smelter due diligence

[email protected] / www.assentcompliance.com / 1 866 964 6931 / © Assent Compliance 2017

SMELTER DUE DILIGENCE

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http://www.assentcompliance.com



Today’s Presenters

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Drew YoungAssent ComplianceResearch & Analysis Lead







Agenda

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Conflict Minerals Updates

OECD Due Diligence Overview

Smelter Risk

Risk Mitigation

Program Alignment

Discussion

123456







INTRODUCTION







Assent Product SuitesOur Market Leading Platform

Ethical Sourcing

Materials Management

Supplier Information Management

InspectionsConfigurable Surveys & Declarable Substance

Lists

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Feature PresentationPRESENTER, TITLE & COMPANY Feature Presentation







Memorandum Summary

The Guardian published an alleged leaked Presidential Memorandum on Dodd-Frank Section 1502◆ https://www.theguardian.com/us-news/2017/feb/08/trump-administration-order-conflict-

mineral-regulations

Quick Facts◆ This text of alleged Memorandum is temporary waiver, not a repeal of the rule

◆ The ability to trigger this temporary waiver requires a determination that it is in the national security interest of the United States

◆ There is wide belief that such a determination is likely to be challenged in court

◆ The Secretaries of State & Treasury have 180 days to propose an alternative plan

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https://www.theguardian.com/us-news/2017/feb/08/trump-administration-order-conflict-mineral-regulations




Executive Order Summary

Here is a direct quote:

SEC. 3 Secretary's’ Plan. The Secretary of State and the Secretary of Treasury shall propose to the President a plan for addressing human rights violations and funding of armed groups in the Democratic Republic of the Congo or an adjoining country. The plan could include targeting persons and entities engaged in violations of law and negative human rights impacts, consistent Section 13 of the Exchange Act. The Secretaries shall submit their plan to the President within 180 of the date of this Order.

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In addition to the previously mentioned drivers, there are additional legal and administrative factors to take into consideration:

◆ Recent SEC chair statement

◆ The Financial Choice Act

◆ Court case

Other Legal & Administrative Considerations

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Other Conflict Mineral Regulations & Guidelines

There still may be a need for alignment with the following:

◆ European Union’s conflict minerals regulation

◆ Emerging Chinese conflict minerals guidance/regulation

◆ Massachusetts, Maryland & California state level requirements

◆ European Union’s Non-Financial Reporting Directive

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Other Potential Conflict Mineral Requirements

◆ Commercial customer requirements

◆ Corporate social responsibility programs

◆ External stakeholder pressure including NGOs,

socially responsible investors and consumers

Drivers that may require conflict minerals information to be collected throughout the supply chain and reported:

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Take-Aways

A signed Memorandum has not yet been issued. The rule is still in place as of today and conflict mineral filings are still due at the end of May 2017.

For now, companies should stay the course on their existing conflict mineral compliance efforts. Even if a memorandum similar in nature to the one leaked by the Guardian is issued, many companies will continue to request CMRTs and voluntarily report on their websites.

In the event of a temporary waiver, companies will need to consider the other compliance drivers discussed in determining their course of action.

Assent and Ropes & Gray are monitoring legislative and other developments closely. We will keep you informed as new information becomes available.

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OECD Due Diligence Guidance

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◆ OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas Second Edition

◆ “this Guidance sets out the steps companies should take toidentify and address actual or potential risks in order to prevent or mitigateadverse impacts associated with their activities or relationships, whilerecognising that flexibility is needed in its application depending onindividual circumstances and factors such as the size of the enterprise, thelocation of the activities, the situation in a particular country, the sector andnature of the products or services involved”







OECD Due Diligence Guidance

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◆ Almost all CMRs filed last year contained a statement similar to:

“Our due diligence measures have been designed to conform with the framework in The Organisation for Economic Co-operation and Development (“OECD”) Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (the “OECD Guidance”) and the related Supplements for gold and for tin, tantalum and tungsten.”

◆ Is this really the case?







Five-Step Framework for Risk-Based Due Diligence

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1 Establish strong company management systems. Companies should:a. Adopt, and clearly communicate to suppliers and the public, a company policy for the supply chain

of minerals originating from conflict-affected and high-risk areas. This policy should incorporate the standards against which due diligence is to be conducted, consistent with the standards set forth in the model supply chain policy in Annex II.

b. Structure internal management to support supply chain due diligence.c. Establish a system of controls and transparency over the mineral supply chain. This includes a

chain of custody, a traceability system or the identification of upstream actors in the supply chain. This may be implemented through participation in industry-driven programs.

d. Strengthen company engagement with suppliers. A supply chain policy should be incorporated into contracts and/or agreements with suppliers. Where possible, assist suppliers in building capacities with a view to improving due diligence performance.

e. Establish a company-level, or industry-wide, grievance mechanism as an early-warning risk-awareness system.







