Update on Conflict Minerals and the Supply Chain

Stephen DeAngelis

August 24, 2012

Back in December 2010, I wrote: “The general public has not paid a lot of attention to the portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act that deals with ‘Transparency for [the] Extraction Industry.’ There is growing concern, however, among retailers and manufacturers about its potential effects.” [“Conflict Minerals” and the Supply Chain] Shortly after the Dodd-Franks Act was passed in July 2010, Jean Eaglesham and Jeremy Lemer wrote:

“The links between electronic devices such as smartphones and the bloody conflict in the Congo may to date have been largely invisible to most consumers. But a combination of increasing public pressure and a far-reaching new regulation in the US could well change this. A fresh law, buried in section 1,502 of the Wall Street reforms passed [in July 2010], will force many manufacturers to overhaul checks on their supply chain in an attempt to identify any ‘conflict minerals’ that can be traced back to the Democratic Republic of the Congo or adjoining countries. Thousands of companies will be affected by the law.” [“US law to squeeze ‘conflict minerals’,” Financial Times, 17 August 2010]

Eaglesham and Lemer went on to note, “That task of due diligence is not an easy one, given that the minerals pass through several stages – including a smelter process – between the mines and the assembly plant.” I concluded my previous post by stating, “Consumers are going to be tested as to whether their ethics or their pocketbooks mean the most to them. Supply chain traceability and reporting doesn’t come cheap and those costs are likely to be passed along to the consumers.” In fact, Jessica Holzer reports the SEC now estimates it will “cost companies a total of $3 billion to $4 billion upfront, plus more than $200 million a year” to comply with the transparency regulations. [“Wal-Mart, Target Avoid Mining Rule,” Wall Street Journal, 22 August 2012]

 

Efforts by manufacturers and resource extraction companies to gain relief from the transparency requirements of the Dodd-Frank Act have been largely unsuccessful. Shahien Nasiripour and Tom Burgis report:

“Oil and mining groups with US listings will be forced to disclose details of their payments to foreign governments after US regulators rejected most of the industry’s efforts to water down new transparency rules. The rules, intended to combat corruption and help make rulers of resource-rich nations more accountable to their people, will affect companies such as ExxonMobil, BP and Rio Tinto. They will also oblige manufacturers such as Apple to verify whether they use so-called conflict minerals from war-torn central Africa in their products.” [“Disclosure of government payments mandated,” Financial Times, 22 August 2012]

In an accompanying editorial, the staff at the Financial Times wrote:

“It has taken the SEC two years – much longer than Congress gave it – to finalise the rules, in no small part because of oil industry lobbying. Still, its final product, while not perfect, is much better than some had feared. On both rules, the SEC has resisted pressure for large loopholes. While one may be sceptical about whether monitoring will really prevent the use of conflict minerals, the transparency rule will make a real difference.” [“Sunshine rules,” 22 August 2012]

Bolaji Ojo, Editor in Chief of EBN, isn’t as optimistic as the folks at the Financial Times. He writes, “Perfect, clean, and 100 percent legally mined mineral materials from the Democratic Republic of Congo? That would be the day.” [“Illusions of ‘Conflict-Free’ Minerals,” 16 August 2012] Still, Tutu Alicante, an activist from Equatorial Guinea, told Nasiripour and Burgis, “This represents a milestone for the millions of impoverished people who live in resource-rich countries.”

 

There is a real concern on the part of oil, gas, and mining companies, however, that disclosing details of payments to foreign governments for drilling and mining rights is “like ‘giving [out] the formula for Coca-Cola’ and would leave US-listed groups at a disadvantage.” Nasiripour and Burgis report that “oil, gas and mining companies with US listings now face an awkward balancing act between the demands of regulators in Washington and those of governments that jealously guard the terms of their resource deals.” The Financial Times‘ editorial staff, however, isn’t buying any of it. It writes:

“There is little evidence for this fear. Payment structures are well known in the industry. Transparency only removes the competitive advantage provided by the ability to bribe; one that US-listed companies should in any case not deploy. Despite the grumbling, most companies will benefit from a cleaner industry.”

Simon Taylor, director of Global Witness, an anti-corruption group, told Nasiripour and Burgis “that if companies had ‘a concern about being disadvantaged then they should be joining us in trying to make a serious, meaningful global standard’.” The Financial Times‘ editorial staff applauded the fact that the SEC didn’t grant exceptions for secretive countries, like Qatar and Angola, stating, “Anything but a most comprehensive application of the rule creates incentives to bend the law that frustrate its purpose and cause an enforcement problem.”

