Public Comments. National Association of Manufacturers Washington, DC

Transcription

1 Public Comments National Association of Manufacturers Washington, DC Concerning Proposed Chinese Due Diligence Guidelines for Responsible Mineral Supply Chains put forward by the China Chamber of Commerce of Metals, Minerals and Chemicals Importers & Exporters November 6, 2015 Introduction The National Association of Manufacturers (NAM) is the largest and oldest industrial trade association in the United States, representing small and large manufacturers in every industrial sector and in all 50 states. Its membership includes both large multinational corporations with operations in many foreign countries and small and medium manufacturers engaged in international trade on a more limited scale. Our members depend heavily on the global supply chain to compete within the U.S. marketplace and abroad. NAM members have a strong track-record of working with the U.S. government to improve supply chain transparency and compliance practices. On behalf of America s manufacturers, the NAM is writing to provide comments in response to the China Chamber of Commerce of Metals, Minerals and Chemicals Importers & Exporters (CCCMC) s public consultation concerning possible due diligence guidelines for responsible mineral supply chains. The NAM supports the underlying objective of laws and regulations which seek to address atrocities occurring in conflict regions such as the Democratic Republic of the Congo (DRC). However, our member companies of all sizes and across all industry sectors have deep and serious concerns about conflict minerals regulations, such as those stemming from or similar to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the U.S. Rule ), which created a hugely burdensome, unworkable and unfeasible system in the United States. To this end, the NAM strongly urges that CCCMC exercise great caution in its development of any guidelines related to the sourcing of minerals from conflict regions and continue to consult carefully with those that would be responsible for implementing new guidelines. Given the experience of manufacturers in the United States in complying with the U.S. Rule for more than two years, the NAM recommends that CCCMC learn from prior policy initiatives, focus on that portion of the supply chain closest to the conflict, and avoid creating an unworkable system that is not addressing the underlying objectives. U.S. Experience under the U.S. Rule The U.S. Rule requires that companies publicly traded in the United States annually report to the Securities and Exchange Commission (SEC) any use of conflict minerals in their supply chains. It defines conflict minerals as columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives (which are commonly referred to as tantalum, tin, gold and

2 tungsten, respectively, or 3TG), and it directs companies to disclose whether those minerals originated in the DRC and its adjoining nations Angola, Zambia, Tanzania, Rwanda, Burundi, Uganda, South Sudan, Central African Republic, Republic of the Congo and Cameroon. In August 2012, the SEC promulgated rules outlining how publicly traded companies should comply with the Dodd-Frank Act. While the NAM supports the underlying objective of Section 1502 of the Dodd-Frank Act to address the atrocities occurring in the DRC, the NAM and our member companies of all sizes and across all industry sectors have, however, deep and serious concerns that the U.S. Rule has created a hugely burdensome, unworkable, and unfeasible system with which industry must comply and which is not advancing its underlying objectives. In particular, the disclosure requirements laid out by the SEC: Pose a huge financial, reporting, and auditing burden on reporting manufacturers, given the breadth of use of these four minerals throughout the manufacturing process and the depth, complexity, and constantly evolving nature of modern supply chains. Many companies have thousands of multi-tier suppliers for their products. Tulane University s business school has issued a series of studies of the U.S. Rule, which have found that it would cost industry almost $8 billion to implement, and that publicly traded companies worked a combined 6,139,983 hours on the first annual filing alone. 1 Affect thousands of small- and medium-sized companies not subject to SEC reporting because they supply large, publicly traded companies and are asked by those issuers to conduct the due diligence required by the rule. Downstream users are forced to rely almost entirely on the due diligence of their suppliers throughout the supply chain, even when they have limited or no influence on those smaller firms. There is ample evidence that many smaller, privately-held companies are unable or unwilling to cooperate with due diligence efforts, largely due to limited resources, remoteness in the supply chain from publicly traded companies required to report, or both. Moreover, years of experience have made clear that smelters and refiners are almost invariably unable or unwilling to disclose the mines of origin of the ores they purchase, despite very extensive efforts from downstream industry to elicit such disclosure. As a result, the disclosure mandated by the U.S. Rule has failed to obtain the desired results. The most recent study conducted by the United States Government Accountability Office (GAO) of the first year by U.S. publicly traded companies, found that [m]ost [filers] were unable to determine whether [their] minerals came from [the Democratic Republic of the Congo], and none could determine whether the minerals financed or benefited armed groups 2 Are not consistent with the realities of global supply chains, and fail to acknowledge the practical limitations that issuers face in attempting to gather information let alone influence the behavior of other parties in supply chains that stretch from downstream users across multiple tiers. Moreover, NAM member companies supply chains are not static but dynamic, as companies continuously seek new suppliers with better products or more competitive prices or delivery terms to deliver value for their customers. 1 A Critical Analysis of the SEC and NAM Economic Impact Models and the Proposal of a 3rd Model in view of the Implementation of Section 1502 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Tulane University (Oct. 17, 2011). Dodd-Frank Section 1502: Post-Filing Survey 2014, Tulane University (2014). 2 SEC Conflict Minerals Rule: Initial Disclosures Indicate Most Companies Were Unable To Determine the Source of Their Conflict Minerals. Government Accountability Office (August 2015). 2

