The program was also launched to help its member companies identify and track the
                                 supply chains of other precious metals, such as platinum, palladium, and rhodium.
                                 13
                                   As mentioned previously, chain of custody refers to the paper trail that documents the
                                 sequence of entities that have custody of minerals as they move through a supply chain.




                                 Page 41                                       GAO-12-763 Conflict Minerals Disclosure Rule
                                   Appendix II: Descriptions of Global and In-
                                   Region Sourcing Initiatives




                                   end user with the use of RJC tracking records to ensure a proper chain of
                                   custody is maintained. 14 Participating RJC members must be
                                   independently audited to be certified, in accordance with the OECD Due
                                   Diligence Guidance, and RJC recognizes and accepts audits completed
                                   under the GeSI and EICC Conflict-Free Smelter Program, as well as
                                   WGC’s and LBMA’s initiatives.

                                   Two factors may limit the efficacy of RJC’s chain-of-custody certification
                                   program. First, certification under RJC’s program is voluntary and
                                   companies may determine which parts of their business and which
                                   materials they want to certify. Second, companies certified under RJC’s
                                   program are not prevented from sourcing from mining entities outside the
                                   program; gold purchased from a mine outside the program simply has to
                                   be segregated from gold from certified suppliers. While some refiner
                                   representatives report that segregation of gold in their facilities is difficult,
                                   several gold refiners have been certified as conflict-free through the RJC
                                   chain-of-custody certification program.


In-Region Sourcing
Initiatives

ITRI Tin Supply Chain Initiative   ITRI, an international tin industry association, began developing the ITRI
(iTSCi)                            Tin Supply Chain Initiative (iTSCi) in 2008 to improve due diligence and
                                   traceability within the tin, tantalum, and tungsten supply chains. ITRI
                                   initially designed the initiative to support the responsible sourcing of tin
                                   from Central Africa, but in 2010 ITRI began working with the Tantalum
                                   Niobium International Study Center to include tantalum. At that time, the
                                   initiative was also expanded to include tungsten. iTSCi has three
                                   components: (1) a physical chain-of-custody system to track and monitor
                                   minerals from the mine to the smelter; (2) independent third-party risk
                                   assessments of mine sites, transport routes, and companies involved in
                                   mining and transport to identify and manage conflict-related risks; and (3)



                                   14
                                     RJC defines grandfathered gold as existing stocks of gold that existed before the chain-
                                   of-custody standard came into effect, with a reliable record demonstrating its date of
                                   ownership, extraction and/or manufacture. Grandfathered gold may be in the form of bars,
                                   ingots, coins, or similar, or within a sealed container (e.g., grain, powder, or sponge), with
                                   the refining date either permanently shown with the mark of a refiner or government mint;
                                   or verified by the refiner in accordance with a serial number or other permanent physical
                                   mark or characteristic; or determined though bank depository or inventory records.




                                   Page 42                                         GAO-12-763 Conflict Minerals Disclosure Rule
Appendix II: Descriptions of Global and In-
Region Sourcing Initiatives




independent third-party audits of all participants in the initiative. iTSCi
helps companies comply with the OECD Due Diligence Guidance through
these three components. According to an industry association
representative, as of June 2012, iTSCi was being implemented at tin,
tantalum, and tungsten mine sites, including approximately 1500 mine
areas in the Katanga Province in the DRC and at approximately 400 mine
areas in Rwanda, and the programs in both countries support
approximately 45,000 artisanal miners. 15, 16

Although iTSCi was started and overseen by ITRI, it was developed with
input from local and national officials in the DRC and Rwanda and it is
being implemented by local organizations and national officials in their
countries, with support from Pact, a NGO, and Channel Research, an
independent auditor. Pact manages the initiative’s field operations and
performs initial mine risk assessments; coordinates with DRC and
Rwandan government officials and local NGOs to implement the initiative
at mine sites; continuously monitors activities on the ground; and helps
train government officials to build their capacity. Channel Research is in
charge of conducting pre-audits, governance assessments, and company
audits of the companies participating in iTSCi.

Through audits, assessments, and continuous monitoring of the initiative,
ITRI and its partners identified a number of problems with current
operations. For example, ITRI representatives reported a number of
problems with the iTSCi system, including duplicate tags, tags appearing
in the wrong places, and bag weights increasing between check points in
the supply chain. ITRI began addressing these concerns in 2011 through
the development of an incident reporting template that staff are using to
record and report incidents. According to an iTSCi document, the new
protocol will ensure a timely and consistent identification and response to
incidents. According to an iTSCi report, incidents have been reported, but
at a low frequency in comparison to the amount of material bagged and
tagged.



