Wednesday, 1 May 2013

Third-party observations on the Audit Review Committee of the Conflict Free Smelter Program: 2012

Dr. Steven B. Young
April 5, 2013

Scope

I am the sole third-party member of the audit review committee (ARC) of the Conflict Free Smelter Program (CFS). Under agreement with the Electronic Industry Citizenship Coalition (EICC), I was engaged by the EICC in January 2012 “to provide an independent, technical perspective to the audit review process and will also be responsible for identifying opportunities to improve the overall efficacy of the CFS Program”.

While I am paid for my time as a private contractor, I am autonomous and do not feel pressured by EICC or the ARC membership in my actions or decisions. Thus, I feel that I can form an independent opinion on the ARC and its function. Since January 2012 in this position I have worked closely with EICC industry members, and have had access to the full depth of information regarding the operation of the CFS program, and the process and results of the ARC. As a member of the ARC, I hold one vote in its decisions.

I also have academic interests in the CFS and its operation. I have published and presented at scholarly venues on the topic.

My activity

This report communicates information and impressions based on my observations and experiences with the ARC over my first year of involvement, from January to December 2012.
Over that period, I participated on approximately 30 conference call meetings of the ARC, plus several other calls with stakeholders and directly with individuals associated with the CFS. I was unable to attend two scheduled meetings of the ARC. In addition to telephone conference calls, email correspondence between members of the ARC takes place, and includes document review of audit reports and review of draft communications to and from smelters/refineries.

Background on CFS

The Conflict Free Smelter Program provides assurances on the procurement programs related to sourcing of strategic resources, which contain metals that are ultimately used in electronic and other
products. The CFS was established as a response to concerns in the Democratic Republic of Congo (DRC) associated with “conflict minerals,” defined as tantalum (Ta), tin (Sn), tungsten (W) and gold (Au), and their compounds. The CFS is managed by a working group of companies, mostly members of the Electronic Industry Citizenship Coalition (EICC) or the Global e-Sustainability Initiative (GeSI).
Since its start in late 2010 the CFS program has utilized detailed auditable protocols that define documentation and traceability requirements of mineral shipments received at smelters/refiners. The EICC and GeSI member companies help identify priority suppliers and thus target smelters and refineries they wish to be compliant. To be compliant, processors must not accept materials from known or plausible conflict sources and demonstrate they have business processes to substantiate this plausibility.

Auditors visit smelters and refiners to assess the traceability of metals back to sources at mines or to recycled sources to assure compliance. Major metal producers around the world have been evaluated, including in Australia, Canada, China, Germany, Japan, Kazakhstan, Russia, Thailand, and the USA. The audit review committee (ARC) oversees the work of auditors, checks audit results, and confirms compliance of passing facilities.

Facilities voluntarily participate; however, there is external pressure and encouragement from their customers in the value chain, including OEM electronics companies. Names and dates for compliant facilities are published on the CFS website.

The supply chain of metals to electronics products varies and can have as many as nine tiers or levels of suppliers. There is a narrowing in the number of actors in the chain of production at the point where metals are processed into high purity grades. For Ta, Sn and W this point occurs at metal smelters, which accept mineral ores from mines, mineral concentrates and scraps and recyclables from industrial and non-industrial (e.g., post-consumer) sources for chemical or thermal conversion into pure metals and alloys. For gold the point of convergence in the supply chain is with refiners, which process gold from primary raw metal and recycled sources into pure metal (e.g., 99.99%) suitable for bullion and jewelry, as well as industrial grade metal. The CFS therefore targets smelters and refiners as a manageable set of “gates” where the supply of metal shipments can be observed and facilities can be audited.

Protocols have been developed by the program that describe compliance expectations for smelters and refiners, and define rules for auditors to check facility compliance. The protocols include requirements such as:

  • Implementation of a conflict free policy which is embedded into internal operating practises;
  • Mechanisms for tracing origins of purchased materials back to sources including shipping documents, information on assays and mine identification;
  • Tracking of paperwork both internal and external to the smelters/refiners;
  • Criteria to exclude low-risk materials from sourcing requirements, for example materials identified as recycled;

The protocols are structured based on risk to provide for greater rigour and scrutiny (e.g., level of documentation and degree of audit sampling) for higher risk shipments sourced from areas more likely
to be associated with the conflict areas: low risk countries are classified as Level 1, with Level 2a and Level 2b each presenting higher risks and greater audit requirements, and with the DRC itself categorized as Level 3. (Note: with the 21 December 2012 harmonized 3Ts audit protocol, Levels 2b & 3 have been merged into Level 3, and Level 2a becomes Level 2.)

Process of the ARC

The ARC meets weekly on a conference call with documents sent out in advance by the ARC chair. We may review as many as three smelter reports each week. The committee requires a quorum for decision-making and observes strict confidentiality of company data and audit details.
The members of the ARC take their roles seriously. I have been impressed with their individual knowledge, diligence and sincerity. Part of the attitude of the group is ensure that the CFS protocols are followed, with an aim to identify and screen-out facilities with poor practices, but also to see that good facilities are properly informed and encouraged to get things right so that they can become CFS compliant.

