Executive Briefings

Time to Extract Conflict Minerals From Global Supply Chains

It's time for high-tech, automotive and other manufacturers to get their act together on the issue of conflict minerals coming out of the Democratic Republic of the Congo. Later this year, the U.S. Securities and Exchange Commission will publish final rules on a new law that requires publicly traded companies to disclose whether their products contain certain minerals that were mined in the DRC. And while the law doesn't ban the use of those materials outright, it's going to have a big impact on global supply chains.

The DRC is a major source of several essential minerals or metal ores, including columbite-tantalite (tantalum), wolframite (tungsten), cassiterite (tin) and gold. They are found in everything from cell phones and computers to automotive parts. According to the International Peace Information Service, about half the mines that produce those materials are controlled by armed rebels or rogue soldiers, products of the bloody and seemingly endless civil war in the DRC and neighboring states. They engage in wholesale violence, rape and worker exploitation, including child labor.

Human rights organizations such as The Enough Project have been working for years to raise awareness of the issue. High-tech manufacturers have been slow to respond, arguing that it's difficult if not impossible to trace the origin of every element that goes into a finished product. Now they're about to get a push from the U.S. government. Buried within the massive Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama in July 2010, is the new reporting requirement. Known as the Congo Conflict Minerals Act of 2009, the law requires publicly traded manufacturing companies to report annually to the SEC if they use conflict minerals from the DRC or nine adjoining countries that are "necessary to the functionality or production" of their products, whether they make them directly or employ contract manufacturers. Affected companies that operate mines must also meet strict reporting requirements about worker health and safety practices.

To comply with the law, manufacturers will have to map their supply chains from end to end, and be intimately familiar with the sourcing practices of all suppliers. That's an especially tough requirement to meet, given that high-tech materials are routinely mixed with supplies from all over the world, and pass through multiple steps of processing before being incorporated into finished products. So get ready for a bureaucratic headache.

It's not an impossible task, however. Industry trade groups are already devising programs to help their members comply with the law. The Electronic Industry Citizenship Coalition has undertaken a number of initiatives, including a smelter validation program which seeks to identify the origin of materials at this key "choke point" in the chain, in the words of Aaron Hall, policy analyst with The Enough Project. The Automotive Industry Action Group is helping suppliers in that industry to prepare for the new regime.

Some questions remain unanswered. According to Paul Laurenza, partner in the law firm of Dykema Gossett PLLC, the law's language is hazy about what constitutes a material that is "necessary to the functionality" of a product. Does a car radio fall into that category? Defined strictly in terms of transportation, the obvious answer is no, meaning that the manufacturer isn't required to report the presence of conflict minerals in the unit. But if you consider the vehicle's overall economic or marketing value, you come up with a different conclusion.

The term will likely be clarified by SEC when it drafts its final rule, which is due out some time in August. Even then, says Laurenza, "there may still be situations where the rule provides examples of guidance without having specific definitions." For example, there might not be a strict standard for what constitutes a "reasonable" country of origin enquiry. As with so many laws, key provisions of the act will still rely on human judgment.

By restricting itself to publicly traded companies, the law appears to contain at least one giant loophole. What's more, SEC's mandate extends only to reporting; the agency won't have the power to ban the use of conflict minerals in products sold in the U.S.

Don't think, however, means exempted companies can skate on the requirement. Because a typical high-tech or automotive supply chain involves so many partners, even those that aren't regulated by the SEC will have to comply to some degree. The commission has estimated that some 6,000 publicly trade companies will be directly affected, but Laurenza says the "funnel-down" effect will end up involving "thousands of other companies," include those that are privately held or foreign-owned.

The DRC isn't the only place to source those crucial minerals, but it's a major player. Hall quotes estimates that Eastern Congo is responsible for anywhere from 30 to 60 percent of the world's supply of tantalum, 8 to 10 percent of cassiterite and 5 to 7 percent of tungsten. (The amount of gold is harder to quantify, although it probably doesn't approach the numbers for the other three.)

So the amounts are small enough to make feasible a total boycott of materials from the region, if that's the way image-conscious businesses want to go. Surprisingly, notes Hall, The Enough Project isn't advocating that extreme a measure. There are also legitimate mines within the DRC, which relies on the trade to prop up its shaky economy. (Even if the lion's share of that business is smuggled out of the country and doesn't contribute a dime to tax revenues.) The group is simply asking companies to be fully aware of every link in their supply chains, with an eye toward devising a system of certification that could eventually cut off the funds that are flowing to the rebels and soldiers.

Now would be an excellent time to get started. The Organization for Economic Cooperation and Development recently hosted a conference in Paris with governments, private companies and non-governmental organizations to hash out new guidelines for eliminating conflict minerals from consumer products. Hall says OECD has already passed diligence standards that have been endorsed by the United Nations Security Council, which has the power to sanction companies that are buying from rebel groups. A new bill introduced in the California legislature would stop the state government from doing business with companies that don't adhere to the U.S. federal reporting rule. So measures aimed at stopping the trade might soon get some teeth.

"It takes time to understand what your process is going to be, and to put that in place," says Sheryl Toby, another Dykema Gossett partner in the firm's automotive practice. "The thought process really has to start now."

