Business Ethos Blog

Conflict Minerals Law

Dr. David Mielke, Dean
College of Business at Eastern Michigan University

I am sure you have seen the movie “Blood Diamonds” and are aware of the world-wide ban on the trade in diamonds that some warring factions in Africa have been using to finance their operations.  This type of ban has now been extended to conflict minerals tin, tantalum, tungsten and gold from parts of the Democratic Republic of Congo.  Income from those minerals is blamed for fueling violence that has claimed millions of lives in eastern Congo.  There is a new federal law, part of the Dodd-Frank financial law passed in July, that requires public companies to report what steps they are taking to verify that minerals that they use in production weren’t taxed or controlled by rebel groups.  It is estimated that rebel groups made roughly $185 million in 2008 from dealing in the 4 minerals.  There is also a move by US regulators that could force retailers to report whether their store-brand goods contains those minerals from the Congo.  Products that don’t contain these minerals can be labeled as “DRC conflict free”.  Companies can still sell their products if they fail to verify their sources, but could face embarrassment.

A broad array of US companies use these minerals in the production of medical devices, cellphones, airplanes and machine tools, will be affected, but it is less clear whether or not retailers that have private labels, such as Walmart and Target will also be impacted.  The SEC has the power to determine who is considered a manufacturer under the law and therefore who must comply.  The SEC will start to require companies to report as early as mid-2012 whether or not products they made in 2011 contained conflict materials.  Tracing the source of minerals is extremely difficult because intermediaries stand between them and the mines.  There is also concern that many companies will stop sourcing these minerals from central Africa to avoid any possible problems.  This will have severe implications for countries there that legally produce those minerals and have thousands of people dependent on this economic activity.  Other sources are available since this area in Africa accounts for only 15-20% of the tantalum, 4 % of the tin and a very small % of the gold.

There are a number of issues to consider to answer “Is this the Right Thing to do?”

1. Is this the right thing to do to try to legislate where raw materials are sourced?  Is this “feel good” legislation that will have little if any results?  How can we effectively police this law?  I can understand the foreign corrupt practices act which makes it illegal to provide bribes in other countries, but is this a reasonable area to deal with at the company level?  I think it is a foreign affairs/state department issue that should be dealt with at an international level–UN perhaps?  Who will define what rebel groups are involved?  What about the unintended consequences of having companies refuse to purchase from even the legitimate producers and thereby impact the jobs of thousands of workers in those countries?

2. Is it the right thing to do to have this new law “attached” to the Dodd-Frank financial reform legislation?  What does this issue have to do with the new regulations for our financial institutions?  Attaching the law almost assures that there was no discussion of the issue in Congress.  If the DRC law is important it should have been introduced as separate legislation to assure public awareness and a needed debate as to how it was to be applied.  There is no guidance provided by that discussion whether retailers that produce private labels should be included.  This was not the right thing to do.

3. Why is the SEC responsible for implementation and  the regulations to implement the law?  The SEC is responsible for the financial information provided by companies and for oversight of the financial markets.  What does the trade in minerals have to do with their core functions?  The issues seems to relate to trade, or the state department or foreign affairs, not financial regulations.

4. Should private label retailers be included under this legislation?  Why should Walmart and Target be included?  They do not manufacture, they contract other companies to manufacture.  The actual producers should be required to verify their products as DRC free.

5. What about the timing?  There is a very short time line for companies to comply.  In effect, they have to start getting verification in 2011.  What if companies have outstanding supplies under contract?  Will they have time to pursue alternative sources, if needed?  The final regulations have not even been completed by the SEC and they have not yet determined which companies have to comply?  How can the SEC expect to have all of this change overnight?  It is the wrong thing to do to impose the new regulations so quickly.

Given the balance of these four issues, this latest move to regulate and force DRC free is the wrong thing to do.