Conflict Minerals Reports - Post Mortem...Conflict Minerals Reports - Post Mortem Plus Details on North Korean Gold Thursday, June 19, 14 Claigan Conflict Minerals Services •

Presented by:Bruce CalderVP Consulting Services

Conflict Minerals Reports - Post MortemPlus Details on North Korean Gold

Thursday, June 19, 14

Claigan Conflict Minerals Services• Conflict Minerals

- Conflict minerals compliance

• RCOI (Reasonable Country of Origin)• Due Diligence

• Conflict Minerals Report

• Experience- Claigan work is quoted in the SEC final rules 18 times

- Claigan has testified to Congress on Conflict Minerals

- Worked for

- Legrand, Danaher, Smiths Medical, Smith & Nephew, Covidien, Johnson & Johnson, Hamilton Beach, Honeywell, Hach, Fluke, Moog, Edwards Lifesciences, Instrumentation Laboratory, GE, Schneider Electric, KavoKerr, Microsemi, Agilent, Barrx, Tyco, L-3, Johnson & Johnson, Smart Technologies, Pelton & Crane, Cooper Surgical, Carestream, Abbott Laboratories, Atricure, CAE, Philips, Plexus, FLIR, Trojan, Deltrol Controls, LoJack, Thermo Scientific, Li-Cor, Avid, and US Commercial Service.


Agenda• Introductions

• Due Diligence- Industry due diligence statistics

- Due diligence definitions

- Gaps Due Diligence

• North Korea- Central Bank of North Korea

- Other North Korean sources

• Other CSR Issues

• Recommendations

• Summary

Webinar is 50 minutes with 10 minutes of Q&A

(hopefully)


Due Diligence - From a Review of Submitted CMRs• Very few companies

showed any due diligence

• From review of submission from 1306 issuers

• Next slides to explain

Did not perform due diligence94%

Performed due diliigence6%

From Conflict Minerals Reports of 1306 issuers


Due Diligence• The majority of industry does not understand due

diligence as described in the SEC final rules

• Common misconception- Request and review of supplier EICC-GeSI templates

represents due diligence

• This is only a portion of step 2 of Section 1502 of Dodd-Frank- Reasonable Country of Origin Inquiry (RCOI)

• Recommended reading for all issuers- SEC final rules

• ppg 148 to 157

• ppg 161 to 166

• ppg 182 to 183


3 Steps in Section 15021. Issuer to determine whether it is subject to the

requirements

• Necessary to the functionality or production of a product manufactured or contracted by that issuer to be manufactured

2. Issuer to conduct a reasonable country of origin inquiry regarding the origin of its conflict minerals

• RCOI process to determine whether or not their conflict minerals originate in the DRC or adjoining countries

3. Issuer to conduct due diligence on the source and chain of custody of its conflict minerals and provide a Conflict Minerals Report

• if, based on its RCOI, the issuer knows or has reason to believe, that it has necessary conflict minerals that originated in the Covered Countries and did not come from recycled or scrap sources.

• Only applies to those conflict minerals sourced from the DRC or adjoining countries


RCOI - Sourcing from the DRC• RCOI Standard - SEC Final Rules - pg 148

- “We do view an issuer as satisfying the reasonable country of origin inquiry standard if it seeks and obtains reasonably reliable representations indicating the facility at which its conflict minerals were processed and demonstrating that those conflict minerals did not originate in the Covered Countries ... These representations could come either directly from that facility or indirectly through the issuer’s immediate suppliers, but the issuer must have a reason to believe these representations are true given the facts and circumstances surrounding those representations.”

• Key passage - pg 153- “This revised approach does not require an issuer to prove a

negative to avoid moving to step three, but it also does not allow an issuer to ignore or be willfully blind to warning signs or other circumstances indicating that its conflict minerals may have originated in the Covered Countries.”


Due Diligence - Section 1502

• Due diligence has two phases1. ‘Reason to Believe’ phase

2. Due diligence for those minerals that that the issuer knows or has reason to believe are sourced from the DRC or surrounding region


Due Diligence 1 - Reason to Believe• ‘Reason to Believe’ phase

- If is it is unclear whether a supplier or facility is sourcing from the DRC or surrounding countries,

• The issuer needs to determine if they have ‘Reason to Believe that they are sourcing from the DRC or surrounding region’

- Needs to meet ‘Reasonable’ standard

- Omission to do something a ‘reasonable person’ would do does not meet that standard


Reason to Believe - Reasonable Standard• What would a reasonable person do in this

circumstance?- What would YOU do if you wanted to know when a store closed?

• Look it up on the internet

• Phone the store

• Reasonable for facilities- Internet search of publicly available information on facilities

- Attempt to contact facilities

• You could conduct the same procedure on suppliers instead of facilities but- Many more suppliers than facilities

- Suppliers are not expected to have accurate knowledge


Due Diligence 2 - Chain of Custody• For those conflict minerals that you know or have reason

to believe are sourced from the DRC or surrounding countries

- Required to conduct due diligence

• Due diligence and information communicated in Form SD should reflect on those specific sources- 10% of the facilities

• Smaller workload

• Easier to become DRC Conflict Free

• If DRC Conflict Free, reporting requirements to the SEC are significantly reduced.- Every single company that got in trouble in the news after SEC

disclosure are for things they had to report since they were not DRC Conflict Free (including North Korea)


Due Diligence - From a Review of Submitted CMRs• Very few companies

showed any due diligence

• No evidence of• Reason to believe due

diligence

• Due diligence on chain of custody

• No evidence they even google’d their smelters

Did not perform due diligence94%

Performed due diliigence6%

From Conflict Minerals Reports of 1306 issuers


Obvious Gaps in Due Diligence• Put the following into google

- “Malaysian Smelting Corporation Conflict Minerals”

