Responsible Gold Auditing Pankaj Chadha, Partner
Setting the Context Unorganized Sector - Key Concern Conflict Minerals - Key Concern Areas: Areas: Formal or informal industry ► standards are lacking; Money Laundering ► Health, Safety, security & ► Funding Illegal Conflicts, ► environment (HSSE)/ Conflict Supporting Armed Groups Minerals guidelines / monitoring lacking; Child, Forced Labour ► Working conditions, wages, ► health and safety aspects a concern; Human Rights Abuses ► Child labour and youth ► Economic Loss to Host ► employment is a common Country & Political Instability practice; Mixing of conflict-free & conflict ► Biodiversity Loss ► minerals is a big risk; can undermine efforts being taken by the organized sector; Operational Inefficiencies – ► Mining, Refining Page 2
Rising Global Consensus - Emerging Guidelines and Regulations 2012-13 EU building own legislation around Conflict Minerals Dodd Frank Wall Street Reforms & Consumer The European Union has been following the proceedings Protection Act passed in US 2011 over the Dodd-Frank Act and US debate to shape its own LBMA RGG Developed, and recommendations on conflict minerals legislation. In March Applicable for refiners from of 2014, the EU took a first big step in announcing a formal 2010 2012 proposal to “stop profits from the trade of minerals fuelling conflicts around the globe” . OECD launches Due Diligence Guideline for Conflict Minerals 2009 Congo Conflict Minerals Act (CCMA) introduced in US Senate 2005 Course of Events Council for Responsible Jewellery Practices (RJC) 2004-06 formed International Rescue Committee launches a global campaign to 2004 end the crisis at DRC UN resolves for arms embargo on DRC 2003 Militant groups financed to increase mining 1999-2003 Rwanda & Uganda invade DRC to exploit minerals Page 3
Audit Developments and Regional Perspective Auditing Standards and Regulations Industry Response International brands, such as Tiffany & Co. and LVMH, want their suppliers & ► LBMA - No of sites certified with The vendors to be certified. Many of them are pushing Responsible Jewellery London Bullion Market Association Council (RJC) and World Gold Council (WGC) guidelines to be followed. 100 86 Industry associations upped the anti on conflict minerals cause; LBMA ► 74 80 launched stand-alone Responsible Gold Guidance for refiners in 2011. This framework is mandatory for all refiners wishing to sell into the London Bullion 60 Gold rating Market. 40 Silver rating 22 20 9 Similarly, Conflict Free Sourcing Initiative (CFSI), currently having more than ► 1 1 200 companies and trade associations as members, promotes Conflict Free 0 Smelter Program, developed according to leading global standards such as World India China OECD guidelines. The US senate signed into federal law in July 2010 the Dodd-Frank Act. ► CFSI - No of refiners/smelters compliant Within the Act, Section 1502 deals specifically with the use of conflict with conflict free gold smelter program minerals. On 22 August 2012, the US SEC issued a final rule to implement 75 the new disclosure requirements required by Dodd–Frank. The SEC 80 estimates that around 6,000 issuers will be directly impacted by the rule 60 40 EU is now developing its own regulation for Conflict Free Minerals. Mostly in ► line with the Dodd-Frank Act, it deviates at one major aspect. Rather than 20 8 8 starting at the brand level, the EU proposed to focus on self-certification of 1 direct importers and smelters of the 3T’s and Gold because they are closer to 0 the source of the minerals. However, after recent rejection by the European Total Indian sites Chinese Sites in parliament, it is likely that the proposed law would require mandatory due sites USA diligence by smelters & refiners. Page 4
Why Focus on Supply Chain- Risks and Related Ask • Does SCO provides me with competitive advantage? Strategic • Does it assist me in reducing cost and waste? • Does it address climate change & sustainability agenda of the company? Differentiation Risk • Does the company’s climate change agenda appropriately covered in audit plan? • Sustainable labor policies? • Conflict minerals? Compliance Risk • Sales lost due to non-compliance? • Sales improved due to compliance? • Risk of compliance on directors & KMPs? • Cost of purchase? • Margins? Financial Risk • Volume increases? • Fund raising? • Investors agenda? • SCO errors impact on reputation? Reputation Risk • Advertisement & publicity strategy for SCO strengths? • Good practices v/s best practices? • Quality considerations- cost of conversion? Operational Risk • Talent impact? Page 5
