SEC Conflict Minerals Rule: Insights from Companies' Initial Disclosures and State and USAID Actions in the Democratic Republic of the Congo Region
Published: 2015-11-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony summarizes the information contained in GAO's August 2015 report, entitled SEC Conflict Minerals Rule: Initial Disclosures Indicate Most Companies Were Unable to Determine the Source of Their Conflict Minerals , (GAO-15-561) .
section_title: What GAO Found
paragraphs: According to a generalizable sample GAO reviewed, company disclosures filed with the Securities and Exchange Commission (SEC) for the first time in 2014 in response to the SEC conflict minerals disclosure rule indicated that most companies were unable to determine the source of their conflict minerals. Companies that filed disclosures used one or more of the four “conflict minerals”—tantalum, tin, tungsten, and gold—determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo (DRC) or adjoining countries. Most companies were based in the United States (87 percent). Almost all of the companies (99 percent) reported performing country-of-origin inquiries for conflict minerals used. Companies GAO spoke to cited difficulty obtaining necessary information from suppliers because of delays and other challenges in communication. Most of the companies (94 percent) reported exercising due diligence on the source and chain of custody of conflict minerals used. However, most (67 percent) were unable to determine whether those minerals came from the DRC or adjoining countries (Covered Countries), and none could determine whether the minerals financed or benefited armed groups in those countries. Companies that disclosed that conflict minerals in their products came from covered countries (4 percent) indicated that they are or will be taking action to address the risks associated with the use and source of conflict minerals in their supply chains. For example, one company indicated that it would notify suppliers that it intends to cease doing business with suppliers who continue to source conflict minerals from smelters that are not certified as conflict-free.
a Covered Countries: Angola, Burundi, Central African Republic, the Democratic Republic of the Congo, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia.
Department of State (State) and U.S. Agency for International Development (USAID) officials reported taking actions to implement the U.S. conflict minerals strategy, but a difficult operating environment complicates this implementation. The agencies reported supporting a range of initiatives including validation of conflict-free mine sites and strengthening traceability mechanisms that minimize the risk that minerals that have been exploited by illegal armed groups will enter the supply chain. As a result, according to the agencies, 140 mine sites have been validated and competition within conflict-free traceability systems has benefited artisanal miners and exporters. Implementation of the U.S conflict minerals strategy faces multiple obstacles outside the control of the U.S. government. For example, eastern DRC is plagued by insecurity because of the presence of illegal armed groups and some corrupt members of the national military, weak governance, and poor infrastructure.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss our work on conflict minerals.  Over the past decade, the United States and the international community  have sought to improve security in the Democratic Republic of the Congo  (DRC), the site of one of the world’s worst humanitarian crises. The  International Rescue Committee estimates that between 1998 and 2010,  more than 5.4 million people died there as a result of this crisis, which has  also destabilized and created insecurity in the minerals-rich eastern part  of the country. As we previously reported, illegal armed groups and some  units of the Congolese national military have committed severe human  rights abuses and mass killings and profited from the illegal exploitation of  minerals originating in eastern DRC.
Expressing a sense that the exploitation and trade of conflict minerals  originating in the DRC is contributing to an emergency humanitarian  situation therein, Congress included a provision in the 2010 Dodd-Frank  Wall Street Reform and Consumer Protection Act (the act) pertaining to  the trade in “conflict minerals”—tantalum, tin, tungsten, and gold. Section  1502 of the act directed several U.S. agencies to take certain actions to  implement the act’s conflict minerals provisions. For example, Section  1502(b) required the Securities Exchange Commission (SEC), in  consultation with the Department of State (State), to promulgate  disclosure and reporting regulations regarding the use of conflict minerals  from the DRC and adjoining countries. Accordingly, SEC adopted its  conflict minerals disclosure rule in August 2012, and companies filed  disclosures for the first time in response to the rule in 2014, on conflict  minerals used in calendar year 2013. The act also required State, in  consultation with the U.S. Agency for International Development (USAID),  to submit to appropriate congressional committees a conflict minerals  strategy to address the linkages between human rights abuses, armed  groups, mining of conflict minerals, and commercial products. The act  contained a provision for GAO to, among other things, report annually,  beginning in July 2012, on the effectiveness of the SEC rule in promoting  peace and security in the DRC and adjoining countries.