15
  According to a NGO representative, in addition to improving due diligence and
transparency within the tin, tantalum, and tungsten supply chains, the initiative is enabling
the government of the DRC to legitimately collect taxes.
16
   Compared to eastern DRC, Katanga is relatively conflict-free. As of June 2012, ITRI and
its partners had not extended the ITRI initiative to eastern DRC, where conflict and
violence persist.




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                                 Appendix II: Descriptions of Global and In-
                                 Region Sourcing Initiatives




Certified Trading Chains         According to BGR representatives, since 2008 the German government’s
Program and the                  Federal Institute for Geosciences and Natural Resources (BGR) and its
Implementation of a National     partners have helped build capacity within the DRC and Rwandan
Certification and Traceability   governments through several initiatives, including a certified trading
System in DRC                    chains program and the development of a national certification and
                                 traceability system. BGR and its partners have developed and piloted the
                                 certified trading chains program in eastern DRC and Rwanda to help the
                                 governments formalize the artisanal mining sectors (see fig. 8). BGR and
                                 its partners work with the host government and other stakeholders to
                                 develop standards by which mines are independently assessed, and the
                                 organization provides technical support for the host government to
                                 implement the program. 17 According to BGR representatives, BGR and its
                                 partners are currently conducting a pilot program for the certification of
                                 four mine sites in South Kivu, in eastern DRC. In Rwanda, three of the
                                 five mine sites audited between November 2008 and June 2011 have
                                 been certified through the program. 18 BGR representatives noted that
                                 they are planning to implement the certified trading changes program at
                                 additional mine sites in North and South Kivu in 2012. However, they also
                                 noted that the security situation in eastern DRC remains a challenge to
                                 the implementation of initiatives in the region.




                                 17
                                   The standards are aligned with the OECD Due Diligence Guidance. In addition,
                                 according to a BGR representative, the DRC government incorporated the standards in
                                 national legislation and the Rwandan government included the standards in a national
                                 guidance document; the standards are obligatory in DRC and voluntary in Rwanda.
                                 18
                                   According to a BGR representative, BGR supports the process while the partner actually
                                 certifies the mine sites.




                                 Page 44                                       GAO-12-763 Conflict Minerals Disclosure Rule
Appendix II: Descriptions of Global and In-
Region Sourcing Initiatives




Figure 8: Artisanal Miners Panning Tin Ore at a Rwandan Mine Site




Page 45                                       GAO-12-763 Conflict Minerals Disclosure Rule
Appendix II: Descriptions of Global and In-
Region Sourcing Initiatives




BGR and its partners have also been helping the DRC government
develop a national certification and traceability system for tin, tantalum,
tungsten, and gold since 2009; 19 the certification system is based on the
certified trading chains project. As part of the governments’ efforts to
develop the system, BGR and its partners are working with
representatives from the DRC government and others to inspect mine
sites in eastern DRC. Specifically, the mine site validation missions are
joint missions supported by BGR and include representatives from the
local and national governments, civil society, industry, the United Nations
Organization Stabilization Mission in the Democratic Republic of the
Congo (MONUSCO), and ITRI. According to BGR officials, the goal is to
regularly monitor the security situation at the mine sites, as part of the
government’s efforts to map mining sites and armed group locations. 20 In
June 2011 and August 2011, the mine site validation teams conducted
some mine site qualification reviews; however, the DRC government
published the results of the mine site qualification reviews over 8 months
after the mine site validation missions occurred, limiting the public’s
access to timely information concerning the security situation at the
mines. 21

According to BGR officials, BGR and its partners’ in-region sourcing
initiatives provide companies that purchase minerals through the program
with assurances that artisanal miners participating in the initiative produce
and trade minerals in accordance with accepted standards. BGR and its
partners provide these assurances by certifying mine sites and helping to
build the capacity of Congolese and Rwandan government officials. In



19
  The DRC’s national certification system, the Certification Nationale, will enable the
government to implement ICGRL’s regional certification mechanism.
20
   Cadastre Minier—an office within the DRC Ministry of Mines—and the International
Peace Information Service will conduct a comprehensive mine site qualification and
cartography initiative throughout eastern DRC. In addition, MONUSCO is working with the
DRC government on the Centres de Négoce initiative, an effort to establish five mineral
trading centers in North and South Kivu. The project was launched in 2009 with the goal of
creating choke-points where traceability procedures could be properly applied and where
tin, tantalum, tungsten, and gold could be sold, bought, analyzed, and taxed. As of
November 2011, MONUSCO completed construction of four of the centers and
established a validation process to ensure that only conflict-free minerals will be traded at
the centers.
21
  According to BGR representatives, the mine site validation teams will visit and conduct
qualification reviews at additional mines in North and South Kivu in the coming months
and the validation of mine sites in Maniema and Katanga will being in July 2012.




Page 46                                        GAO-12-763 Conflict Minerals Disclosure Rule
                                 Appendix II: Descriptions of Global and In-
                                 Region Sourcing Initiatives




                                 addition, the maps being developed by the DRC government, in
                                 conjunction with BGR and other groups, may serve as a tool for
                                 companies to determine the conflict status of a mine site when conducting
                                 due diligence.

