If your company isn’t among the estimated 6,000 publicly traded companies on the Securities and Exchange Commission and it isn’t a supplier of tantalum, tin, tungsten or gold, or of products containing said minerals, then you could be excused to skip ahead to the next article. For the rest, you may want to continue reading for the next few minutes.
Created as a tragic result of the genocide and humanitarian atrocities committed as part of the continuing conflicts in Central Africa, the term “Conflict Resources” now describes “natural resources whose systematic exploitation and trade in a context of conflict contribute to, benefit from or result in violations of international humanitarian law.” This may be best associated with the 2006 movie “Blood Diamond,” which depicted the brutal measures engaged by West African warlords to control the mining and sale of diamonds as a means of financing their military operations.
While the trafficking of conflict diamonds ultimately led to the “Kimberley Process Certification Scheme” ─ a process designed to identify a diamond’s origin ─ a similar effort took effect on Jan. 1 designed to identify the origin of regional “conflict minerals.” Included as an obscure addition to the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” Section 1502 on Conflict Minerals requires all public companies listed under Sections 13(a) or 15(d) with the SEC to audit their supply chains to identify if any products and/or production processes required tantalum, tin, tungsten or gold.
If the review produces a “Yes,” the company must determine whether those minerals are deemed “necessary” to the functionality of the product, or to the product’s production process. If this review also produces a “Yes,” Section 1502 requires the company to investigate whether those minerals originated in one of the 10 designated “Covered Countries:” the Democratic Republic of the Congo, the Republic of the Congo, Tanzania, Central Africa Republic, Burundi, South Sudan, Rwanda, Zambia, Angola and Uganda.
Should this review also prove positive, the company is further required to conduct “due diligence” on the source and chain of custody of its conflict minerals to determine whether the issuer’s minerals are “DRC conflict free,” — that is, that they neither directly nor indirectly financed or benefited armed groups in the Covered Countries. This requires being able to trace the mineral back to the mine of its extraction because not all mining operations are guerilla-controlled. And, because your resulting disclosure must be “filed” with the SEC, you are now subject to Exchange Act Section 18 liability for fraudulent or false reporting.
Although all parties agree that the cause is absolutely praiseworthy, it becomes immediately clear why industry groups such as the U.S. Chamber of Commerce and the National Retail Federation have been quick to criticize, as the initial data-mining efforts alone, as well as the supporting costs, are likely to be substantial.
In a New York Times article, Kraft Foods reported at a preliminary SEC roundtable meeting that its 40,000 products requires 100,000 suppliers, thus “creating a Herculean task of auditing supply chains for conflict minerals.” The National Association of Manufacturers also was cited as estimating that the cost to companies could run as high as $16 billion.
For any legislation to be meaningful, it must be effective and enforceable, while being balanced against adding undue cost or complexity to businesses or trade facilitation. Take, for example, the 2008 Lacey Act Amendments that intended to help stop the flow of illegal logging. The Subcommittee on Fisheries, Wildlife, Oceans and Insular Affairs in May held an oversight hearing in which Subcommittee Chairman John Fleming wrote: “These provisions are costing millions of dollars in compliance costs and subjecting Americans to literally thousands of foreign laws, regulations and decrees. I am disappointed that neither the Obama administration nor any of our witnesses presented any evidence on how the 2008 Amendments have stopped the illegal logging which was the fundamental reason given for enacting these changes in the first place.”
Nonetheless, Section 1502 of Dodd-Frank is a reality. If you’re just getting started, there already are a number of existing organizations, initiatives, programs and tools that can provide assistance. Many of these are listed, beginning on page 17, of the Government Accountability Office’s report on “Conflict Minerals Disclosure Rule” (GAO-12-763), available at www.gao.gov/assets/600/592458.pdf.
Jerry Peck is a licensed customs broker and Global Trade Management expert with more than 30 years experience in regulatory compliance and GTM optimization solutions. Contact him at 469-235-5229, or at firstname.lastname@example.org.