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It's time for high-tech, automotive and other manufacturers to get their act together on the issue of conflict minerals coming out of the Democratic Republic of the Congo. Later this year, the U.S. Securities and Exchange Commission will publish final rules on a new law that requires publicly traded companies to disclose whether their products contain certain minerals that were mined in the DRC. And while the law doesn't ban the use of those materials outright, it's going to have a big impact on global supply chains.

The DRC is a major source of several essential minerals or metal ores, including columbite-tantalite (tantalum), wolframite (tungsten), cassiterite (tin) and gold. They are found in everything from cell phones and computers to automotive parts. According to the International Peace Information Service, about half the mines that produce those materials are controlled by armed rebels or rogue soldiers, products of the bloody and seemingly endless civil war in the DRC and neighboring states. They engage in wholesale violence, rape and worker exploitation, including child labor.

Human rights organizations such as The Enough Project have been working for years to raise awareness of the issue. High-tech manufacturers have been slow to respond, arguing that it's difficult if not impossible to trace the origin of every element that goes into a finished product. Now they're about to get a push from the U.S. government. Buried within the massive Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama in July 2010, is the new reporting requirement. Known as the Congo Conflict Minerals Act of 2009, the law requires publicly traded manufacturing companies to report annually to the SEC if they use conflict minerals from the DRC or nine adjoining countries that are "necessary to the functionality or production" of their products, whether they make them directly or employ contract manufacturers. Affected companies that operate mines must also meet strict reporting requirements about worker health and safety practices.

To comply with the law, manufacturers will have to map their supply chains from end to end, and be intimately familiar with the sourcing practices of all suppliers. That's an especially tough requirement to meet, given that high-tech materials are routinely mixed with supplies from all over the world, and pass through multiple steps of processing before being incorporated into finished products. So get ready for a bureaucratic headache.

It's not an impossible task, however. Industry trade groups are already devising programs to help their members comply with the law. The Electronic Industry Citizenship Coalition has undertaken a number of initiatives, including a smelter validation program which seeks to identify the origin of materials at this key "choke point" in the chain, in the words of Aaron Hall, policy analyst with The Enough Project. The Automotive Industry Action Group is helping suppliers in that industry to prepare for the new regime.

Some questions remain unanswered. According to Paul Laurenza, partner in the law firm of Dykema Gossett PLLC, the law's language is hazy about what constitutes a material that is "necessary to the functionality" of a product. Does a car radio fall into that category? Defined strictly in terms of transportation, the obvious answer is no, meaning that the manufacturer isn't required to report the presence of conflict minerals in the unit. But if you consider the vehicle's overall economic or marketing value, you come up with a different conclusion.

The term will likely be clarified by SEC when it drafts its final rule, which is due out some time in August. Even then, says Laurenza, "there may still be situations where the rule provides examples of guidance without having specific definitions." For example, there might not be a strict standard for what constitutes a "reasonable" country of origin enquiry. As with so many laws, key provisions of the act will still rely on human judgment.

By restricting itself to publicly traded companies, the law appears to contain at least one giant loophole. What's more, SEC's mandate extends only to reporting; the agency won't have the power to ban the use of conflict minerals in products sold in the U.S.

Don't think, however, means exempted companies can skate on the requirement. Because a typical high-tech or automotive supply chain involves so many partners, even those that aren't regulated by the SEC will have to comply to some degree. The commission has estimated that some 6,000 publicly trade companies will be directly affected, but Laurenza says the "funnel-down" effect will end up involving "thousands of other companies," include those that are privately held or foreign-owned.

The DRC isn't the only place to source those crucial minerals, but it's a major player. Hall quotes estimates that Eastern Congo is responsible for anywhere from 30 to 60 percent of the world's supply of tantalum, 8 to 10 percent of cassiterite and 5 to 7 percent of tungsten. (The amount of gold is harder to quantify, although it probably doesn't approach the numbers for the other three.)

So the amounts are small enough to make feasible a total boycott of materials from the region, if that's the way image-conscious businesses want to go. Surprisingly, notes Hall, The Enough Project isn't advocating that extreme a measure. There are also legitimate mines within the DRC, which relies on the trade to prop up its shaky economy. (Even if the lion's share of that business is smuggled out of the country and doesn't contribute a dime to tax revenues.) The group is simply asking companies to be fully aware of every link in their supply chains, with an eye toward devising a system of certification that could eventually cut off the funds that are flowing to the rebels and soldiers.

Now would be an excellent time to get started. The Organization for Economic Cooperation and Development recently hosted a conference in Paris with governments, private companies and non-governmental organizations to hash out new guidelines for eliminating conflict minerals from consumer products. Hall says OECD has already passed diligence standards that have been endorsed by the United Nations Security Council, which has the power to sanction companies that are buying from rebel groups. A new bill introduced in the California legislature would stop the state government from doing business with companies that don't adhere to the U.S. federal reporting rule. So measures aimed at stopping the trade might soon get some teeth.

"It takes time to understand what your process is going to be, and to put that in place," says Sheryl Toby, another Dykema Gossett partner in the firm's automotive practice. "The thought process really has to start now."

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