Conflict Minerals: Company Reports on Mineral Sources in 2017 Are Similar to Prior Years and New Data on Sexual Violence Are Available
Released: 2018-06-28T00:00:00

Letter

Background

History of Conflict in the DRC and the Region

The DRC is a vast, mineral-rich nation with an estimated population of about 83 million people and an area that is roughly one-quarter the size of the United States, according to the United Nations. Figure 1 shows the DRC’s provinces and adjoining countries.

Since gaining its independence from Belgium in 1960, the DRC has undergone political upheaval and armed conflict. From 1998 to 2003, the DRC and eight other African countries were involved in what has become known as “Africa’s World War,” which resulted in a death toll of an estimated 5 million people in the DRC, according to the U.S. Department of State (State). The eastern DRC has continued to be plagued by violence, often perpetrated against civilians by illegal armed groups and some members of the Congolese national military. Notably, in 2012, an illegal armed group occupied the city of Goma and other cities in the eastern DRC and clashed with the Congolese national army. During this time, the United Nations reported numerous cases of sexual violence against civilians, including women and children, which were perpetrated by armed groups and some members of the Congolese national military. In 2017, the United Nations reported that serious violations of human rights remain widespread in the DRC, including continued acts of sexual violence by government security forces as well as nonstate armed groups.

Uses of Conflict Minerals

Various industries, particularly manufacturing industries, use the four conflict minerals specifically named in the Dodd-Frank Act—tin, tungsten, tantalum, and gold—in a wide variety of products. For example, tin is used to solder metal pieces and is also found in food packaging, steel coatings on automobile parts, and some plastics. Tungsten is used in automobile manufacturing, drill bits and cutting tools, and other industrial manufacturing tools and is the primary component of filaments in incandescent light bulbs. Most tantalum is used to manufacture capacitors that enable energy storage in electronic products such as cell phones and computers or to produce alloy additives used in turbines in jet engines. Gold is held as bullion by central bank reserves and used in making jewelry and also in the electronics industry, for example, to manufacture cell phones and laptops.

SEC Conflict Minerals Disclosure Rule

In August 2012, SEC adopted its conflict minerals disclosure rule in response to Section 1502(b) of the Dodd-Frank Act. The act required that SEC promulgate disclosure and reporting regulations regarding the use of conflict minerals originating from the DRC and covered countries. In the summary section of the adopting release for the rule, SEC noted that to accomplish the goal of helping to end the human rights abuses in the DRC caused by the conflict, Congress chose to use the Dodd-Frank Act’s disclosure requirements to bring greater public awareness of the sources of companies’ conflict minerals and to promote the exercise of due diligence on conflict mineral supply chains.

The SEC disclosure rule addresses the four conflict minerals named in the Dodd-Frank Act from the DRC and covered countries. The rule outlines a process for companies to follow, as applicable, to comply with the rule (see app. II). The process broadly requires a company to 1. determine whether it manufactures, or contracts to be manufactured, products with “necessary” conflict minerals; 2. conduct a reasonable country-of-origin inquiry (RCOI) concerning the origin of those conflict minerals; and 3. exercise due diligence, if appropriate, to determine the source and chain of custody of those conflict minerals, adhering to a nationally or internationally recognized due diligence framework, if such a framework is available for these necessary conflict minerals.

If companies choose to disclose that their products are “DRC conflict free,” the SEC disclosure rule requires companies to obtain an independent private-sector audit (IPSA).

Conflict Minerals Disclosures Filed in 2017 Were Similar to Those Filed in Prior Years, and SEC Updated Guidance on Enforcement of Due Diligence Requirements

Our review of companies’ conflict minerals disclosures filed with the SEC in 2017 found that, in general, they were similar to disclosures filed in the prior 2 years. In 2017, a similar number of companies filed conflict minerals disclosures as in 2015 and 2016. Based on our review of a generalizable sample, we found that almost all companies that filed conflict minerals disclosures in 2017 reported performing inquiries about their conflict minerals’ country of origin, similar to the results we previously reported for 2016 and 2015. In their 2017 disclosure reports, many companies described actions they took to improve data collection processes, and most companies indicated challenges in determining the country of origin. Our review of company filings found that almost all companies required to conduct due diligence, as a result of their country- of-origin inquires, reported performing it. SEC issued revised guidance in April 2017, indicating that the SEC’s Division of Corporation Finance would not recommend enforcement action if companies did not report on specified due diligence disclosure requirements.