This statement summarizes key findings from our August 2015 report, in  which we examined, among other things, (1) company disclosures filed  with SEC for the first time in 2014 in response to the SEC conflict  minerals rule, and (2) State and USAID actions related to the U.S. conflict  minerals strategy in the DRC region. In brief, we found that company  disclosures filed in 2014 indicate that companies performed country-of- origin inquiry and due diligence but provide limited insights regarding  country of origin of conflict minerals used, citing difficulty obtaining  information from suppliers. We also found that State and USAID actions  to implement the U.S. conflict minerals strategy have yielded some  results, but conditions remain difficult.
To conduct our review, we analyzed documents and data and interviewed  officials from State, USAID, SEC, the Department of Commerce,  nongovernmental organizations (NGO), industry, and international  organizations, including offices within the United Nations (UN). We  analyzed a random sample of 147 reports from a population of 1,324 to  create estimates generalizable to the population of all companies that  filed Specialized Disclosure reports and Conflict Minerals Reports with the  SEC. We spoke with company representatives to obtain additional  perspectives. We traveled to the DRC, Burundi, and Rwanda for field  work and visited and observed artisanal mining activities at three different  mines. We met with a range of stakeholders, including NGOs,  contractors, international organizations, and private sector  representatives. We conducted the work on which this testimony is  based 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 objectives. We believe that the  evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The DRC is a vast, mineral-rich nation with an estimated population of  about 75 million people and an area that is roughly one-quarter the size of  the United States. Since its independence in 1960, the DRC has  undergone political upheavals, including a civil war. Eastern DRC, in  particular, has continued to be plagued by violence, including sexual  violence against women and children, perpetrated by armed groups and  some members of the Congolese national military. Some of the adjoining  countries in the region have also experienced recent turmoil, which has  led to flows of large numbers of refugees and internally displaced persons  into the DRC. For example, the United Nations High Commissioner for  Refugees (UNHCR) estimated that as of mid-2013 there were around 2.6  million internally displaced persons living in camps or with host families in  the DRC.
Various industries, particularly manufacturing industries, use the four  conflict minerals in a wide variety of products. For example, tin is used to  solder metal pieces and is also found in food packaging, in steel coatings  on automobile parts, and in some plastics. Most tantalum is used to  manufacture tantalum capacitors, which enable energy storage in  electronic products such as cell phones and computers, and to produce  alloy additives, which can be found in turbines in jet engines. Tungsten is  used in automobile manufacturing, drill bits and cutting tools, and other  industrial manufacturing tools and is the primary component of filaments  in light bulbs. Gold is used as a reserve and in jewelry and is used by the  electronics industry. As we have previously reported, conflict minerals are  mined in various locations around the world.
Over the past decade, Congress has focused on issues related to the  DRC. In 2006, Congress passed the Democratic Republic of the Congo  Relief, Security, and Democracy Promotion Act of 2006, stating that U.S.  policy is to engage with governments working for peace and security  throughout the DRC and holding accountable any individuals, entities,  and countries working to destabilize the country. In 2011, State and  USAID developed the U.S. Strategy to Address the Linkages between  Human Rights Abuses, Armed Groups, Mining of Conflict Minerals and  Commercial Products (the strategy).
section_title: Company Filings in 2014 Indicate That Company Inquiries and Due Diligence Provided Limited Insights Regarding Country of Origin of Conflict Minerals Used, Citing Difficulty Obtaining Information from Suppliers
paragraphs: The SEC conflict minerals disclosure rule outlines a three-step process  for companies to follow, as applicable, to comply with the rule. Broadly,  the process falls into three steps requiring a company to (1) determine  whether the rule applies to it; (2) conduct a reasonable country of origin  inquiry (RCOI) concerning the origin of conflict minerals used; and (3)  exercise due diligence, if appropriate, to determine the source and chain  of custody of conflict minerals used. (App. II depicts SEC’s flowchart  summary of the rule). Of the 1,321 companies that filed conflict minerals  disclosures in 2014, the sample of filings that we reviewed indicates that  almost all of the companies conducted an RCOI and a majority of them  exercised due diligence, but most reported that they were unable to  determine the country of origin of conflict minerals they had used in  2013. Company representatives we interviewed cited difficulties in  obtaining information from suppliers. According to our analysis, an  estimated
67 percent reported that they were unable to determine the
4 percent reported that conflict minerals came from Covered
24 percent reported that conflict minerals did not originate in
2 percent reported that conflict minerals came from scrap or
3 percent did not provide a clear determination.
