The 2,300 or so pages that make up the Dodd-Frank Wall Street Reform and Consumer Protection Act affect just about every aspect of Wall Street. Signed into law in July 2010, “Dodd-Frank,” as it is more commonly known, is considered by some to be the most draconian regulatory reform to our financial systems since the Great Depression.

The scope of Dodd-Frank, however, is not limited to the financial services industry. Buried between Section 1501, “Restrictions on use of United States funds for foreign governments;protection of American taxpayers” and Section 1503, “Reporting Requirements Regarding Coal or Other Mine Safety” is Section 1502—Conflict Minerals. The intent of the legislation is to deter violence and human rights violations in countries funded by trading in certain minerals.

On August 22, 2012, the Securities and Exchange Commission (SEC) issued a final rule on conflict minerals pursuant to Dodd-Frank Section 1502 requiring companies to track and report on the origin of “conflict minerals” through their supply chain.  For companies required to file them, the first Conflict Minerals Reports are due to the SEC on May 31, 2014, to report on the 2013 calendar year.

 What are “conflict minerals”?

“Conflict minerals” relates to the sourcing of specific minerals mined in conditions of conflict (hence the title of the provision) in the Democratic Republic of Congo (DRC) and neighboring countries.

 One of the challenges for companies affected by the rule is the breadth of what can be defined as a “conflict mineral.” While the regulated materials include tantalum, tin, tungsten and gold—commonly referred to as 3T’s/G—they extend far beyond these basic materials. Conflict minerals also encompass cassiterite, columbite-tantalite (coltan) and wolframite, as well as their derivatives (the “3Ts”) and gold. Adding to the complexity is the multitude of alloys, grade and semi-finished metal forms, and products included in products or the manufacture of products.

Which companies are affected by conflict minerals?

Section 1502 affects all public companies (issuers) that are listed with the SEC under Sections 13(a) or 15(d), regardless of where their manufacturing takes place. Affected companies are those whose products contain conflict minerals that are “necessary to the functionality or production” of products that they themselves manufacture or that they contract to be manufactured. The list of affected products is vast, from aircraft and automotive parts, to glass, jewelry, PVC, cellphones, fishing lures and more. The SEC estimates that the rule will affect approximately 6,000 issuers. Reporting and due diligence requirements directly affect many private companies within those issuers’ supply chains. The SEC has and continues to provide guidance regarding the scope of the rule. For instance, it recently provided clarification that excluded product packaging from the required disclosures.

The cost of compliance

The massive scope of the conflict minerals rule is matched by equally massive projected costs for compliance. The August 2012 final rule from the SEC included the following statement: “We believe it is likely that the initial cost of compliance is approximately $3 billion to $4 billion, while the annual cost of ongoing compliance will be between $207 million and $609 million.” However, although there are those that focus on cost—the aerospace industry is estimating that the cost of compliance for its manufacturers will range from $100 million to $2 billion, there are those who believe that compliance has an upside. Compliance with Section 1502 forces companies to map out their entire supply chain from tier one suppliers all the way back to the original mine and, in the process, identify cost savings and process improvements.

Implementing an effective conflict minerals compliance program

The Organization for Economic Co-operation and Development (OECD) has published guidance, “OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas” in which it outlines recommendations for a framework for risk-based due diligence for conflict minerals. These include appropriate management systems, supply chain risk assessments, independent third-party audits and reporting.

The role of technology

Technology, although not the whole solution, must be part of the solution. The complexity and scope of the rule and the penalties for material misstatements or omissions cannot be addressed without appropriate technology to intelligently manage and automate much of the required due diligence.

With appropriate technology, companies have successfully implemented thorough, objective and—key for many large companies—massively scalable processes and policies. After initially establishing internal, cross-functional task forces to determine areas of potential risk and implement project plans, these companies have used technology to complete extensive supplier due diligence. Specifically, they have been able to identify conflict minerals in their supply chain, establish origins and chain of custody, and develop supplier risk profiles. Armed with this information, these organizations can now work with impacted suppliers to develop plans to address these risks and explore alternative suppliers.  By quickly identifying which suppliers are in scope, companies can effectively and cost-effectively apply resources to only those suppliers. Reporting and disclosures are considerably simplified and transparent. Technology can handle often overlooked aspects of supplier communication such as training and attestations.

Finally, given the potential business impact of terminating suppliers deemed to be “high risk,” technology, in the form of next-generation analytics, gives companies much needed “what if” modeling and stress testing capabilities.

For many suppliers, the impact of complying with due diligence requirements from their customers will be considerable: A single supplier may end up needing to provide more or less the same information multiple times to different customers. Today’s intelligent supplier networks can reduce or eliminate this burden by allowing suppliers to complete preliminary due diligence information once and allowing that information to be shared with multiple customers.

Finally, a statement released on June 3 by various investment groups who represent more than $450 billion of assets under management stated the following: “Requiring disclosure within a company’s supply chain allows investors to evaluate supply chain policies and practices, to make company-to-company comparisons, to calculate the level of risk associated with conflict mineral sourcing, and to provide assurance that companies are not engaging in destabilizing activities.”

In a business environment where investors want to evaluate companies down to the supply chain level, technology, if implemented correctly, may be a way to drive shareholder value and, ultimately, a competitive advantage.