SUPPLY CHAIN RISK MANAGEMENT BLOG

Transparency in the supply chain – Dodd-Frank Act stipulates disclosure obligation

May 30, 2014    Heiko Schwarz

 


On 31 May 2014 the first 2013 reports for the Dodd-Frank Act are due. Given the topicality and importance attached to this issue, we would like to shed more light on the Dodd-Frank Act in this blog contribution.

In the first instance, the Dodd-Frank Act serves as a basis for the reform of the US financial market law. However, it also includes a regulation that requires all companies listed on the US stock exchanges to make public whether their products contain minerals from conflict areas, namely cassiterite, columbite-tantalum, wolframite as well as their derivatives such as gold, of the Democratic Republic of the Congo and its adjoining countries.

The regulation came into existence because these so-called conflict minerals and their exploitation contribute significantly to the emergence and intensification of conflict in the DRC, but also to dry up sources of funding for international terrorism. The impact of these conflicts is also illustrated in films such as “Blood Diamond” with Leonardo Di Caprio or “Blood in the mobile”, which demonstrates, among other things, that companies like mobile telephone manufacturer Nokia cannot exclude the use of illegally mined minerals from the DRC.

The regulation of the Dodd-Frank Act is aimed at the entire supply chain of US stock exchange-listed companies – i.e., not only worldwide companies that are listed on the US stock exchanges are subject to disclosure obligation, this also extends to all their suppliers in the multi-tier supply chains. In particular, this affects the telecommunication, aeronautical and automobile sectors as conflict minerals are found in products such as mobile phones or computers, airbags, cables or brakes, but also in zips, tins or special glass.

According to a survey by the Research Organisation IHS in December 2013, 42% of 162 global companies indicated that they were uncertain as to whether they could fulfil the requirements by May 2014. For 30% of the respondents, the biggest concern was to be non-compliant with U.S. regulations, 28% feel they may lose clients, followed by 20% not having responsible supply chains. 

Companies can find reference points and assistance in the OECD guidelines “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas”:

  1. Establish strong company management systems
  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 at identified points in the supply chain
  5. Report on supply chain due diligence

In any event, the Dodd-Frank Act presents a challenge, and tracing companies right down to micro enterprises involved in this exploitation is problematic. Although companies in some cases have a transition period of 2 to 4 years (at the latest up to the end of the 2016 reporting period), there is ultimately no alternative but to check the entire supply chain right up to the raw materials source.

The key words “transparency in the supply chain” now also gain great regulatory significance and imply, on the one hand, as indicated in the OECD, long-term monitoring and managing of external added value and suppliers, and on the other, establishing sustainable risk management along the multi-tier supply chain.

Finally, consideration should be given to the fact that this is not only about observing the regulations of the Dodd-Frank Act, but also about protecting the company and its image, ensuring compliance and remaining competitive.


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