According to our estimate, just about all of the companies that filed  conflict minerals disclosures reported that they conducted an RCOI, with  96 percent of them reporting that they conducted a survey of their  suppliers to try to obtain information about whether they used conflict  minerals, the country of origin of those conflict minerals, and the  processor of the conflict minerals. Based on some of the filings that we  reviewed and interviews with company representatives, in general,  companies used a supplier survey and industry template to conduct their  RCOIs. A challenge noted by representatives of some companies we  spoke with was that they received incomplete information from suppliers,  limiting their ability to determine the source and chain of custody of the  conflict minerals they used in 2013. We should note that in a July 2013  report, we found that a company’s supply chain can involve multiple tiers  of suppliers. As a result, a request for information from a company could  go through many suppliers, as figure 1 illustrates, delaying the  communication of information to the company.
For example, as we noted in our 2013 report, companies required to  report under the rule could submit the inquiries to their first-tier  suppliers. Those suppliers could either provide the reporting company  with sufficient information or initiate the inquiry process up the supply  chain, such as by distributing the inquiries to suppliers at the next tier— tier 2 suppliers. The tier 2 suppliers could inquire up the supply chain to  additional suppliers, until the inquiries arrived at the smelter. Smelters  could then provide the suppliers with information about the origin of the  conflict minerals. Representatives of some companies that we spoke with  told us that they were making efforts to address concerns about the lack  of information on the country of origin of conflict minerals they had used.
Our analysis shows that the exercise of due diligence on the source and  chain of custody of conflict minerals yielded little or no additional  information, beyond the RCOI, regarding the country of origin of conflict  minerals or whether the conflict minerals that companies used in 2013 in  their products benefited or financed armed groups in the Covered  Countries. The estimated 4 percent of the companies who determined  that the necessary conflict minerals used in their products originated from  Covered Countries could not determine whether such conflict minerals  financed or benefitted armed groups during the reporting period, even  though they disclosed that they conducted due diligence on the source  and chain of custody of conflict minerals they used.
section_title: State and USAID Actions to Implement the U.S. Conflict Minerals Strategy Have Yielded Some Results, but Conditions Remain Difficult
subsections: section_title: State and USAID Are Taking Action to Implement Strategy Objectives
paragraphs: State and USAID officials reported that they are implementing the U.S.  conflict minerals strategy they submitted to Congress in 2011 through  specific actions that address the strategy’s five key objectives. Both State  and USAID officials in Washington and the region reiterated that the  strategy and its five key objectives remain relevant. The following  summarizes our findings about each objective:
Promote an Appropriate Role for Security Forces (Objective 1).
Some of the reported actions being undertaken by the  International Organization for Migration (IOM), a USAID  implementing partner, are helping to lessen the involvement of the  military and increasing the role of legitimate DRC government  stakeholders in mining areas. For example, USAID reported that  IOM has assisted with the planning and demilitarization of mine  sites in eastern DRC through leading a multi-sector stakeholder  process of mine validation to ensure that armed groups and  criminal elements of the Congolese military are not active in  eastern DRC mines. As we previously reported, according to UN,  U.S., and foreign officials and NGO representatives, some  members of the 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.
Enhance Civilian Regulation of the DRC Minerals Trade  (Objective 2). USAID reported that it is undertaking a number of  actions, through implementing partners, to enhance civilian  regulation and traceability of the DRC minerals trade. For  example, USAID reported funding TetraTech, a technical services  company, to (1) build the capacity for responsible minerals trade  in the DRC, (2) strengthen the capacity of key actors in the conflict  minerals supply chain, and (3) advance artisanal and mining  rights. In addition, USAID indicated that it is funding IOM to  support DRC infrastructure and regulatory reform. According to an  IOM official we spoke with in the region, IOM also provides the  DRC government with information on which mines should be  suspended from the conflict-free supply chain based on safety and  human rights violations. During our visit to the region, we met with  a USAID official and representatives of local human rights  organizations who told us that the implementation of traceability  schemes is contributing to positive outcomes. For example, in  some cases, according to USAID, local miners earn double the  price for certified conflict-free minerals compared to non-certified  illegal minerals, which is more than they would earn from  smuggling (see app. III, figs. 1 and 2).
Protect Artisanal Miners and Local Communities (Objective 3).
