United States: Revisiting The Conflict Minerals Rule

Last Updated: February 10 2015
Article by Alex J. Brackett and Yves Melin

Companies listed in the U.S. are required by Section 1502 of the Dodd-Frank Act to report whether they manufacture products that incorporate so-called conflict minerals (defined as gold, tin, tungsten and tantalum coming from the Democratic Republic of Congo and its neighboring countries). The first part of this article reviews the conflict minerals rules of Dodd-Frank, and assesses their impact. In the authors' view, Dodd-Frank has failed to achieve its objective to reduce the financing of armed conflicts in Eastern Congo through the illegal trade in minerals, and has created a de facto embargo against minerals mined responsibly in the region.

The European Commission proposed in March 2014 conflict minerals rules for the EU. The second part of this article summarizes the proposed Regulation (and the impact assessment report and studies underpinning it), compares the EU proposal with the U.S.'s Dodd-Frank, and critically reviews it in view of its stated objective. In the authors' opinion, the EU proposal helps improve the ability of operators to perform due diligence of their supply chain. But it does not contain any meaningful incentive meant to foster the responsible sourcing of minerals from conflict areas. If adopted as such, the proposed EU rules are likely to result in the same embargo as the one Dodd-Frank created, but for the EU this time, and for potentially a lot more countries than the African countries targeted by Dodd-Frank.

1. INTRODUCTION

When the United States Congress included a much-criticized conflict minerals disclosure rule in the Dodd- Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") in 2010, it did so with the best of intentions. The so-called "Conflict Minerals Rule" (section 1502 of the Act) was meant to help address an ongoing humanitarian crisis in the Democratic Republic of Congo (the "DRC") and adjoining countries by requiring companies that report to the Securities and Exchange Commission ("SEC") to disclose the use of certain conflict minerals in the products they manufacture or contract to manufacture. Whether the Conflict Minerals Rule will prove to be effective in accomplishing its goals of limiting the funding of armed groups through the exploitation of mineral resources very much remains to be seen. As commentators and industry closely analyze the first round of required disclosures, which were submitted in early June 2014, the initial returns appear to be that the cost to industry to comply with the rule were higher than expected, participation was far lower than expected, and the net result of the rule may be initiation of a highly-counterproductive de facto embargo of conflict minerals originating in the DRC and adjoining countries.

As the European Union ("EU") is working to design and implement its own conflict minerals disclosure mechanisms, it is worth revisiting the grand experiment of the Conflict Minerals Rule and whether it is workable to forcibly leverage private industry to accomplish social changes that are typically reserved for action at a national government level, and via inter-governmental and non-governmental organizations.

The critical challenge of the Conflict Minerals Rules is the inherent tension between forcing risk-averse companies to make disclosures that could invite public scrutiny and loss of shareholder value without having those companies eliminate the DRC and adjoining countries from their conflict mineral supply chains. In fact, the humanitarian goals of the Conflict Minerals Rule can only be accomplished if legitimate buyers remain engaged in the region. This means that the artisanal and small-scale mining and trading industries1—which are economically critical to the region—must in particular be supported to improve their commercial viability, legitimacy and professionalism, and to ensure they have the capacity to identify and manage the risks that determine their ability to deliver "conflict-free" minerals to the market. If the adoption of these rules produces the opposite outcome—further marginalization and criminalization of these miners—then it is failing to meet its humanitarian goal.

Because current conflict minerals disclosure rules and proposals lack proper incentives to source minerals responsibly from the conflict and neighboring regions, a large proportion of the companies subject to such rules appear to have chosen the simpler due diligence route of avoiding potentially-problematic sourcing of conflict minerals from the DRC, adjoining countries and in some cases even Africa at-large. Changing this response to disclosure rules will likely require the United States and other stakeholders to provide incentives to companies to source in-region. Only through commercial reinvestment in the legitimate mining industries of the African Great Lakes region can the ultimate goals of conflict minerals disclosure rules be achieved.

However, such reinvestment is unlikely to occur without critical improvements to industry infrastructure, such as: improving the general business climate in affected African Great Lakes nations by working with governments to attend to existing commercial barriers and risks (e.g., fiscal, infrastructure, corruption, bribery, import/export, banking, etc.); nurturing the capacity of business operators to conduct due diligence; helping civil society act as an effective monitor and whistleblower for flagging risks; and supporting the range of still-nascent mineral supply chain certification programs working upstream and downstream to improve supply chain transparency and risk management as the basis for generating market confidence. None of this will happen if private stakeholders chose to avoid conflict areas to comply with disclosure requirements imposed by the U.S., and possibly soon by the EU as well.

Ultimately, the Conflict Minerals Rule and its coming EU counterpart are forced to operate in a politically fraught environment that is preventing existing due diligence systems from coming to scale for the covered minerals, and an equally challenging commercial environment that is resistant to adopting new due diligence systems. The United States government and the governments of the EU's Member States can impact, through development aid and political pressure, the attitude, policies and actions of authorities in conflict areas. They can also have an impact on the behavior of private stakeholders, by setting up the right incentives to avoid de facto embargoes and instead drive responsible investment, including creating a market for responsible minerals sourced from conflict-affected and high-risk areas. This will bring local businesses the stability and capital they need to invest in due diligence and improve the situation on the ground.

To read this article in full, please click here.

Originally published by Global Trade and Customs Journal.

Footnote

1. "Artisanal" or "small-scale" mining is subsistence mining conducted by individuals or small groups of individuals working independently, typically with hand tools. "Smallscale" mining is more organized, often with a profit motivation, and semi-mechanized. artisanal and small-scale mining may occur seasonally or year-round. Up to 30 million persons are believed to engage in artisanal mining in over 70 developing nations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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