How to Pass a Conflict Minerals Audit

Transcription

1 How to Pass a Conflict Minerals Audit Process for Passing an IPSA Presented by: Bruce Calder VP Consulting Services

2 Agenda - How to Pass an Audit Introduction Audit - When is it required? - Privately held companies - Why undergo an audit? Due diligence - Supplier based due diligence - Smelter based due diligence Checklist approach Simplified approach to the audit Q&A Webinar is 50 minutes with 10 minutes of Q&A (hopefully)

3 Claigan - Conflict Minerals Services RCOI and Due Diligence IPSA Auditing Experience Quoted in the SEC final rules 18 times Testified to Congress on Conflict Minerals Discussed Conflict Minerals with all of the SEC commissioners Works for a wide range on companies on conflict minerals Works for the CFSI regarding identification of new smelters

4 Claigan - Due Diligence has been Audited Claigan has passed an IPSA

5 Audit Requirement An audit is only required if a company chooses to declare itself DRC Conflict Free Comment on 2 year grace period The grace period was related to the DRC Conflict Undeterminable (not the audit) An audit was only required when a company declares itself DRC (or Not DRC) Conflict Free With the US Court of Appeals rulings, DRC Conflict Undeterminable is extended indefinitely and companies using the undeterminable status do not require an audit

6 Privately Held Company Privately held companies (and other companies that are not publicly traded in the US) are not directly under scope of the US Conflict Minerals requirements They are only completing sufficient work to enable their customers to meet their compliance requirements. An IPSA is not required, nor even applicable for privately held manufacturers

7 Why Undergo an Audit? Advantages of being DRC Conflict Public recognition and press of being Conflict Free Product marketing (particularly to institutions) Less information required to be disclosed Most of the embarrassing items that have gotten companies in trouble in the media (for conflict minerals) are related to disclosure of facilities and countries due to DRC conflict undeterminable requirement

8 Example CSR Issues to be Avoided

9 UAE Gold Smuggling from DRC A large number of companies identified gold mined from the UAE The UAE has no gold mines That is smuggled DRC or Sudanese gold

10 Audit Goal / Questions 1. Whether the design of the company s due diligence framework is in conformity with the OECD Due Diligence Guidance 2.Whether the company s description of the due diligence measures it performed is consistent with the due diligence process that the company undertook

11 Due Diligence If a company is sourcing from smelters that source from the DRC or surrounding region, then the issuer has to conduct due diligence on the conflict minerals source and chain of custody The design of the due diligence process has to conform to the OECD Due Diligence Guidance OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas Key note Due diligence is separate from the Reasonable Country of Origin Inquiry (RCOI) See SEC FAQ (Conflict Minerals) question 18

12 Key Note on Due Diligence Reliance exclusively on CFSI or industry bodies Step 2 of OECD Due Diligence is very clear Downstream companies may engage and actively cooperate with other industry members in order to identify the smelters/refiners in their supply chain and assess their due diligence practices or identify through industry validation schemes the refiners/ smelters but Downstream companies retain individual responsibility for their due diligence, and should ensure that all joint work duly takes into consideration circumstances specific to the individual company. If there are gaps, you are individually responsible for closing them

13 Two Different Due Diligence Options 1.Conducting due diligence of smelters via suppliers Supplier based due diligence 2.Conducting due diligence of smelters directly Smelter based due diligence The OECD is clear that due diligence is to be conducted at the smelter level, but provided the option of conducting due diligence directly or via suppliers.

14 Supplier Based Due Diligence Conducting due diligence of smelters through suppliers Summary Conducting of due diligence of smelters down the supply chain through immediate suppliers Through direct suppliers, the due diligence of the smelters needs to be conveyed to the issuer to include a risk assessment to identify and mitigate red flags

15 Issues with Supplier Based Due Diligence Issues Indirect data (telephone game) Supplier knowledge is very limited If you have trouble getting a basic response, satisfactory due diligence via suppliers is going to be extremely difficult Every issuer will have a different data set No economies of scale or similarity Audit will include supplier data sampling Enormous undertaking Summary Path of expensive failure

16 Smelter Based Due Diligence Conducting due diligence of smelters directly Summary Conducting due diligence of smelters via direct contact with smelters Through direct contact with the smelters, due diligence needs to include a risk assessment red flags need to be identified and mitigated

17 OECD Due Diligence Step 2 B, C, and D Guilty until proven innocent Smelter Question : Does the smelter source from the DRC or surrounding countries? Innocent until proven guilty Question : Is the smelter conflict free certified? Yes No Question : Is the smelter conflict free certified? Yes No Response No Included in Conflict Minerals Report No Yes Is there a Reason to Believe Yes No Not included in Conflict Minerals Report Issue Conflict free. Complete Question : Can the smelter provide reasonable evidence? & Review against industry and NGO sources Reasonable and no contrary evidence Not reasonable and / or contrary evidence Due Diligence Not Required

18 Smelter - Data Summary Summary of smelter due diligence

19 Smelter - Data Sampling In IPSA audit will sample the data Supporting documents need to be available

20 Checklist Approach Best practice for managing the audit Checklist approach to OECD Due Diligence Guidance Arrange each requirement in a checklist Ensure each is complete Identify the document in which the process is described Ensure that data that could be sampled is available

21 Example Checklist Approach Checklist Approach for the Audit

22 Conflict Minerals Report The issuer s conflict minerals report is fundamental to the audit - For the auditor to form an opinion whether the due diligence performed by the company is consistent with the due diligence as described in their conflict minerals report Key recommendations - Ensure that the due diligence, as described in the conflict minerals report, is consistent with the due diligence performed - Clearly demark, in the conflict minerals report, between - The description of RCOI process, and - The description of due diligence performed - If the RCOI is described under Due Diligence in the CMR, then it is in scope of the audit

23 Simplified Approach to Passing an Audit Use Claigan for your due diligence - Claigan s due diligence has already been audited - The smelter aspect is virtually identical between all issuers

24 Structure Steps Issuer or Claigan completes RCOI Claigan corrects and validates smelter list Claigan completes smelter due diligence Issuer leverages Claigan s audit report and data set Important note - Even if you have started down a different due diligence path, Claigan can pick up from there

25 Advantages - Claigan Due Diligence Process You are going to pass the audit - Step 2 (covered by Claigan s audit) is the fundamental due diligence section of the OECD Guidance - The rest of the guidance is just paperwork Cost and time - Your IPSA audit will be significantly reduced in cost - The cost of the Claigan s due diligence is roughly the same as the reduction in audit cost you will see - i.e. Claigan s due diligence is effectively free - All of the heavy lifting is already complete including corrective actions - Significantly reduce time spent by internal resources

26 Summary Summary - Audit - Only required if declared DRC Conflict Free - Two different approaches to due diligence - Supplier based due diligence - Smelter based due diligence - Recommended approach for preparing for an audit - Use checklist format - Use Claigan for due diligence - Claigan due diligence is effectively free due to reduction in audit cost

27 Reminder on Due Diligence Reliance exclusively on CFSI or industry bodies Step 2 of OECD Due Diligence is very clear Downstream companies may engage and actively cooperate with other industry members in order to identify the smelters/refiners in their supply chain and assess their due diligence practices or identify through industry validation schemes the refiners/ smelters but Downstream companies retain individual responsibility for their due diligence, and should ensure that all joint work duly takes into consideration circumstances specific to the individual company. If there are gaps, you are individually responsible for closing them

28 Claigan Services RCOI and Due Diligence IPSA Auditing Due Diligence Q&A Audited against Step 2 of OECD Due Diligence Guidance Strongly recommended to use Claigan for your due diligence