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The 'conflict minerals' conundrum

conflcit

The apparent leak of a draft presidential executive order at the beginning of February seemed to set the tone for the Trump administration: onerous regulation is not to be tolerated, and it would care not a whit about how that would appear to the world at large. It would not care whether such a move “sent the wrong signals” to murderous warlords in Africa, notorious for their use of child soldiers and sexual violence. What would matter was that a burdensome regulation was removed from the backs of US industry.

 

That, however, would be a simplistic interpretation of what did not actually happen. The leaked order – which may or may not have been genuine, or may have been a very early drafting exercise – would have waived the US conflict minerals regulations for a period of two years, during which time efforts would be made to take an alternative approach to sourcing minerals from the beleaguered Democratic Republic of the Congo (DRC) – an
approach that, said the draft, did not actually harm the region nor contribute to instability and thereby threaten US interests.

 

In 2010, the Dodd-Frank Act was passed and signed into law by President Barack Obama. Enacted in the wake of the 2008 global financial crisis, the law was designed to deal with the failings of Wall Street regulation. In addition, section 1502 of the Act required the Securities and Exchange Commission (SEC) to create regulations relating to ‘conflict minerals’, which it released in 2014.

 

Those rules applied to companies that were subject to SEC regulation – in effect, any company, including non-US businesses, with shares or bonds listed on Wall Street. They required such companies to investigate their supply chains and determine whether they use any so-called conflict minerals. These are commodities mined in the DRC or surrounding states – an area notorious for extremely dangerous armed rebel groups that use violence to secure funding from mining operations in the area.

 

The main minerals involved are often referred to as ‘3TG’ – tungsten, tantalum, tin and gold. Importantly, these minerals are regarded as conflict minerals even if mined in, for instance, Australia. In the somewhat convoluted vocabulary of the commission, the key issue is not whether a company uses conflict
minerals, but whether those conflict minerals are sourced from the DRC or surrounding area – whether they are ‘DRC-free’ conflict minerals.


No right to remain silent

 

When the SEC rules were first drafted, the business world was aghast. Even with the best will in the world, the supply chains of many businesses were simply lacking the necessary transparency to determine whether, say, the tungsten used in their products came from DRC, China, Portugal or Bolivia. Tracing tin supplies back to a particular smelter might be possible, but where the smelter itself sourced its raw material from could not always be determined with any certainty.

 

Legal action against the SEC rules was initiated in 2012 by the US industrial group National Association of Manufacturers, the US Chamber of Commerce and the Business Roundtable. The SEC fought valiantly but failed on one crucial point: in 2014 the rules were found by a Court of Appeals to violate the first amendment constitutional right to freedom of speech.

 

At the heart of this argument lay the particular rule with compulsory but tortuous wording. Companies that had successfully determined that their supply chains did not include DRC-origin conflict minerals were allowed to say that on their products and website – although they required an independent audit in order to verify the claim.

 

But companies that could not be absolutely sure whether the tin, tungsten, tantalum or gold in their products came from DRC were required by the regulations to label such products as “not having been found to be DRC conflict-free”. This fell foul of the constitution, being a self-tainting, negative statement.


Change of tone

 

With the inauguration of President Trump on 20 January, Michael Piwowar, a one-time Republican party economist who had been appointed an SEC commissioner by President Obama in 2013, was named as acting chairman of the commission. Suddenly, the regulator’s tone changed.

 

On 31 January, about a week before the apparent leak of the presidential order that would have waived the SEC rules, Piwowar asked for comments on the conflict minerals rule and the SEC guidance to be submitted by interested parties.

 

Even more significantly, on 10 February, a judge assigned the ongoing case against the SEC ordered the two sides to submit a joint status report by 10 March. The SEC in effect switched sides – or, at least, decided not to contest the litigation – and both the claimants and the commission informed the court that no further action was required. In effect, the most contentious part of the SEC’s conflict minerals rules – that relating to disclosure – was dead in the water.

 

What happens now? An imminent presidential executive order appears unlikely, says Dynda Thomas, a partner at law firm Squire Patton Boggs.

 

“It’s possible that those who are working on executive orders or memoranda directing executive agencies to take action are looking at these things very carefully because of all the legal challenges,” she says.

 

The SEC’s 2014 guidance on how to comply with the rules still stands, although the commission will not
be taking any further legal steps to fight for the disclosure rule that was found to be unconstitutional. A repeal of section 1502 could be passed by Congress, and there are two bills currently being considered that seek to do just that.

 

“It’s just a matter of time and a question of how this rule is either suspended, repealed or revoked,” Thomas says.

 

But she urges companies to not scale back their efforts to identify the source of conflict minerals in their supply chains. The next reporting deadline, 31 May, is imminent, “and there has been no change in what is required so they must push hard to prepare, just as they have in prior years. So meet, gather information from suppliers, do those things that are part of the due diligence framework.”

 

However, both activists and nongovernmental organisations (NGOs) will continue to scrutinise these reports and rank companies by their performance.

 

“It may be worth putting in some extra effort to ensure that, if this is the last report they are going to have to make, they put their best foot forward,” she says.

 

“And I’ve heard there are companies that are considering posting their reports and making them publicly available regardless of whether they are required to by the SEC.”


Europe’s new legislation

 

In any event, while the US is seemingly set to unwind the conflict minerals rules, the European Union is introducing them. On 16 March – fully aware of developments in the US – the European Parliament voted by 558 to 17 (with 45 abstentions) to approve new legislation that will affect all but the smallest EU importers of conflict minerals.

 

The EU law is broadly similar to the US rules, but is in some respects more onerous. It has a wider remit, covering all “conflict-affected and high-risk areas”, not just those in and around DRC. Although the reporting requirements for those do not really take effect until 2021, Squire Patton Boggs’s Thomas advises importers it “would be wise to take some action soon”, to start preparing and put themselves in the best position to comply with the requirements.

 

However inadequate the current US regulatory machinery may be, it is the best that is currently available. Campaigners are extremely concerned that waiving or repealing the regulations sends out the wrong signals to armed groups in central Africa.

 

“The whole point of [section 1502] was to remove the warlords,” Joanne Lebert, executive director of Partnership Africa Canada told CBC News.

 

“So this is going to send a signal that it’s carte blanche. They can do whatever they want.”

 

Washington-based NGO The Enough Project says the conflict in DRC has killed more than five million people since the late 1990s and is the deadliest conflict since the Second World War. The NGO’s Sasha Lezhnev told CBC News: “In 2010 the UN said nearly every mine was controlled by a military actor. Now, 79% of miners are working in mines that are conflict-free.”

 

In 2014, Intel CEO Brian Krzanich announced that all of the company’s microprocessors released that year would be DRC conflict-free. “As a shareholder, you should care about this,” he said in a speech at the SEC. “You should want us to address it. It did cost us a lot to set up this programme, but now it’s running, the cost of the actual materials is no more.”

 

This article is a piece of independent writing by a member of Procurement Leaders’ content team.

 

Andrew Sawers

Andrew Sawers -

Special Projects Editor, Procurement Leaders

Special projects editor for Procurement Leaders as well as a freelance journalist covering CFO and treasury matters