Conflict Minerals & the SEC

The squabble over conflict minerals just won't go away. Congress passed a law that it thought would end the problem, and it turned the implementation over to the Securities and Exchange Commission. But the staid agency seems to have gotten itself entangled in a situation with more twists and turns than the US tax code.

President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law in July 2010, and the SEC planned to release its regulations on the act's conflict mineral provision before the end of 2011. Late last year, the agency moved the goal again. This gave electronics manufacturers another break in their long fight to ensure they can comply with the legislation. The guidelines are still under review and will be issued in the next six months — if everyone can agree on the terms and conditions.

Until it outlines and publishes the regulations, the SEC cannot enforce compliance with the conflict mineral provision. In effect, this might mean companies don't have to comply fully with the law. Or does it? I believe the delay in publishing the guidelines doesn't quite excuse manufacturers from obeying the intent of the law. In fact, anecdotal evidence provided by the IPC, a trade group for the electronics interconnect industry, indicate many suppliers have simply avoided buying raw materials from the war-torn parts of Africa referred to in the act.

The IPC is thrilled with the delay, because it believes the Dodd-Frank provision puts an unfair and onerous burden on component manufacturers and OEMs to prove that the raw materials of their products were not sourced from war-plagued areas where children have been used or are being used for mining. In an email to me, an IPC spokesperson further explained what the delay means for its members:

This means that companies whose fiscal year is the calendar year should have an additional year before having to report on their use of conflict minerals than they would have had the SEC issued the regulation in December. Of course, we hope that the SEC will include the measures we proposed like an interim indeterminate origin category and a phased implementation, among others, in its final regulation. The efforts of IPC, its Members, and industry colleagues have had an impact in helping the SEC and Congress understand the practical difficulties presented in the SEC's initial draft.

The IPC says it isn't trying to stop the implementation of Dodd-Frank as it applies to conflict minerals. Instead, it wants the SEC to consider the obstacles in complying with a law that puts the onus of proving the “cleanness” of raw materials heavily on manufacturers, as well as the potential impact on the communities where the minerals are being mined. The spokesperson said many of the mines that were operating legitimately are being closed, while the warlords targeted by the act continue to evade its long arms by scrubbing the materials mined in territories under their control.

The law is obviously imperfect, but the conditions it aims to end — slavery-like mining of metals bound for the electronics market, and using the proceeds to fund civil wars in places like the Congo — are appalling to many in the Western world. The cause has often been championed by human rights organizations concerned about criminal activity at the mines. For these organizations, any steps to end the proliferation of these mines are worth supporting.

Others have argued that Dodd-Frank threw the baby out with the bathwater. Mines operated by local citizens, many of whom have no connection with the warlords, have been hurt by the legislation. Rather than engaging in potentially fruitless efforts to ascertain the source of raw materials from these war-torn countries, many electronics manufacturers have simply refused to buy components from these countries. For OEMs and component suppliers, trying to prove these materials were sourced legally can be expensive and can easily degenerate into a public relations fiasco.

Will the SEC regulations, when finally adopted, help manufacturers sort out these thorny issues? I doubt it. By the time the regulations are proclaimed, more electronics manufacturers will have decided to stay completely out of the fray. The human rights organizations will have moved on to another front-burner issue. Legitimate miners will be out of business, and the warlords will have perfected the act of buying safe passage for their illicit products.

Dodd-Frank meant well, but winning this battle depends more on having stable, law-abiding governments in these contaminated mining zones.

11 comments on “Conflict Minerals & the SEC

  1. stochastic excursion
    January 13, 2012

    I totally agree with you on this, Bolaji.  Significant new regulations on thriving industries are rarely greeted with cooperation and conciliation.  In US history we only have to look at the Whiskey Rebellion, the Civil War, and Prohibition.

    In Prohibition, we finally decided that the moral benefits were nowhere near clear enough to justify the social upheaval that resulted.   If this is the case with conflict minerals, those closest to the situation will have to sort out.

  2. DataCrunch
    January 13, 2012

    This seems like a no win scenario.   