Value-Adds of Responsible Gold Audit Responsibly sourced gold enables TRANSPRERANCY throughout the supply chain. This ensures that gold is sourced from conflict free zones and is delivered to the investor/customer without any possibility of blending with gold sourced from conflict regions. • License to enter and sell in certain markets • Develop a long term business relationship with their commercial partners; Miner / Refiner • Get a fair price for the gold • Fairtrade practices lead to improved economical, social and environmental performance • Fulfil requirement of customers for conflict free gold Supplier • Ink long term agreements with their clients • Associate with leading trade associations and organizations globally • Ensure credibility of the gold Broker / Retailer • Provide a conflict free gold to customers with confidence • Establish sustainable supply chain of conflict free gold • Customers that are looking for conflict free gold are ensured that their gold comes Customer from a conflict free region • Contribute towards a sustainable tomorrow Page 6
Opportunities for Indian Gold Sector Opportunities: Current State: India continues to be a major consumer of gold, however most demand is met through Considering the amount of Gold held by Indian import households, ~25,000 Tonnes, and the high demand, India Gold sector anticipates many more refineries for monetising and attracting foreign direct investment (FDI) India often imports around 600 to 900 tonnes per annum, which is roughly 25 per cent of the global annual production of bullion With growing international pressure and focus on conflict minerals, the FDI is expected to flow to responsible players in the sector; existing and new players will have to demonstrate strong compliance Despite this high demand, at present there are with international guidelines on Responsible Gold only 32 refiners in India. Baring a few, most refiners are not following Considering changing Indian regulatory landscape, any of the leading global guidelines on conflict New Company’s Act 2013, SEBI-National Voluntary minerals Guidelines on Responsible Business, Draft Gold Monetization Scheme, Financial Reporting under IFRS equivalent Standards, GST, ICDS etc., the focus is increasing on the industry for transparency. It MMTC-PAMP is the first and the only London is the perfect time for the Indian Gold Industry to Bullion Markets Association accredited gold improve its practices and align itself with International and silver refinery in the country standards Page 7
Approaching Responsible Gold Audit • Define your stand and policy Establish strong • Management structure and systems company • Review and disclosure mechanisms management system • Establish communication channel with supply chain counterparts Identify and assess Design and implement • Identify risks in Gold • Define strategy of risk risks in the supply a management supply chain management chain • Assess risks in light strategy to respond to • Identify responsibility risks of global standards holders and actions Periodic Cycle Transparency: Report Arrange for an • Disclose on findings on findings and independent third- • Devise action plan • Identify accredited, improvement aspects and timeline for party audit of supply authorized auditors identified chain observations Page 8
Way Forward - Roadmap The consumers and traders are becoming aware and active players of responsible sourcing supply chain of gold. Therefore, it is inevitable for Indian gold refiners, smelters and traders to adopt practices that are in line with the global trend. All the actors across the supply chain must establish a transparent tracking mechanism Leads to competitive market and obtain responsible sourcing certificate Long term agreements between the refiner - Ensures business continuity and supplier and between supplier - provides bandwidth for such initiatives trader/consumer are required Once long term agreements are in place, the cost of maintaining responsible supply chain Ensures cost is not burdened on a must be divided amongst different players particular player in the supply chain across the supply chain Due diligence (Internal and third party) must Ensures credibility across supply be made compulsory across supply chain chain even beyond conflict risk areas. So the next important question is whether the Indian Gold Sector is ready and wiling to participate in such initiatives which will enable them to attain International Standards… Page 9
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