State and USAID reported several programs through their  implementing partners, aimed at protecting artisanal miners and  local communities and providing alternative livelihoods. For  example, State reported that it funded an implementing partner for  anti-human-trafficking initiatives as well as to promote alternative  livelihoods and improve workers’ rights in the artisanal mining  sector. According to State, these efforts aimed to reduce the  vulnerability of men and women in local communities. In addition,  USAID has funded an implementing partner to promote  community conflict mitigation and conflict minerals monitoring  structures at local levels. According to USAID, artisanal mining  provides survival incomes to Congolese throughout the country  but it is particularly significant in eastern DRC, where roughly  500,000 people directly depend on artisanal mining for their  income. These miners work under very difficult safety, health, and  security conditions and almost always within an illicit environment.  Moreover, as we observed during our visits to the mines in the  region, artisanal mining is a physically demanding activity  requiring the use of rudimentary techniques and little or no  industrial capacity (see app. III, figs. 3 and 4).
Strengthening Regional and International Efforts (Objective 4).
U.S. diplomatic and capacity building initiatives have reportedly  helped strengthen international efforts. For example, USAID said it  is working with TetraTech to build the capacity of the International  Conference on the Great Lakes Region (ICLGR), an  intergovernmental organization. According to USAID, this effort  supports the implementation and coordination of regional  countries’ efforts to promote monitoring, certification, and  traceability of mine sites. A TetraTech representative we met with  in the region told us that TetraTech is also organizing workshops  for educating and raising awareness about regional certification in  ICGLR countries. According to officials we interviewed from the  United Nations Organization Stabilization Mission in the  Democratic Republic of the Congo (MONUSCO) and the ICGLR,  as well as local officials, U.S. diplomacy has increased awareness  about conflict minerals and improved coordination in the region.  Some of these officials described State and USAID actions to  strengthen regional and international efforts as the most effective  in the region.
Promote Due Diligence and Responsible Trade through Public  Outreach (Objective 5). State and USAID reported engaging in  various efforts to reach out to industry associations, NGOs,  international organizations, and regional entities to help promote  due diligence and responsible trade in conflict minerals. For  example, State and USAID reported that they leveraged private  sector interest to establish the Public-Private Alliance for  Responsible Minerals Trade to support supply chain solutions to  conflict minerals challenges in the region. The alliance includes  State, USAID, and representatives from U.S. end-user companies,  industry associations, NGOs, and ICGLR, among others. In  addition, State is engaged with the Conflict-Free Sourcing  Initiative (CFSI) and State and USAID both participate in the  biannual Organization for Economic Co-operation and  Development, UN Group of Experts (UNGOE), and ICGLR  forums. According to State and USAID officials, these efforts  promote continued engagement with industry officials and civil  society groups and encourage due diligence and strengthening of  conflict-free supply chains.  A USAID official in the region told us  that teams of private sector executives, hosted by State and  USAID officials, have visited eastern DRC and Rwanda mining  sites on several occasions, reinforcing the executives’  commitment to source minerals responsibly. In addition, a State  official noted that some private companies have been active in  providing feedback on certification and traceability mechanisms.
section_title: State and USAID Face Difficult Conditions in Implementing the U.S. Conflict Minerals Strategy
paragraphs: Although State and USAID officials provided some examples of results  associated with their actions, the agencies face difficult operating  conditions that complicate efforts to address the connection between  human rights abuses, armed groups, and the mining of conflict minerals.  We have described some of these challenges in our previous reports but,  as we observed during our fall 2014 visit to the region, numerous  challenges continue to exist. First, the mining areas in eastern DRC  continue to be plagued by insecurity because of the presence and  activities of illegal armed groups and some corrupt members of the  national military. In 2010, we reported extensively on the presence of  illegal armed groups, such as the Democratic Forces for the Liberation of  Rwanda or Forces Democratiques de Liberation du Ruwanda, and some  members of the Congolese military and the various ways in which they  were involved in the exploitation of the conflict minerals sector in eastern  DRC. In 2013, the Peace and Security Cooperation Framework signed  by 11 regional countries noted that eastern DRC has continued to suffer  from recurring cycles of conflict and persistent violence. Although U.S.  agency and Congolese officials informed us during our recent fieldwork in  the region that a large number of mines had become free of armed  groups (referred to as green mines), MONUSCO officials we met with in  the DRC also told us that armed groups and some members of the  Congolese military were still active in other mining areas. Specifically,  MONUSCO officials described two fundamental ways in which armed  groups continued to be involved in conflict minerals activities: directly, by  threatening and perpetrating violence against miners to confiscate  minerals from them; and indirectly, by setting up checkpoints on trade  routes to illegally tax miners and traders. As we noted in our 2010 report,  U.S. agency and UN officials and others believe that the minerals trade in  the DRC cannot be effectively monitored, regulated, or controlled as long  as armed groups and some members of the Congolese national military  continue to commit human rights violations and exploit the local  population at will.