    January 15, 2012

    I read your article with interest and I believe your very last sentence sums up the whole situation perfectly.

  4. SunitaT
    January 16, 2012

    Dodd-Frank meant well, but winning this battle depends more on having stable, law-abiding governments in these contaminated mining zones.

    @Bolaji, very informative article. I totally agree with you that we need law-abiding governments to win this battle. I think whole world needs come together and support the idea of building a stable and law-abiding government in such war-torn countries.

  5. bolaji ojo
    January 16, 2012

    Dave, The group that benefits from this situation are the warlords. The Dodd-Frank reporting requirements is forcing out many of the local miners and squeezing supply. This will inevitably push prices up and, of course, the group that gets its products to market somehow will be the beneficiary and these are the illegal miners.

  6. DataCrunch
    January 16, 2012

    Bolaji, yup.  It sure seems that way.  I remember reading an article that had pleas from legitimate miners to the US government not to pass this legislation basically saying what you wrote about.  Although well intentioned and they appreciated those intentions that for them it was going to cause more harm than good.

  7. Jay_Bond
    January 17, 2012

    This situation seems to get more complicated as time goes on, and looks like there will be no winner. I understand the moral purposes of this law, but the government is fighting a no win situation. I tend to compare this battle with other lengthly and costly battles that still are unresolved. Gun control, if you ban guns out right the only people that will have guns are outlaws. A law won't stop them from having them. Drugs, look at the billions of dollars and decades of fighting this battle. Yet, there are still drug dealers everywhere.

    Even if the SEC can sort out its situation and starts enforcing the Dodd-Frank provision, the war lords and corrupt governments will still sell their precious minerals. This might stop some U.S based companies from buying these minerals, but the world demand will not dry up and people will continue to get exploited in these war-torn countries.

    The best defense is for a stable government willing to fight corruption and illegal activities.

  8. Anand
    January 18, 2012

    Bolaji, if many electronics manufacturers have simply refused to buy components from these countries what other alternatives do they have ? Can these manufacturers source the materials from different (stable) countries or can they substitue these minerals with any other minerals which have the same property ?

  9. Anand
    January 18, 2012

    This situation seems to get more complicated as time goes on, and looks like there will be no winner.

    @Jay_Bond, there will be no winner but even worse it will pinch the end users more because the scarcity of these minerals will push the prices which means end users have to pay more when they purchase these products.

  10. Barbara Jorgensen
    January 19, 2012

    It's maddening that doing the right thing becomes such a nightmare. Maybe if companies got ahead of this issue and boycotted the abusive mines voluntarily, there would be less of an impact on the economies of the effected areas. It's possible that the political aspects of the Dodd-Frank Act did more harm than good. It raised a huge outcry over legislation that doesn't really restrict anything, it just requires disclosure. AS SOX has proven, disclosure doesn't mean anything–there hasn't been one prosecution of SOX violations since the Act was passed. It's up to the Justice Department or other agencies to overse compliance and honestly, the SEC is the last place I'd look for vigorous action.

    BTW, does anyone remember how this particular legislation got attached to the bill? My impression is the rest of the Dodd-Frank Act has nothing to do with human rights violations.

  11. dalexander
    January 24, 2012

    Barbara, The Congo and Tantalum come to mind. There was a time when tantalum capacitors went through the roof due to demand outstripping supply. Enter the technology force of Necessity and Invention. Organic Polymer Caps with low ESR, first introduced by Sanyo, later others followed. What do you think would happen if every time a conflict mineral was identified, team of technologist went to work on finding alternative materials? This sounds overly ideal but think of the mounting number of chemicals on ECHA's list that are hazardous to humans that also need alternate materials in order to allow a company to continue to ship it's products into REACH mandated territories. Maybe some kind of blending mechanism of REACH alternative chemical research with conflict materials resolution, could be formalized as a legislated entity to make every conflict mineral region aware that they either resolve their conflicts or their market for whatever resource they are exporting will soon be shrinking dramatically. Hit them below the money belt…so to speak.

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