Supply Chain

Metals That Threaten Reputations

Companies are scrambling to comply with the SEC's "conflict minerals" disclosure requirements.
By: | September 1, 2013 • 8 min read

Of the 6,500 companies that file with the Securities and Exchange Commission, about 4,000 are impacted by the Dodd-Frank Act’s Section 1502, which requires reporting any “conflict minerals” used in their products.

Conflict minerals are those mined in the Democratic Republic of the Congo (DRC) and adjoining countries: Angola, Burundi Central African Republic, Congo Republic (a different nation than DRC), Rwanda, Sudan, Tanzania, Uganda and Zambia.

The new SEC disclosure requirements demand immediate review of many companies’ supply chain management policies and procedures. It calls for disclosure of source-of-origin and requires due diligence to determine the presence or use of very common materials inherent in conflict minerals, namely gold, tin, tantalum and tungsten, called 3TG.


Non-compliance could result in criminal or civil penalties. At the very least, those failing to comply run the reputational risk of having their names associated with the use of conflict minerals.

“This is a name and shame law,” said Rich Goode, senior manager, Climate Change and Sustainability Services at Ernst & Young.

“I can envision someone from the SEC making public a list of companies that say they source from the DRC and are not conflict-free,” he said.

Organizations making brand-name consumer electronics don’t want “Greenpeace, or Amnesty International saying your product contributes to enslaving children in Africa. That’s a reputational risk for sure,” he said.

Adding to the risk is the fact that the SEC’s disclosure requirements are easily misunderstood — and some companies may not even know they use these minerals.

Companies also may overthink the SEC requirements, causing more work and expense than necessary, and still may not be in compliance with the law. The SEC estimated that initial compliance costs for the affected companies will run about $6 billion.

Identification and Disclosure

To comply, organizations must first determine whether the requirements are applicable to their business. If so, they will need to conduct a “reasonable country of origin inquiry” to identify and disclose the minerals present in their supply chain.Ultimately, they must file a Conflict Minerals Report (CMR). The report also may be submitted to a certified independent third party audit, according to the SEC.

Sounds simple enough, right?

Hardly. Goode said companies are scrambling to determine if their products contain conflict minerals and to identify the sources of those minerals. “It can come down to the individual smelter.”

Companies need to make reasonable efforts to identify the sources of the 3TG in their products. They cannot, for example, skip looking for gold.

“However, if in their efforts to identify all the 3TG in their product, a company misses one component, this is not a deal breaker,” he said. “In fact, an essential part of the rule is for companies to show continuous improvement year over year.”

The other point, Goode said, is that the law is “nuanced.” While the SEC allows a company’s approach to be “reasonable,” meaning there are no penalties if a product or supplier is missed, “there are a lot of subtle nuances in areas — like risk mitigation, the need for a grievance mechanism or having a conflict minerals policy written and posted on the company website — that many companies can miss.”

In short, companies should understand what they need to do to be compliant, but they also should know that they are not required to determine with 100 percent certainty (especially in Year 1) the source of all conflict minerals in their products.

“The SEC gives companies some time and leeway to improve year over year, but it’s not a two-year free pass. It’s progress, not perfection,” Goode said.

“There is no rule that says you cannot use these minerals in your products — because they are almost essential to many products. There is also no law against sourcing from the DRC,” Goode explained.

In fact, “we tell our clients not to put an embargo on DRC — they should source from DRC, because they need the trade and the business.” However, companies should focus on conflict-free sources within the DRC, he noted.

What is Section 1502?

The Dodd-Frank Act, passed by Congress in July 2010, directs the SEC to issue rules requiring certain companies to disclose their use of conflict minerals — certain minerals from mining operations in the DRC — if those minerals are “necessary to the functionality or production of a product” manufactured by those companies.


Congress enacted Section 1502 of the Dodd-Frank Act, which amends the Securities and Exchange Act of 1934, because of concerns that the exploitation and trade of conflict minerals by armed groups is helping finance serious human rights abuses in the DRC region.