About as Many Companies Filed Conflict Minerals Disclosures in 2017 as in Each of the Prior 2 Years

In 2017, 1,165 companies filed conflict minerals disclosures—almost as many companies as filed in 2016 and 2015 (1,230 and 1,281 respectively). Our analysis of a generalizable sample of filings found that an estimated 90 percent of the companies that filed in 2017 were domestic and an estimated 10 percent were foreign companies, similar to the domestic-to-foreign ratio we found in 2016 and 2015. While not all companies reported the minerals used, of those that disclosed this information, an estimated 69 percent reported using tin, 54 percent reported using tantalum, 59 percent reported using tungsten, and 63 percent reported using gold, figures that are similar to the percentages reported in 2016.

Percentages of Companies Reporting Minerals’ Country-of-Origin in 2017 Were Similar to Prior 2 Years

Our analysis of a generalizable sample of 2017 filings found that, as in 2016 and 2015, almost all companies that filed conflict minerals disclosures indicated that they performed country-of-origin inquiries. Specifically, an estimated 100 percent of the companies reported that they performed such an inquiry, similar to the percentages that we estimated reported doing so in 2016 and 2015. As a result of the inquiries they conducted, an estimated 53 percent of companies reported in 2017 whether the conflict minerals in their products came from covered countries—similar to the estimate of 49 percent in 2016 and in 2015 but significantly higher than the estimate of 30 percent in 2014 (see fig. 2).

Some Companies Reported Improvements in Supply Chain Data Collection Efforts, but Challenges Remain

In the filings we reviewed, many companies indicated they had taken actions to improve their data collection processes, such as gathering missing information about their supply chains and working with suppliers to encourage conflict-free sourcing. In interviews, representatives of selected companies that filed conflict minerals disclosures in 2017 and other industry participants noted that (1) awareness among suppliers about the use of conflict minerals had continued to increase and (2) the process for collecting data on supply chains had become more routine and standardized. However, as in prior years, our review of filings found that most companies reported challenges in determining the country of origin of conflict minerals, in part due to lack of access to suppliers and complex supply chains involving many suppliers and processing facilities.

Almost All Companies Required to Conduct Due Diligence Reported Performing It

Our review of company filings found that almost all companies that were required, as a result of their country-of-origin inquires, to conduct due diligence on the source and chain of custody of the conflict minerals in their products reported doing so. In 2017, an estimated 96 percent reported conducting due diligence, compared with 96 and 97 percent in 2016 and 2015 respectively. An estimated 87 percent of companies in 2017 reported using a due diligence framework prescribed by the Organization for Economic Co-operation and Development (OECD) guidance for conducting due diligence on the source and chain of custody of the conflict minerals in their products. That result is comparable to an estimated 92 percent that we reported in 2016 and an estimated 95 percent that we reported in 2015. The remaining 13 percent of the companies that reported conducting due diligence in 2017 did not specify a framework for their due diligence activities.

After conducting due diligence, an estimated 37 percent of the companies reported in 2017 that they were able to determine that their conflict minerals came from covered countries or from scrap or recycled sources, compared with an estimated 39 and 23 percent in 2016 and 2015, respectively. An estimated 47 percent of the companies in 2017 reported that they could not definitively confirm the source of the conflict minerals in their products, compared with an estimated 55 and 67 percent in 2016 and 2015, respectively. However, as in previous years, almost all of the companies that reported conducting due diligence in 2017 reported that they could not determine whether the conflict minerals financed or benefited armed groups. Four companies in our sample reported determining that the minerals in their products did not finance or benefit armed groups in covered countries, and declared some products “DRC- conflict free.” Three of these companies included the required independent private-sector audit (IPSA) report, and one company did not include an IPSA report. Overall, a total of 16 companies filed an IPSA report in 2017, compared with 19 in 2016.

SEC’s Division of Corporation Finance Issued Updated Guidance Indicating It Would Not Recommend Enforcement Action on Due Diligence Disclosure Requirements

In April 2017, the SEC’s Division of Corporation Finance issued revised guidance indicating that it would not recommend enforcement action to the Commission if companies did not report on specified due diligence disclosure requirements. The SEC disclosure rule requires companies, if applicable, to report on their due diligence in a conflict minerals report (see app. II for additional detail on the disclosure requirements). SEC’s Division of Corporation Finance staff told us that they received inquiries from a small number of companies about the filing process for 2017. In response to these inquiries, these staff noted that they advised companies that the companies had the flexibility to determine whether or not to report on their due diligence and to report their country-of-origin inquiry findings in either the Form SD or in a conflict minerals report. However, the Division of Corporation Finance staff also told us that, regardless of the division’s revised guidance, the SEC could still initiate enforcement action if companies do not report on their due diligence, as required by the SEC disclosure rule. In our sample, three companies cited the updated guidance and other statements issued by the SEC in their filings as a rationale for not reporting on due diligence activities. In interviews, representatives of some companies and other industry participants told us that even though the revised guidance and other statements made by the SEC raised some uncertainty about the filing process, generally, companies plan to continue to report similar conflict minerals disclosure information.