3 Have not addressed the underlying goals of the legislation. Indeed, some experts have testified that the U.S. Rule has curtailed legitimate business activity as industries seek to avoid the region. Rick Goss, Senior Vice President of Environment and Sustainability with the Information Technology Industry Council, testified in May 2013 before the House of Representatives Committee on Financial Services Subcommittee on Monetary Policy and Trade that the U.S. Rule has led to a de facto embargo on minerals from the covered region, with serious consequences for local populations. Major smelters report that a majority of their direct customers are demanding metals that are Congo-free, rather than conflict-free. 3 More recent analyses confirm this conclusion. For example, some reports indicate that the legislation set off a chain of events that has propelled millions of miners and their families deeper into poverty, according to interviews with miners, community leaders, activists, and Congolese and Western officials, as well as recent visits to four large mining areas. 4 Another analysis found that [w]hile the concept of conflict minerals is convenient for people far from Africa, it is inducing incredible hardship for the miners and their families. Congolese miners are paying to ease the consciences of Western consumers. 5 Furthermore, in August 2015, the United States Court reviewing the U.S. Rule found that Because of the law miners are being put out of work or are seeing even their meager wages substantially reduced, thus exacerbating the humanitarian crisis and driving them into the rebels camps as a last resort. 6 The CCCMC should carefully assess the negative lessons from the U.S. Rule and craft a policy that avoids these undesirable outcomes. Comments on CCCMC s Proposal Based on the vast experience of its members in implementing the U.S. Rule, the NAM is very concerned by several aspects of CCCMC s proposed guidelines. Our comments focus on five specific concerns: Need for Close Alignment with International Guidelines. We urge that any new guidelines expressly acknowledge and treat other accepted international, national, association or industry compliance schemes, including the Organization for Economic Cooperation and Development Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict- Affected and High Risk Areas (the OECD Guidelines ), the U.S. Rule, and any future European Union conflict minerals regulations, as explicitly acceptable means of exercising reasonable due diligence and compliance in satisfying any CCCMC guidelines. Such mutual recognition will avoid duplication of effort and unnecessary burdens on the supply chain, such as multiple redundant smelter audits or supply-chain questionnaires. The proposed CCCMC Guidelines, although clearly intended to align with the OECD Guidelines, diverge from them in the following ways that would complicate multinational compliance efforts: 3 Testimony of Rick Goss, Senior Vice President of Environment and Sustainability, Information Technology Industry Council, before the Subcommittee on Monetary Policy and Trade, Committee on Financial Services, U.S. House of Representatives (May 21, 2013). 4 How a Well-intentioned Law Left Congolese Miners Jobless, Washington Post (Nov. 30, 2014). 5 How Dodd-Frank is Failing Congo, How Dodd-Frank is Failing Congo. Foreign Policy (Feb. 2, 2015). 6 National Association of Manufacturers, et al. v. Securities and Exchange Commission, et al., United States Court of Appeals for the District of Columbia Circuit (Aug. 18, 2015). 3