Five-Step Framework for Risk-Based Due Diligence

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2 Identify and assess risk in the supply chain. Companies should:a. Identify risks in their supply chain as recommended in the Supplements.b. Assess risks of adverse impacts in light of the standards of their supply chain policy consistent with

Annex II and the due diligence recommendations in this Guidance.

3 Design and implement a strategy to respond to identified risks. Companies should:b. Devise and adopt a risk management plan.

ii. Depending on their position in the supply chain, downstream companies are encouraged to build and/or exercise their leverage over upstream suppliers who can most effectively and most directly mitigate the risks of adverse impacts… mitigation efforts should focus on suppliers’ value orientation and capability-training to enable them to conduct and improve due diligence performance.

c. Implement the risk management plan, monitor and track performance of risk mitigation efforts and report back to designated senior management. This may be done in cooperation and/or consultation with local and central government authorities, upstream companies, international or civil society organizations and affected third-parties where the risk management plan is implemented and monitored in conflict-affected and high-risk areas.







Smelters of Concern - OECD Red Flags

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◆ The following red flags should trigger the due diligence standards and processes contained in this Guidance:

The minerals originate from, or have been transported via, a conflict-affected or high-risk area

The minerals are claimed to originate from a country that has limited known reserves, likely resources or expected production levels of the mineral in question (i.e. the declared volumes of minerals from that country are out of keeping with its known reserves or expected production levels)

The minerals are claimed to originate from a country in which minerals from conflict-affected and high-risk areas are known to transit

The company’s suppliers or other known upstream companies have shareholder or other interests in companies that supply minerals from, or operate in, one of the above-mentioned red flag locations of mineral origin and transit

The company’s suppliers or other known upstream companies are known to have sourced minerals from a red flag location of mineral origin and transit in the last 12 months







Smelters of Concern

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◆ Assent’s scoring schema takes into account:⬦ conflict sourcing⬦ unethical sourcing⬦ facility locations identified in Dodd-Frank⬦ breach of trade sanctions

◆ The following are facilities the Assent Research and Analysis Team have identified as being of highest concern to the supply chain.






[email protected] / www.assentcompliance.com / 1 866 964 6931 / © Assent Compliance 2017 19

Tony Goetz NV - CID002587

Location: BelgiumMineral: GoldRisk: Conflict Sourcing

◆ Located in Antwerp, Belgium◆ Extreme risk of sourcing from conflict areas in the DRC, Uganda and Burundi◆ Reports have found evidence of ties to conflict mines, gold smuggling, black

market dealing, money laundering and fraud dating back to the 1980s⬦ Final report of the Group of Experts on the Democratic Republic of the Congo for the United

Nations Security Council (S/2016/466)







African Gold Refinery Limited (AGR)

Location: UgandaMineral: GoldRisk: Conflict Sourcing & Facility Location

◆ Officially launched February 2017◆ Has stated it sources gold ore from Uganda, DRC and Tanzania

⬦ Impacts Question 3 of CMRT declaration page – “Do any of the smelters in your supply chain source the 3TG from the covered countries?”

◆ Primary investor is Tony Goetz NV (discussed in previous slide)◆ Very unlikely this facility will be declared in the supply chain for 2016







Kaloti Precious Metals - CID02563

Location: United Arab EmiratesMineral: GoldRisk: Conflict Sourcing

◆ De-listed from the Dubai Multi Commodities Centre (DMCC) Good Delivery List in 2015⬦ Failed to meet re-certification criteria for reasons not publicly disclosed

◆ In 2014, Global Witness reported on a leaked, unreleased audit report from Ernst & Young revealing suspicious transactions, falsified paperwork and inadequate tracing of high-risk gold from Sudan and the DRC (Global Witness, City of Gold: Why Dubai’s first conflict gold audit never saw the light of day, February 2014)

◆ Representative of the large issue of gold smuggling, fraudulent reporting and money laundering in Dubai, UAE







Phoenix Metals - CID002507

Location: RwandaMineral: TinRisk: Conflict Sourcing & Facility Location

◆ Paused smelting to implement processes and systems necessary to comply with CFSI audit

◆ Extended Corrective Action Plan initiated July 2015 based on recommendations by auditors⬦ (http://phoenix-metal.com/app/download/5815227616/CAP_Phoenix_sep_2016.pdf)⬦ Have thus far been unable to demonstrate the processes and systems necessary to support

conflict-free sourcing◆ Removed from CFSP Active Status September 2016◆ High-risk of conflict minerals entering the supply chain through this facility






http://phoenix-metal.com/app/download/5815227616/CAP_Phoenix_sep_2016.pdf


Universal Precious Metals Refining - CID002854

Location: ZambiaMineral: GoldRisk: Conflict Sourcing & Facility Location

◆ This facility has stated they refine gold ore⬦ Impacts Question 3 of CMRT declaration page – “Do any of the

smelters in your supply chain source the 3TG from the covered countries?”