New Survey Data Are Available on the Rate of Sexual Violence in Burundi and Uganda

We identified two new population-based surveys since our last report related to sexual violence in Burundi and Uganda published in 2018; the most recent information for eastern DRC and Rwanda is from 2016. We also identified some new case-file data on sexual violence in the DRC; however, as we reported previously, case-file data on sexual violence are not suitable for estimating an overall rate of sexual violence.

Results of Two New Demographic and Health Surveys Conducted in Uganda and Burundi Were Published in 2018

We identified two new population-based surveys related to sexual violence that were conducted in Uganda and Burundi in 2016 and 2017, respectively, and whose results were published in 2018. The Uganda Demographic and Health Survey was conducted from June to December 2016 by the Uganda Bureau of Statistics with technical assistance from ICF International. The survey estimated that 12.7 percent of women nationwide, ages 15-49, reported they had experienced sexual violence in the 12-month period preceding the survey, while 21.9 percent reported they had experienced sexual violence at some point in their lifetime. In addition, 4 percent of men nationwide, ages 15-49, reported they had experienced sexual violence in the 12-month period preceding the survey, while 8.3 percent reported they had experienced sexual violence at some point in their lifetime.

The Burundi Demographic and Health Survey was conducted from October of 2016 to March of 2017 by the Burundi Institute of Statistics and Economic Studies with technical assistance from ICF International. The survey estimated that 12.7 percent of women nationwide, ages 15- 49, reported they had experienced sexual violence in the 12-month period preceding the survey, while 23.1 percent reported they had experienced sexual violence at some point in their lifetime. In addition, 1.9 percent of men nationwide, ages 15-49, reported they had experienced sexual violence in the 12-month period preceding the survey, while 6.1 percent reported they had experienced sexual violence at some point in their lifetime. The most recent information on the rate of sexual violence for eastern DRC and Rwanda is from 2016 and is discussed in our previous reports.

Figure 3 shows the publication dates for the population-based surveys with data on rates of sexual violence in the eastern DRC, Rwanda, Uganda, and Burundi that have been published since 2007.

Some Additional Case-File Information about Sexual Violence Has Become Available

State and United Nations entities have provided additional case-file information about instances of sexual violence in the DRC and adjoining countries. State’s annual country reports on human rights practices provided the following case-file data pertaining to sexual violence in the DRC and Burundi:

DRC. In 2017, the UN documented 267 adult victims and 171 child victims, including two boys, of sexual violence in conflict. This violence was perpetrated by illegal armed groups as well as state security forces and civilians and was concentrated in North Kivu Province and in the Kasai region, according to State.

Burundi. One government organization—Humara Center— responsible for investigating cases of sexual violence and rape received 197 cases of sexual and gender-based violence through early December 2017, according to State. Observers stated many women were reluctant to report rape, in part due to fear of reprisal, according to State.

In addition, UN entities reported the following case-file data about sexual violence in the DRC:

DRC. In 2017, the United Nations Organization Stabilization Mission in the DRC verified 195 cases of conflict-related sexual violence, with illegal armed groups responsible for 80 percent of the cases and DRC security forces responsible for the remaining 20 percent. United Nations officials we interviewed raised concerns about a resurgence of sexual violence in certain regions in the DRC due to a variety of factors, including political instability arising from the government’s postponement of the presidential election originally scheduled to take place in November 2016.

Agency Comments

We provided a draft of this report to the SEC, State, and the U.S. Agency for International Development for comment. SEC provided technical comments, which we incorporated as appropriate. State and USAID did not provide comments.

We are sending copies of this report to appropriate congressional committees and to the Chairman of the Securities and Exchange Commission, the Secretary of State, and the Administrator of the U.S. Agency for International Development. The report is also available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me 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 report. GAO staff who made key contributions to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

In this report, we provide information about (1) companies’ disclosures filed with the U.S. Securities and Exchange Commission (SEC) in 2017 compared with disclosures filed in the prior 2 years and (2) the rate of sexual violence in the eastern Democratic Republic of the Congo and neighboring countries published in 2017 and early 2018.

