Associated Issues with Conflict Minerals Reporting

It is in the interests of businesses to enact legislation that address the human rights impacts of their activities. The Guiding Principles on Businesses and Human Rights (The Guiding Principle) in June 2011 was introduced as a result of a widespread review of processes and is supported by a range of diverse stakeholder groups. The principles are based on three pillars: 

  1. Protect human rights;
  2. Respect the rights of individuals; and
  3. Remediate rights abuses.  

The United Nations Human Rights Council (UNHRC) in 2011 stated that financial reporting requirements should clarify that human rights impacts in some instances may be material or significant to the economic performance of business enterprises. Developments in the area of business and human rights had implications for reporting and assurance practice. The Human Rights Reporting and Assurance Framework initiative (RAFI) is a UN supported initiative developed by the human rights NGO Shift and Mazars. The RAFI project facilitates a multi-stakeholder process to develop public reporting and assurance frameworks based on the UN guiding principles. On September 19, 2017, Mazars and Shift launched the UNGP Assurance Guidance of human rights reporting in line with the Guiding Principles. 

Companies need to ensure that they do not contribute to human rights abuses. Concern about the lack of transparency in the mineral supply chains of global corporations has led to increased stakeholder pressure through protest actions. Companies are required to enhance their reporting transparency about conflict minerals supply chains where legal mandate should, in principle, provide an inevitable path to supply chain accountability. Conflict minerals are minerals mined in conditions of armed conflict and human rights abuses, and are sold or traded by armed groups. Companies, whether at the ‘upstream’ stage of the supply chain (i.e. from mine to smelter) or at the ‘downstream’ stage (i.e. from smelter to end user), are at risk of using conflict minerals. Companies trading in minerals from the Democratic Republic of Congo (DRC) or its nine neighboring countries must perform a reasonable country of origin enquiry to determine whether minerals originated in the DRC or its neighboring countries; if so, the companies need to provide a report describing the measures taken to exercise due diligence on the source and chain of supply which must include an independent private sector audit of the report that is certified by the company submitting the report. 

The Dodd-Frank Act of 2010 in the US (in particular, Section 1502 of this Act) gave companies listed on the US stock exchange over three years to determine and report on whether their products contained ‘conflict minerals’ originating from the DRC and its nine neighboring countries. The Act sought to reduce human rights abuses by armed groups in the DRC who use profit from the sale of minerals to fund the conflict. By requiring conflict minerals disclosures for publicly traded companies, the US congress aims to cut off funds for armed groups and promote peace in the region. The European Union, Canada and Australia have also taken steps to address concerns about conflict minerals. In May 2015, the European Union introduced mandatory certification for all EU importers sourcing from conflict zones. All importers of minerals (ex. tin, tantalum, and gold) for manufacturing consumers goods will, by law, need to be certified by the EU to ensure that they do not contribute to conflicts and human rights abuses. Internationally, the Guidance for Responsible Supply Chains from the Organisation of Economic Co-operation and Development (OECD) provided a due diligence framework to address concerns about conflict minerals. According to OECD (2013), the due diligence is very important because it is an ongoing, proactive and reactive process through which companies can ensure that they respect human rights and do not contribute to conflict.

The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas includes a 5-Step Framework:

  1. Establish strong company management system;
  2. Identify and assess risk in the supply chain;
  3. Design and implement a strategy to respond to identified risks;
  4. Carry out independent third-party audit of supply chain due diligence, and
  5. Report annually on supply chain due diligence.  

As companies make progress towards achieving conflict-free status for their minerals, a significant increase in the independent external audit can be expected in the future in order to enhance the credibility and transparency of conflict mineral disclosures. The confirmation objectives of independent audits include the following:

  1. The design of the due diligence program as described in its conflict mineral reports conforms to the nationally or internationally recognized due diligence framework used by the issuer; and
  2. Its activities during the covered year are described properly in its conflict mineral reports.  

This new prospect for assurance services provides audit firms with the potential for an enduring new source of income. Even so, there will be significant challenges for audit firms to overcome in developing and performing this new type of assurance service. 

About the Author

Dr. Habiba Al-Shaer

Dr. Habiba Al-Shaer is an Enterprise Risk Management Consultant at Global Risk Intelligence. She earned her doctorate from the Durham Business School at Durham University. Previously, she earned her MS in Banking and Financial Support Services from Suffolk University in Boston, Massachusetts, United States. Dr. Al-Shaer is fluent in Arabic and English. She is currently a Lecturer at Newcastle University and based in the United Kingdom.

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