The final rule, issued on Aug. 22, 2012, applies to companies that use 3TG minerals if:

* The company files reports with the SEC under the Exchange Act; and

* The minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company.

Issuers must comply with the final rule for the calendar year beginning Jan. 1, 2013, with the first reports due May 31, 2014, according to the SEC.

The Complexity of Compliance

There are a number of ways of dealing with the disclosure requirements, including by using software to keep track of supply chains and findings, or by working with an outside organization to investigate the use of conflict minerals by the company and its supply chain.

Because of the complexity of compliance, Goode said, companies that use these minerals may want to seek outside guidance.

“Some companies are going to overthink it and some will under-think it,” he said. “You want a pragmatic, repeatable program in place, because this isn’t a one-time thing. This law doesn’t look like it’s going away anytime soon.”

At the same time, the initial effort may require the most focus. A company putting a compliance program in place in Year 1, “won’t have to do the same thing in Year 2,” Goode said.

He cautioned, however, that taking “20 internal employees off their jobs to cover this Conflict Minerals_090113issue” may not be the most cost effective way to address compliance, because those employees will be taken away from performing their core jobs.

Organizations that opt to retain an outside expert should “look for someone who can help make up a program that fits within the confines of the existing infrastructure and doesn’t uproot the whole company,” Goode advised, adding that the goal is to make sure that “next year, the program is part of the way the company normally does business.”

Chris Caldwell, chief executive officer of LockPath, a risk management and compliance software company, agreed. Because companies will have to document their due diligence, this will become an ongoing “living, breathing thing,” within an organization, he said.

Caldwell said his company’s services are “not part of the decision of how companies remediate; we help by providing the initial standard questionnaires so they can perform the ‘reasonable country of origin’ inquiry and ask questions of their suppliers about where minerals are being sourced.”

If companies do discover these minerals in their supply chains, there are provisions within the reporting for them to declare that. The software provides questions to ask suppliers and establishes a protocol, he said.

Caldwell’s advice? Get started. “This is a whole new risk that needs to be analyzed and determined how it fits into the overall risk picture.”

He noted that there “are a lot of fine service providers out there that are experts within conflict minerals.”

Penalties of Noncompliance

While there are financial and reputational risks, “the SEC is not interested in putting a bunch of people in jail next year,” Goode said. What they are interested in is identifying companies that are “willfully misrepresenting their position” with the use of conflict minerals. At some point along the way, said Goode, these intractable companies are likely to find themselves facing “heavy fines and jail time on their hands.”

But even for companies that are not deliberately flouting the law, just appearing to be noncompliant could seriously impact a company’s reputation, said Chris Silva, an industry analyst at the San Mateo, Calif.-based Altimeter Group, an independent research firm focused on helping industries understand and develop strategies for market disruptions.


“I have seen it impacting the brand and marketing,” said Silva, “and how everybody from Apple to Samsung and anybody else making something with semiconductors in it is approaching the issue.”

Silva pointed out the instant repercussions when Apple decided to back out of the Electronic Product Environmental Assessment Tool’s (EPEAT) green electronics certification program.

“Apple simply backed out because EPEAT was placing restrictions on their supply chain,” said Silva. “It was placing conditions on their ability to audit things like the origins and disposal of components. As soon as they [Apple] did that, there was backlash. The backlash from the press and users was huge.”


Apple soon changed its position, amid reports that some government agencies and schools that use the EPEAT certification system might drop Apple products, such as iPads and Macintosh computers.

While the issue of conflict minerals may “still be a little abstract for the buyers of cellphones, the manufacturers are very aware of this issue,” Silva said.

“At the end of the day, until someone designs a better mousetrap in terms of semiconductors and things that power smartphones, they will require trace elements like tantalum — and those things are not widely available,” Silva said.

In fact, he added, some estimate that “all of the tantalum in the world would fit inside of a 200-square-foot room. So it’s extremely scarce and also critical to the devices that we use and rely on every day.”

Caroline McDonald reports on risk management and the insurance industry. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]