As we reported in 2010, U.S. government officials and others indicated  that weak governance and lack of state authority in eastern DRC  constitute a significant challenge. As we noted then, according to UN  officials, if Congolese military units are withdrawn from mine sites, civilian  DRC officials will need to monitor, regulate, and control the minerals  trade. We also noted that effective oversight of the minerals sector would  not occur if civilian officials in eastern DRC continued to be underpaid or  not paid at all, as such conditions easily lead to corruption and lack of  necessary skills to perform their duties. Evidence shows that this situation  has not changed much. U.S. agencies and an implementing partner, as  well as some Congolese officials, told us that there are not enough  trained civilians to effectively monitor and take control of the mining  sector. ICGLR officials we met with highlighted the importance of a  regional approach to addressing conflict minerals and indicated that  governments’ capacity for and interest in participating in regional  certification schemes varies substantially, making it difficult to implement  credible, common standards. Corruption continues to be a challenge in  the mining sector. For example, a member of the UN Group of Experts  told us that smuggling remains prolific and that instances of fraud call into  question the integrity of traceability mechanisms. This official stated that  tags used to certify minerals as conflict-free are easily obtained and  sometimes sold illegally in the black market. According to USAID officials,  USAID is working to introduce a pilot traceability system to increase  transparency, accountability, and competition in the legal artisanal mining  sector. According to U.S. government officials and officials from local and  civil society in the region that we met with, lack of state authority bolsters  armed group activity and precludes public trust in the government.
Poor infrastructure, including poorly maintained or nonexistent roads,  makes it difficult for mining police and other authorities to travel in the  region and monitor mines for illegal armed group activity. In our 2010  report, we reported that the minerals trade cannot be effectively  monitored, regulated, and controlled unless civilian DRC officials,  representatives from international organizations, and others can readily  access mining sites to check on the enforcement of laws and regulations  and to ensure visibility and transparency at the sites. As shown by the  photograph in app. III, fig. 5, during our recent visit to the region, poor  road conditions made travel to the mines very challenging.
Chairman Huizenga, Ranking Member Moore, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this testimony, please  contact Kimberly Gianopoulos, Director, International Affairs and Trade,  at (202) 512-8612 or GianopoulosK@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this statement. GAO staff who made key contributions to  this testimony are Godwin Agbara (Assistant Director), Marc Castellano  (Analyst-in-Charge), Jeffrey Baldwin-Bott, Debbie Chung, Stephanie  Heiken, Andrew Kurtzman, Grace Lui, and Jasmine Senior.
section_title: Appendix I: Related GAO Products
paragraphs: SEC Conflict Minerals Rule: Initial Disclosures Indicate Most Companies  Were Unable to Determine the Source of Their Conflict Minerals.  GAO-15-561. Washington, D.C.: August 18, 2015.
Conflict Minerals: Stakeholder Options for Responsible Sourcing Are  Expanding, but More Information on Smelters Is Needed. GAO-14-575.  Washington, D.C.: June 26, 2014.
SEC Conflict Minerals Rule: Information on Responsible Sourcing and  Companies Affected, GAO-13-689. Washington D.C.: July 18, 2013.
Conflict Minerals Disclosure Rule: SEC’s Actions and Stakeholder- Developed Initiatives. GAO-12-763. Washington, D.C.: July 16, 2012.
The Democratic Republic of 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.
The Democratic Republic of the Congo: U.S. Agencies Should Take  Further Action 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.: September 30, 2010.
section_title: Appendix II: SEC Flowchart Summary of the Conflict Minerals Disclosure Rule
section_title: Appendix III: Photographs from GAO Fieldwork
paragraphs: We took the following photographs in the Democratic Republic of the  Congo, Burundi, and Rwanda during fieldwork for our August 2015 report.