◆ High-risk of conflict minerals entering the supply chain through this facility based on geographic location and unwillingness to participate in a CFSI audit

◆ Very unlikely this facility will actually exist in the supply chains of American companies for 2016







Sudan Gold Refinery - CID002567Location: SudanMineral: GoldRisk: Conflict Sourcing & Economic Sanctions

◆ Reports indicate this facility sources from the CAR and South Sudan, covered countries with high-risk conflict-affected gold mining and risk of smuggling

◆ Sudan is not a covered country per Section 1502, but it has large gold reserves in areas of conflict and confirmed human rights abuses ⬦ (Enough Project, Darfur’s Gold Rush: State-Sponsored Atrocities 10 Years After the Genocide,

May 2013)◆ U.S. Dept. of the Treasury’s OFAC’s comprehensive trade embargo on Sudan,

that blocked property and interests of the Government of Sudan, as well as the importation of goods and services of Sudanese origin has been suspended for a 6 month trial period⬦ (https://www.treasury.gov/resource-center/sanctions/Programs/Documents/sudan.pdf)⬦ (https://www.treasury.gov/resource-center/sanctions/Programs/Documents/SSR_amendment

.pdf)






https://www.treasury.gov/resource-center/sanctions/Programs/Documents/sudan.pdf


Fidelity Printers and Refiners - CID002515

Location: ZimbabweMineral: GoldRisk: Economic Sanctions

◆ U.S. Dept. of the Treasury’s OFAC has imposed sanctions on specifically identified individuals and entities connected to actions that cause violence, human rights violations and undermine regional stability⬦ (https://www.treasury.gov/resource-center/sanctions/Programs/Document

s/zimb.pdf)◆ Fidelity Printers is financed by Sino Zim Development (PVT) Ltd,

which is an identified target of the sanctions program⬦ (Global Witness, Financing A Parallel Government?, June 2012)

◆ Material from this facility would constitute a breach of the sanctions program






https://www.treasury.gov/resource-center/sanctions/Programs/Documents/zimb.pdf




Central Bank of the DPR of Korea - CID000190

Location: North KoreaMineral: GoldRisk: Economic Sanctions

◆ U.S. Dept. of the Treasury’s OFAC has imposed sanctions on North Korea to deal with national security and foreign policy threats⬦ (https://www.treasury.gov/resource-center/sanctions/Programs/Documents/nkorea.pdf)

◆ Facility is no longer considered a legitimate refining facility by the CFSI due to cessation of refining operations⬦ Possible the bank is still selling stockpiled gold bars to buyers in Hong Kong and China

◆ Appearance on CMRTs in 2016 is likely the result of suppliers inaccurately updating their smelter list⬦ Can be an indication the reporting supplier has a weak conflict minerals program and

has not conducted proper due diligence







Yunnan Tin Company Limited - CID002180

Location: ChinaMineral: TinRisk: Economic Sanctions

⬥ Reuters released a report examining a mine in Myanmar that is controlled by an armed group, United Wa State Army (UWSA)⬦ http://www.reuters.com/article/us-myanmar-tin-factbox-idUSKBN13N1W0

⬥ U.S. Dept. of the Treasury’s OFAC has imposed sanctions on the UWSA under the Foreign Narcotics Kingpin Designation Act

⬥ Yunnan Tin Company and one of its subsidiaries, Chenzhou Yunxiang Mining and Metallurgy Co., Ltd, source from this mine. ⬦ Both facilities are CFSI Compliant

⬥ >500 companies reported one or both of these facilities in their CMR⬥ Unlikely that the U.S. Treasury Department would ever initiate enforcement

actions against companies for an issue so deep in the supply chain






http://www.reuters.com/article/us-myanmar-tin-factbox-idUSKBN13N1W0

http://www.reuters.com/article/us-myanmar-tin-factbox-idUSKBN13N1W0


Things to Keep In Mind

◆ Very unlikely these facilities are actually in your supply chain◆ Company-level reporting – may not apply to the parts supplied to your company◆ Inability to validate CMRT declarations > one tier down the supply chain◆ One inaccurate CMRT can skew results for an entire supply chain

◆ Once the risk has been reported, it is your responsibility to conduct the necessary risk mitigation◆ Follow OECD Due Diligence Guidance

◆ “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.”