ICGLR’s Regional Certification   With technical support from several NGO partners, ICGLR designed a
Mechanism                        regional chain-of-custody tracking system and standards to ensure that
                                 conflict minerals are fully traceable from the mine site to the point of
                                 export; however, the implementation of the system is only in the nascent
                                 stages and is dependent on the actions of the participating national
                                 governments. In December 2006, the heads of the 11 African states that
                                 form the ICGLR signed the Pact on Security, Stability and Development in
                                 the Great Lakes Region, which included the Protocol Against the Illegal
                                 Exploitation of Natural Resources. In accordance with the protocol,
                                 ICGLR member states agreed to put in place regional rules and
                                 monitoring mechanisms for combating the illegal exploitation of natural
                                 resources. To curb the financing of rebel groups through the illegal
                                 exploitation of natural resources, ICGLR developed and approved six
                                 tools for implementation in the Great Lakes Region. 22 ICGLR worked with
                                 Partnership Africa Canada to develop one of the tools, a regional
                                 certification mechanism, which was approved by the ICGLR member
                                 states in December 2010. ICGLR’s regional certification mechanism may
                                 enable member countries and their mining companies to demonstrate
                                 where and under what conditions minerals were produced; through the
                                 regional certification mechanism, individual member governments are to
                                 issue ICGLR regional certificates for those mineral shipments that are in
                                 compliance with the standards of the mechanism.

                                 Several partners support ICGLR and member countries’ efforts to
                                 implement the mechanism. For example, one NGO is helping the ICGLR
                                 develop a regional database, which would house data collected at the
                                 mine site and at the point of export, to track mineral flows through the
                                 region. At this time, the development of the databases and collection of
                                 data is an ongoing process. In addition, the German International
                                 Cooperation is consulting with ICGLR as it begins to set up a regional
                                 audit committee, which will be responsible for accrediting third-party


                                 22
                                   The ICGLR developed the following six tools: regional certification mechanism,
                                 harmonization of national legislation, regional database on mineral flows, formalization of
                                 the artisanal mining sector, promotion of the Extractive Industry Transparency Initiative,
                                 and a whistle-blowing mechanism.




                                 Page 47                                        GAO-12-763 Conflict Minerals Disclosure Rule
Appendix II: Descriptions of Global and In-
Region Sourcing Initiatives




auditors and overseeing the mechanism’s audit system. Partnership
Africa Canada and BGR are also supporting the national authorities in
Burundi with implementation of the regional certification mechanism.

According to a report by GeSI and the EICC and an ICGLR
representative, ICGLR member countries are expected to harmonize their
national legislation with the regional certification mechanism and develop
a national certification and traceability system prior to issuing ICGLR
regional certificates. According to an ICGLR representative, a report by
GeSI and the EICC, and a report by the International Peace Information
Service, the DRC government incorporated the ICGLR Regional
Certification Manual into the national legal framework in February 2012,
and Rwanda is expected to adopt similar legislation shortly. 23 BGR’s and
ITRI’s initiatives support the implementation of the regional certification
mechanism at the national level, because all activities undertaken through
these initiatives are incorporated into the DRC and Rwandan national
efforts to develop national certification and traceability systems. As of
April 2012, none of the ICGLR member states had issued an ICGLR
regional certificate.




23
   According to the International Peace Information Service, a ministerial decree has been
finalized that would integrate the regional certification mechanism into Rwanda’s mining
code, and it is now pending approval by the Rwandan Ministry of Mines. Certification of
mines will begin after the Rwandan Ministry of Mines approves the decree.




Page 48                                       GAO-12-763 Conflict Minerals Disclosure Rule
Appendix III: Comments from the Securities
              Appendix III: Comments from the Securities
              and Exchange Commission



and Exchange Commission




              Page 49                                      GAO-12-763 Conflict Minerals Disclosure Rule
Appendix III: Comments from the Securities
and Exchange Commission




Page 50                                      GAO-12-763 Conflict Minerals Disclosure Rule
Appendix IV: GAO Contact and Staff
                            Appendix IV: GAO Contact and
                            Staff Acknowledgments



Acknowledgments

                  Michael J. Courts, (202) 512-8980 or courtsm@gao.gov
GAO Contact
                  In addition to the individual named above, Godwin Agbara, Assistant
Staff             Director; Ian Ferguson; Amanda Bartine; Justin Fisher; Ernie Jackson;
Acknowledgments   Debbie Chung; Debra Johnson; Fang He; Etana Finkler; and Jeremy
                  Sebest made key contributions to this report.




(320866)
                  Page 51                                  GAO-12-763 Conflict Minerals Disclosure Rule
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