 

Retailers fared better in their efforts to gain relief from the transparency requirements of the Dodd-Frank Act. Holzer reports, “Big retailers including Target Corp. and Wal-Mart Stores Inc. may largely escape a costly new rule that requires U.S.-listed companies to disclose whether their goods contain so-called conflict minerals that are blamed for fueling violence in central Africa.” She continues:

“Retailers lobbied to be exempted from the requirement, which will affect manufacturers of a range of products, including smartphones, light bulbs and footwear. The Securities and Exchange Commission had proposed an earlier version of the rule that would have applied to retailers carrying products sold under their own brand names, but which are typically produced by outside contractors. On Wednesday, however, the SEC voted 3-2 to adopt a final rule that would exempt companies that don’t exert direct control over the manufacture of such products.”

To the dismay of some groups, the new rules won’t go into effect immediately. Holzer reports, “Nonprofit groups wanted companies to take immediate steps to comply with the rule, rather than take advantage of a two-year transition period during which they could categorize certain products as ‘DRC conflict undeterminable.’ Corinna Gilfillan, head of the U.S. office of Global Witness, a human-rights group, said she was disappointed the SEC approved a two-year phase-in period for the rule, accusing the agency of caving to pressure from businesses.”

 

Another non-profit group, Enough Project, believes that progress is being made. Earlier this month the group “released ‘Taking Conflict Out of Consumer Gadgets: Company Rankings on Conflict Minerals 2012,’ its second report ranking company progress toward responsible and conflict-free supply chains.” [“Progress Being Made In Eliminating Conflict From Minerals Supply Chains,” by Amol Mehra and Katie Shay, Forbes, 16 August 2012] Mehra and Shay continue:

“The report shows that the majority of companies surveyed have made great strides in eliminating conflict minerals from their supply chains since first being evaluated in 2010. … Some of the significant successes include:

  • Intel, HP, and GE cofounded a smelter incentive program, which pays for smelter audits.
  • Intel was the first company to publicly commit to producing a fully conflict-free product – a microprocessing chip that will be produced by 2013.
  • HP has actively engaged to help Congo develop a clean minerals trade, as has Motorola Solutions.
  • Apple was the first to identify the number of smelters in its supply chain (175); since doing so, several companies have followed suit.
  • SanDisk published the names of each of its smelters and has begun auditing its suppliers.
  • Toshiba, Apple, HP, and Nokia implemented policies to require their suppliers to use only audited, conflict-free smelters, once enough are available.
  • Nokia, Panasonic, Philips, AMD, HP, and Microsoft have piloted internationally agreed-upon due diligence guidance on conflict minerals in line with the Organization for Economic Co-operation and Development due diligence model.

“These companies should be applauded for their efforts. Not only is this good for the people of the Congo, but it also evidences clear leadership in corporate social responsibility. With the coming release of final rules, stragglers in implementation will soon be forced to catch up. The efforts of these leaders have paved the way for them to do so.”

Bolaji Ojo isn’t quite as sanguine about the work being done by Enough Project. He calls the organization’s work “a farce.” He explains:

“The report issued today by the Enough Project makes it clear that, while ‘leading electronic companies are making progress in eliminating conflict minerals from their supply chains [they] still cannot label their products as being conflict free.’ Yet, the Enough Project gave at least four companies — Intel Corp., Motorola Solutions Inc, Hewlett-Packard Co., and Apple Inc. — high marks for being ‘pioneers of progress’ and said these companies ‘have moved forward to develop solutions despite delays in the legislative rule-making process by the US Securities and Exchange Commission.’ It also identified electronics manufacturers described as ‘laggards’ that are ‘standing out due to lack of progress and communication.’ Before you tar and feather the companies proclaimed ‘laggards’ by the Enough Project, understand this: You are most likely yourself an unwitting accomplice in whatever crimes are being committed in the Congo that propelled the US Congress to pass a law on the mining of the minerals. Furthermore, you may be as limited in what you can do to effect change as the companies that have been criticized sharply by everyone. You may be a laggard, yourself. The conflict minerals are in our phones, tablet PCs, computers, and much other high-tech equipment. They haven’t disappeared and won’t, simply because Congress passed one law or a thousand laws.”

Ojo is skeptical that any external effort will improve conditions inside the Congo because life there is complicated and corrupt. He notes that “minerals produced in known conflict zones don’t stay in the conflict zone; they can’t be used there.” If they can’t be sold to western firms, he says “they are simply shipped to China, where they get certified, losing their trace to the conflict zone.” He states that potential whistleblowers are beaten or killed. He doesn’t fault those who want to do something rather than nothing, but he fears such efforts might make life worse for those who “the law was meant to protect.” Although he doesn’t propose a solution to the dilemma, Ojo clearly believes that bringing the conflict in the Congo to an end and eliminating the warlords is the only way out of the nightmare. In the meantime, affected companies are going have to comply with Dodd-Frank.