4 The NAM urges the CCCMC to revise its proposed guidelines by eliminating the new category of Type 2 Risks not addressed by the OECD Guidelines. The CCCMC should clarify that the Model Supply Chain Policy attached as Annex I is a recommended policy and is not mandatory. Companies need the flexibility to implement a supply chain policy that is specific to their business, industry sector, place in the supply chain, and risk profile. Consistent with the foregoing, a failure to adopt the Model Supply Chain Policy as written should not be evidence of noncompliance with the CCCMC guidelines. Concerns about Breadth of Definition of Chinese Companies. The CCCMC s proposed guidelines include an overly broad definition of a Chinese company. As currently drafted, the proposed CCCMC Guidelines define a Chinese company as any legal entity whose beneficial ownership fully or partially rests with a Chinese individual As such, it appears to define as a Chinese company any company with a single Chinese shareholder, stakeholder, or partner, no matter how limited that individual s stake in the company. The CCCMC Guidelines should be revised to define as a Chinese company only those entities owned or controlled by Chinese individuals. In addition, the current CCCMC draft defines as a Chinese company any company that is operating in China or registered in China, regardless of whether the majority of the company s operations are located outside China. Such extraterritorial regulation has been frequently criticized by the Chinese and other governments. Accordingly, the proposed CCCMC Guidelines should be revised to apply only to a non-chinese company s operations in China. For similar reasons of avoiding extraterritorial regulation, the proposed CCCMC Guidelines should be revised to exclude coverage of companies listed on a Chinese stock exchange or registered in China, to the extent that the companies are not Chinese-owned or controlled or do not operate in China. 7 It also should be clarified whether the proposed guidelines are intended to be limited to CCCMC member companies. To that end, we urge that the proposed guidelines not extend beyond CCCMC member companies except on a voluntary basis. Difficulty Mapping Supply Chains to Mines of Origin. While industry can establish goals and objectives, the farther away a company is from a mineral source, the more difficult, if not impossible, it is to determine the source and whether or not it is related to the conflict in covered countries. The OECD Guidelines recognize the complexity and fluidity of supply chains and the limited leverage end-product manufacturers have on remote tiers of their supply chains. The OECD Guidelines state, Internal control mechanisms based on tracing minerals in a company s possession are generally unfeasible after smelting, with refined metals entering the consumer market as small parts of various components in end products. By virtue of these practical difficulties, downstream companies should establish internal controls over their immediate suppliers and may coordinate efforts through industry-wide initiatives to build leverage over sub-suppliers, overcome practical challenges and effectively discharge the due diligence recommendations contained in this guidance. 8 7 The NAM recognizes that section 1502 of the Dodd-Frank Act applies to all companies listed on U.S. stock exchanges. We believe that this feature of the Act is unwarranted, and should not be adopted by the Guidelines. 8 OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, Second Edition, p. 33, emphasis added. Organization for Economic Cooperation and Development (November 2012). 4