Before audits take place, a great deal of background work has been undertaken by CFS member company representatives. Based on OEM knowledge of and relationships with their suppliers, the industry collectively has identified sources of metals used in their products, and members have engaged companies with letters and through site-visits at facilities and with metals industry associations. This is not my responsibility; however the ARC receives a regular status report of known smelters and refineries, including a list of pending and completed audits.

Once a smelter has agreed to be audited, the Audit Program Manager arranges for an auditor, who then engages to visit the facility. Auditors gather and review documentation in advance, then typically visit in a small team for one or two days duration. Audit reports are written quickly following the visit and detailed findings are presented to the ARC. Reports include a mix of quantitative tables and spreadsheet calculations, and document text regarding observations and audit conclusions.

Facilities are keen to learn about results, as are the supporters of the CFS program, therefore the ARC reviews audits and responds to the auditee companies in a matter of weeks. The head auditor usually presents their report to the ARC on the conference call, and responds to questions. Often the auditor is required to gather additional information about the company or its suppliers, which may result in a second meeting with the ARC.

The ARC completes a formal vote on key decisions, like agreement to the auditor’s recommendation on facility compliance. Over the first year, these decisions have been consensual, where any issues are discussed, investigated and resolved amongst the ARC. Facilities determined compliant are issued a letter from the ARC, and details on company compliance are posted to the CFS website by the ARC chair. Non-compliant companies are informed by a non-compliance letter to the facility that provides specific options for corrective action. Drafts of letters, responses from facilities and additional information that may be provided from auditors are the subjects of emails between the ARC members.

Results, observations and recommendations

Smelters and refiners typically fail their first audits. This is often due to poor understanding of the CFS program and inadequate information management systems. A 90 day period is provided for processors to perform corrective actions, a common example of which is obtaining specific transport records for identified shipments.

To date, most facilities that have successfully complied with the CFS are sourcing materials from low risk Level 1 countries. Metals facilities vary tremendously in the numbers and types of shipments they receive. For example, one large smelter located in Asia receives all of its input materials from a single nearby mine, with no mixing of mineral ores or input of materials from other locations. In another example, a gold refining facility was found to source from several large regional mines and from buyers of used gold and jewelry. One refinery received shipments from a government-run mining authority in a Level 1 developed country. The audit discovered that each shipment from that country contained materials sourced from as many as 20,000 artisanal and small-scale miners. The information in the audit went so far as to reveal the personal names and production volumes of individual miners in the source country.

There are incidents of substantial non-compliance, beyond paperwork, including some involving level 2A and 2B sources, where smelters are sourcing from mines that they cannot clearly confirm as conflict-free. Several facilities have failed to correct inadequacies after begin given opportunity for corrective action. Some facilities have failed first audits, not completed changes in the 90 day period, and then returned for subsequent audits, thus going through the full process again.

Protocol-driven

Let me highlight that the ARC and the auditors are strongly driven by the documented protocols. As such, the ARC’s job is largely a technical assessment of the facility, based on the evidence that the facility has provided to the auditor, compared against the written requirements of the CFS protocols. NGOs or other stakeholders concerned about the integrity of the CFS or with conflict-free minerals trade should start with these protocols and consider areas such as why some facilities are not motivated to participate in the CFS.

Several areas of the protocols have required interpretation and refinement. The ARC has been significantly involved in these evaluations and in edits made to the protocols. These include procedures for dealing with minerals and metals that are inventoried for long periods of time, and which therefore may not have the same paperwork to meet compliance. The issue of time periods has also required interpretation, with respect to how much of a track record is sufficient to warrant acceptance of a company’s practices. Also there are complications resulting from various patterns of trade between smelters, which involve materials moving between non-compliant and compliant facilities.

Company compliance versus product certification

The CFS has been compared to other sustainability management initiatives like the Forest Stewardship Council. However, unlike other commodity systems the CFS is company-based not product-based. It does not certify the metal product; rather it confirms the compliance of a company’s production
facility(ies) over a period of time, and validate that their information management systems, business processes and practices are in compliance with program expectations.

As it is currently structured, the CFS program provides limited transparency on the commodity, unlike a commodity chain-of-custody system. The core information conveyed with conflict-free compliance is the absence of a negative attribute at a company’s facility (“conflict” associated with the resource source), as opposed to the presence of positive attributes (e.g., “sustainable” practices of resource production) that are more commonly considered in the sustainability certifications of products. I am interested in exploring the implications of this, as information from the CFS is made available to buyers in the manufacturing supply chain, and as the SEC rule for conflict minerals is implemented by USA listed companies.

Contact: Dr. Steven B. Young, Associate Professor, School of Environment, Enterprise and Development (SEED), University of Waterloo, www.uwaterloo.ca, (519) 888-4567 x38419, sb.young-uwaterloo.ca