• First hit in google- Information related to their sourcing from Rwanda and

DRC

• Many of the smelters have email addresses and phone numbers


Placing the Burden on Direct Suppliers - Not Working

• In June of 2014• CV United Smelting Corporation sent a conflict

minerals update to EVERY company that has ever contacted them regarding conflict minerals

• Which totalled 14 companies

• To recap• 1306 companies filed reports to the SEC

• Between these companies and all of theirs 10s of thousands of suppliers

• 14 companies contacted one of the most widely used tin smelters in the world


SEC Filings are Forever• Important thing to remember

- SEC filings are NOT like policies on your website

- You can never change them

- You can never deleted them

- They are there forever

• Mis-steps in a Form SD filing can haunt a company for years

• FYI- All filings are searchable both by Edgar and Google

- A number of universities are conducting full research projects into the conflict minerals submissions


North Korea• 68 Companies reported to the SEC that they source

from the Central Bank of the Democratic People’s Republic of Korea.

- SEC filings are searchable

• Shows lack of due diligence

• Central Bank of DPRK

- In North Korea

• US Sanction violation

• Made front page news in the Wall Street Journal among other major publications


Central Bank of DPRK• North Korean gold smelter

• Former LBMA certified gold smelter- Delisted by LBMA in 2006

• One of the first to report- Microchip industry

• Reviewed the source

• Determined it was historical material from gold vaults

• Removed it from their disclosure

• By then it was too late. - To many companies has already included it in their EICC-

GeSI templates.


Actual North Korean Gold Sources• Central Bank of DPRK is Historical

• However....- Everyone has a smelter that sources from North Korea

• Two Chinese smelters are publicly known to own gold properties in North Korea and smelt gold from those properties

• Represent the largest suppliers of gold wire bonds and balls in China

- In virtually every EICC-GeSI form

• Evidence- Library of Congress reports

- CIA reports (care of wikileaks)

- Korean sources listed on smelter’s websiteThursday, June 19, 14

Other CSR Issues• North Korea is just one of many CSR issues

- Tungsten• Poisoning of a village, eviction, ordering of police to beat protesters

- Tin • Village poisoning (flood of toxic water), military junta, death and illness, crop destruction,

displacement - Gold

• Corruption


2014 Challenge #1• Current challenge

- ‘The Chicken and the Egg’

- Most companies have just completed their 2013 SEC Disclosure

- And, have only started their 2014 work

• v3.01 of the EICC-GeSI form is based on 2014 work

- Many companies are not releasing updated forms until they complete their updates

- which, temporarily, results in a lower supplier response rate


2014 Challenge #2• Many companies declared in their SEC submissions that

they could not report because they did not have part level declarations

- Example 2014 SEC Submission• The majority of our in-scope suppliers have provided a company-level

completed CMRT that does not identify the smelters or refiners used for a particular part, component, or business customer. In cases where suppliers provided a part-level report, the identification of the smelters and refiners that support our specific products could not be determined due to lower tier suppliers reporting on a company basis. Therefore, we are unable to identify with certainty the specific facilities used to process the 3TG in our products.

• Expectation- Significant increase in demand for part level declarations

- Increased aggressiveness in requesting part level declarations


2014 Challenge #3• Non DRC Issues

- Smelters with other CSR issues

- Pressure from customers related to non-DRC smelter issues

• Example- We are seeing more dramatic pressure and escalation from

reporting Central Bank of DPRK than any DRC sourcing

• Letters with demands

• Threatening to no longer buy from the company

• 2014/2015

- Going to continue

- Many smelters and mines have issues


DRC Conflict Free• 2014 Reporting Period (2015 SEC Disclosure)

- DRC Conflict Free is very achievable

• For companies that have conducted due diligence, there are five or less smelters left to solve

• Most look to be solvable in 2014

• Passing an audit is relatively straight forward

• Advantage of declaring DRC Conflict Free- Less reporting requirements

• Virtually every single item that got companies in trouble in the media related to Form SD disclosure would not need to be included in the disclosure

- Public image

• The ‘less reporting requirements’ is the primary advantage- SEC filings are forever

- A lot of smelters (and mines) have other issuesThursday, June 19, 14

Recommendation • Work with someone that really knows what they are

doing

• None of Claigan’s clients ran into any trouble in the media after their 2014 disclosures.

• Doing it right is easier (and cheaper) than doing it improperly

• Remember

- SEC filings are forever


Summary • 6% of filers conducted due diligence

- No reason to believe conducted either due diligence step

• North Korea

- Central Bank of DPRK was submitted by 68 companies to the SEC

- De-certified in 2006

- But, there are other real sources of North Korea gold getting into the electronics supply chain

• Recommendation- Look towards being DRC Conflict Free in 2014/2015

- Work with someone that really know what they are doing


Claigan Conflict Minerals Services

• Conflict Minerals- Conflict minerals compliance

• RCOI (Reasonable Country of Origin)

• Due Diligence

• Conflict Minerals Report

• Experience- Claigan work is quoted in the SEC final rules 18 times

- Claigan has testified to Congress on Conflict Minerals

• [email protected]

Q&A


mailto:[email protected]

mailto:[email protected]

Documents

Conflict Minerals Reports - Post Mortem...Conflict Minerals Reports - Post Mortem Plus Details on North Korean Gold Thursday, June 19, 14 Claigan Conflict Minerals Services •