Tracking Conflict Minerals

On Tuesday, the United States Securities and Exchange Commission held a public roundtable to discuss the agency's required rulemaking for how companies are supposed to "track and report" usage of conflict minerals. (Click here for the video of the two-hour meeting.)

The SEC was given the job of rulemaking by Congress as a result of the passage of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Obama signed into law over a year ago. The provision requires companies to submit an annual report to the SEC describing how they exercised due diligence in sourcing so-called "conflict minerals," including an independent private sector audit and a description of the products manufactured that contain the conflict minerals.

"We are committed to writing an effective rule as soon as possible, and the roundtable will help us do that," said Meredith Cross, director of the SEC’s Division of Corporation Finance, in an SEC statement prior to the hearing.

Electronics was represented by a number of companies including AMD and Tyco Electronics, together with executives from Kraft Foods, Boeing, Ernst & Young, and others.

The Dodd-Frank Act defines conflict minerals as those sourced from mines in the Democratic Republic of the Congo. They include gold, columbite-tantalite (coltan), cassiterite, wolframite, or their derivates or "any other mineral determined by the Secretary of State." These minerals are sources of tantalum, tin, and tungsten, all of which are used in electronics components, along with gold. The DRC produces about 18 percent of the world's tantalum, 7 percent of its tin, and about 3 percent of its tungsten.

There's a well documented connection between the mining of these minerals and the decades-long humanitarian crisis in the Congo that's claimed some 5 million lives, according to the UN and human rights groups. Armed groups and military units illicitly tax minerals at mines and along transport routes and generally abuse and harass workers. "The minerals trade is not the root cause but one of many factors perpetuating the conflict," according to a September 2010 report by the US Government Accounting Office.

The electronics industry has known about conflict minerals for many years. I remember the tantalum capacitor boom in the early 2000s when prices were sky-high and for a while tantalum capacitors became extremely scarce. It was then that we first learned that the shortage was caused by short supply of coltan coming out of the mines in the Congo. No one was overly concerned about the conditions workers faced in the mines. They just wanted to book their order of capacitors before the price went up again.

The sentiment at the US Department of Commerce and within the electronics industry is that while Section 1502 is well intentioned, requiring a whole new reporting bureaucracy is wrong-headed because it adds cost. I'm told that even politicians and business leaders in the DRC and Rwanda are telling the US they appreciate the spirit of the Dodd-Frank Act, but they are losing business because of Section 1502.

Still, the SEC is scheduling to adopt 1502 rules regarding disclosure related to conflict minerals by the end of the year. OEMs would be wise to survey their supply chain partners and ask probing questions about the origins of the materials they use. If your company is not already making these inquiries, you should start now.

There are two other things you should be doing besides asking questions, says Tom Valliere, senior vice president at Design Chain Associates LLC (DCA) . The first is to review your "content database." That's the one you created for RoHS and REACH compliance that tells you how much of what materials are used in any particular component and part. And it's the database that you'll need to update with point-of-origin data when the time comes to comply with the SECs rules for reporting.

In addition, you should start to actively monitor developments at the SEC. He also suggests getting involved in your trade association's activities around Section 1502. Valliere believes there's a valid business case to be made for knowing where parts, materials, and raw materials such as gold and tantalum are sourced.

Think about what happened after the earthquake in Japan this past March. Parts that manufacturers had no idea were being made in Japan suddenly were in short supply, causing production lines to shut down. If they had a point-of-origin database, they could have made a quick assessment of their exposure to the risk and adjusted accordingly.

Visibility across the supply chain is murky at best. Adding another layer of information will, in the long run, prove to be a good thing for business as well as being a legal requirement.