◆ “Risk-based due diligence refers to the steps companies should take to identify and address actual or potential risks in order to prevent or mitigate adverse impacts associated with their activities or sourcing decisions.”

◆ http://www.oecd.org/corporate/mne/GuidanceEdition2.pdf






http://www.oecd.org/corporate/mne/GuidanceEdition2.pdf

http://www.oecd.org/corporate/mne/GuidanceEdition2.pdf


Basic Risk Mitigation Steps

1. Identify suppliers that have reported smelters of concern◆ Smelter Report from the ACM









2. Engage and educate your suppliers◆ “downstream companies are encouraged to build and/ or exercise their leverage over upstream

suppliers who can most effectively and most directly mitigate the risks of adverse impacts”◆ Put your suppliers in a position to help achieve your goals◆ Utilize a trackable LMS system such as Assent University

■ Record your due diligence efforts









2. Engage and educate your suppliers◆ “downstream companies are encouraged to build and/ or exercise their leverage over upstream

suppliers who can most effectively and most directly mitigate the risks of adverse impacts”◆ Put your suppliers in a position to help achieve your goals◆ Utilize a trackable LMS system such as Assent University

■ Record your due diligence efforts3. Request user-defined or part/product level declarations

◆ Your CM policy, reporting requirements and desired timelines should be clearly communicated◆ Identify the specific parts that have been purchased from the individual suppliers◆ Request part-level declarations for the identified parts◆ Assist your suppliers in obtaining similar information from their upstream suppliers if necessary◆ Completion of these steps will often result in smelters of concern being ruled out of the supply

chain and completion of risk mitigation








4. Suspend or end relationship with suppliers (if necessary)◆ “Companies may manage risk by either i) continuing trade throughout the course of

measurable risk mitigation efforts; ii) temporarily suspending trade while pursuing ongoing measurable risk mitigation; or iii) disengaging with a supplier in cases where mitigation appears not feasible or unacceptable”







Risk Mitigation

◆ Flexibility and reasonable timelines◆ “Flexibility is needed in the application of due diligence. The nature and extent of due diligence

that is appropriate will depend on individual circumstances and be affected by factors such as the size of the enterprise, the location of the activities, the situation in a particular country, the sector and nature of the products or services involved.”

◆ “Measurable risk mitigation should be adjusted to the company’s specific suppliers and the contexts of their operations, state clear performance objectives within a reasonable timeframe and include qualitative and/or quantitative indicators to measure improvement.”

◆ Important that smelters are not removed without proper due diligence◆ Understand it may take time to compile detailed declarations and complete due diligence steps◆ Pressuring upstream suppliers with unreasonable timeline demands can lead to misreporting◆ Request CM policies and risk mitigation plans from suppliers

◆ Remember the goal is “progressively eliminating the adverse impacts within reasonable timescales”







Program Alignment

◆ Flexibility and reasonable timelines◆ “Flexibility is needed in the application of due diligence. The nature and extent of due diligence

that is appropriate will depend on individual circumstances and be affected by factors such as the size of the enterprise, the location of the activities, the situation in a particular country, the sector and nature of the products or services involved.”

◆ “Measurable risk mitigation should be adjusted to the company’s specific suppliers and the contexts of their operations, state clear performance objectives within a reasonable timeframe and include qualitative and/or quantitative indicators to measure improvement.”

◆ Important that smelters are not removed without proper due diligence◆ Understand it may take time to compile detailed declarations and complete due diligence steps◆ Pressuring upstream suppliers with unreasonable timeline demands can lead to misreporting◆ Request CM policies and risk mitigation plans from suppliers

◆ Remember the goal is “progressively eliminating the adverse impacts within reasonable timescales”







Program Alignment

◆ Unrealistic demands or timelines without due regard for supply chain size, complexity, positioning etc.◆ Immediate submission of part-level declarations

◆ Must transition to CFSP listed SOR by (specified date)

◆ Must have 100% supplier response rate by (specified date) – see CMRT Question 5

◆ Your suppliers at all levels are expected to have 100% response rate







Upcoming Events: Webinars & Conferences

Learn more about Assent events:www.assentcompliance.com/events

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[Webinar] Compliance Essentials: Conflict Mineral Due Diligence Thursday, February 23rd | 11AM EST

[Webinar] Transitioning from a Regulatory to a Programmatic MindsetWednesday, March 8th | 1PM EST

Upcoming ConferencesSilicon Valley ForumFebruary 23, 2017 | Sunnyvale, CA






http://www.assentcompliance.com/events




Q&A Discussion

Questions?

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smelter due diligence

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