To examine the fourth annual company disclosures filed with the SEC in 2017 in response to the SEC disclosure rule, we downloaded the specialized disclosure reports (Form SD) and conflict minerals reports (CMR) from SEC’s publically available Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database in September 2017. We downloaded 1,165 filings identified as Form SDs and the CMRs included in EDGAR. To review the completeness and accuracy of the EDGAR database, we reviewed relevant documentation, interviewed knowledgeable SEC officials, and reviewed prior GAO reports on internal controls related to SEC’s financial systems. We determined that the EDGAR database was sufficiently reliable for identifying the universe of SD filings.

We reviewed the conflict minerals section of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the requirements of the SEC disclosure rule to develop a data collection instrument (DCI) that guided our analysis of Form SDs and CMRs that contain the information disclosed by the filing companies. Our DCI was not a compliance review of the Form SDs and CMRs. The questions were written in both yes-no and multiple-choice formats. An analyst reviewed the Form SDs and CMRs and recorded responses to the DCI for all of the companies in the sample. A second analyst also reviewed the Form SDs and CMRs and verified the responses recorded by the first analyst. Analysts met to discuss and resolve any discrepancies.

We randomly sampled 100 Form SDs from a population of 1,165 to create estimates generalizable to the population of all companies that filed. All estimates based on our sample have a margin of error of plus or minus 10 percentage points or less at the 95-percent confidence level. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95-percent confidence interval. This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. We also attended an industry conference on conflict minerals and spoke with company representatives to provide additional perspective.

To address our second objective, we identified and assessed any information on sexual violence in the eastern DRC and the three adjoining countries—Rwanda, Uganda, and Burundi—that had been published or otherwise had become available in 2017 and early 2018. We discussed the collection of sexual violence–related data in the DRC and adjoining countries, including population-based survey data and case-file data, during interviews with U.S. Department of State and U.S. Agency for International Development officials and with representatives of nongovernmental organizations and researchers whom we interviewed for our prior review of sexual violence rates in the eastern DRC and adjoining countries. We also interviewed officials from the United Nations Population Fund and the United Nations Special Representative of the Secretary-General in New York on Sexual Violence in Conflict. In addition, we conducted Internet searches to identify new academic articles containing any additional information on sexual violence published in 2017 and early 2018.

We conducted this performance audit from September 2017 to June 2018 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.

Appendix II: U.S. Securities and Exchange Commission (SEC) Summary of the Conflict Minerals Disclosure Rule

The U.S. Securities and Exchange Commission (SEC) conflict minerals disclosure rule requires certain companies to file a specialized disclosure report, known as the Form SD, if the company manufactures, or contracts to have manufactured, a product or products containing conflict minerals that are necessary to the functionality or the production of those products. The rule also requires each company, as applicable, to provide a description of the measures the company took to exercise due diligence in determining the source and chain of custody of the conflict minerals, the facilities used to process them, their country of origin, and the efforts made to determine the mine or location of origin with the greatest possible specificity. Form SD provides general instructions for filing conflict minerals disclosures and specifies the information that companies must provide. Companies were required to file under the rule for the first time by June 2, 2014, and annually thereafter on May 31. Figure 4 shows the SEC’s flowchart summarizing the conflict minerals disclosure rule.

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Godwin Agbara (Assistant Director), Farahnaaz Khakoo-Mausel (Analyst-in-Charge), Diana Blumenfeld, Andrew Kurtzman, Justin Fisher, Grace Lui, David Dayton, Christopher Keblitis, and Michael McAtee made key contributions to this report.

Related GAO Products

Conflict Minerals: Information on Artisanal Mined Gold and Efforts to Encourage Responsible Sourcing in the Democratic Republic of the Congo. GAO-17-733. Washington, D.C.: August 23, 2017.

SEC Conflict Minerals Rule: 2017 Review of Company Disclosures in Response to the U.S. Securities and Exchange Commission Rule. GAO-17-517R. Washington, D.C.: April 26, 2017.

Conflict Minerals: Insights from Company Disclosures and Agency Actions. GAO-17-544T. Washington, D.C.: April 5, 2017.

SEC Conflict Minerals Rule: Companies Face Continuing Challenges in Determining Whether Their Conflict Minerals Benefit Armed Groups. GAO-16-805. Washington, D.C.: August 25, 2016.

SEC Conflict Minerals Rule: Insights from Companies’ Initial Disclosures and State and USAID Actions in the Democratic Republic of the Congo Region. GAO-16-200T. Washington, D.C.: November 17, 2015.

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 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.: September 30, 2010.