5 Section VI of the proposed CCCMC Guidelines articulates a completely unachievable goal for both Chinese and non-chinese companies that as part of their due diligence, it is necessary for all Chinese companies which are using mineral resources and its related products and/or are engaged at any point in the supply chain of minerals to gather sufficient information to trace their resources supply down to the specific location of origin More than a decade of experience in implementing both the OECD Guidelines and the U.S. Rule more recently demonstrate that this approach is not feasible and will lead to onerous and costly reporting systems that will burden all industries involved. 9 This objective is also, as noted above, inconsistent with the OECD Guidelines and the due diligence practices that have evolved under them. The proposed CCCMC Guidelines also make the due diligence process more onerous by failing to limit the conflict region to the U.S. Rule Covered Countries, and also by indicating that the guidelines would apply to mineral resources beyond tantalum, tin, gold and tungsten, including niobium, which is outside the scope of OECD, U.S. and European Union initiatives. To avoid inconsistency with the OECD and other national, international, and industry standards, the CCCMC should either limit the scope of the Guidelines to the Covered Countries and the four minerals for which OECD Supplementary Guidelines exist, or at a minimum work with the OECD to define collaboratively both covered conflicts and minerals. In addition, the OECD Guidelines explicitly advocate collective action through multistakeholder initiatives, as noted above. We urge that the proposed CCCMC Guidelines advocate a similar approach where practicable to reduce duplication of effort and the compliance burdens on individual companies, and specifically urge the CCCMC to incorporate in its guidelines the language from the OECD Guidelines quoted above. Unworkability of the Audit and Certification Provisions. The proposed audit requirements also appear to be inconsistent with the OECD and U.S. audit provisions, and unworkable as drafted. They presume full knowledge of and compliance by all actors in a company s supply chain, notwithstanding the well-documented inability of companies with complex supply chains to achieve this. The CCCMC s proposed guidelines indicate that "the assurance requirements shall not conflict with international standards and with forthcoming legislation." In keeping with this comment, the proposed guidelines should be revised to require audits only of smelters and refiners, in keeping with the OECD Guidelines. 10 We also urge that the guidelines affirmatively provide for mutual recognition of the existing third-party smelter and refiner audit schemes operated by the Conflict-Free Smelter Program, the London Bullion Market Association and the Responsible Jewellery Council, and any applicable national or international regulations. All of the foregoing audit schemes and provisions are widely viewed as robust and independent. Requiring companies to meet a new, alternative audit standard will significantly increase compliance and audit costs. 9 Government Accountability Office, supra note We note that although regulations under Section 1502 of the Dodd-Frank Act originally phased in a requirement for a limited audit of covered companies, the audit was strictly limited in scope, and the audit requirement has subsequently been suspended. By contrast, based on our review of the CCCMC s proposed guidelines, the audit proposed requirements would appear to be far more burdensome. We believe that neither covered companies nor existing audit firms would be able to execute the draft requirements, no matter how extensive the resources committed. Nor do we believe that any company of even modest complexity would be able to receive a clean audit, even if audit-firm resources existed to implement the draft requirement. 5

6 In addition, we urge that the CCCMC guidelines also clarify several issues relating to the audit and certification guidelines, including that: The requirements are intended to be voluntary; and The independent third-party audit, which aligns with Step 4 of the OECD Guidelines, applies exclusively to smelter and refiner audits. The NAM also urges that an appropriate phase-in period be added to the guidelines. Should CCCMC decide to deviate from the OECD s audit provision by applying an audit requirement to non-smelters or refiners, we strongly urge a simplification of the current audit, certification and oversight process. The current proposed disclosure requirements will discourage companies from undertaking audits and obtaining certifications. For example, companies should not be required to inform the Secretariat of their intention to obtain an audit or certification and, without company consent, upcoming and ongoing audits and companies "seeking certification" should not be made public. Companies also should be free to select an accredited audit firm of their choice without coordination with the Secretariat. In addition, the Accreditation Committee should not be charged with providing formal recommendations to companies to improve their due diligence practices, as this also will disincentivize companies from obtaining audits. We also believe that the ability of the Assurance Committee to overturn the recommendation or decision of a qualified auditor also will disincentivize audit firms from undertaking audits. We urge you to include formally the international audit community in the development of the more detailed audit protocols that may be developed pursuant to the proposed guidelines. De Minimis Exception. The NAM strongly believes that any CCCMC conflict minerals guidelines must allow for a de minimis exception based on reasonable, good-faith estimation and judgement. Any minor or trace amounts of the covered minerals many of which are not even intentionally included in the final product should not trigger coverage under the guidelines. Providing such a de minimis exception could significantly reduce the financial and reporting burden on all manufacturers and suppliers, both large and small. Conclusion On behalf of our 14,000 member companies, the NAM cannot overstate the detrimental impact that overly burdensome CCCMC guidelines could have on the competitiveness of manufacturers that own or operate businesses in China. The NAM advises against the creation of any CCCMC guidelines, even those deemed voluntary, which go beyond the scope of existing international rules developed by the OECD, or existing industry due diligence protocols and smelter/refiner audit and certification schemes. If done poorly and without regard to the impact on those industries that would have to implement these guidelines, new CCCMC conflict minerals guidelines could prove even more onerous and costly than the U.S. Rule without achieving their underlying objectives. The NAM appreciates this opportunity to provide comments on behalf of our membership, and we and our member companies would welcome the opportunity to engage further with CCCMC on its proposed guidelines. 6