US law on conflict minerals comes into effectAug 24, 2012
This week, the Securities and Exchange Commission (SEC) of the United States adopted and published the rules concerning Dodd Frank 1502, the provision that was adopted two years ago and that requires companies to report on their use of ‘conflict minerals’. The publication of these rules signifies an end to more than two years of uncertainty. It outlines in detail what US-listed companies are required to report on if they make use of minerals that originate from the Democratic Republic of Congo (DRC ) and that finance conflict.
SOMO welcomes these rules as an important step towards closing the ‘governance gap’ by setting a first-of-a-kind legal framework that addresses specific human rights violations in the supply chains of companies. It constitutes an important and long overdue shift from voluntary mechanisms to legal requirements.
Legislation on DRC conflict minerals in the United States calls for a shift response from the European Union to proceed with the development of similar legislation regarding transparency and responsibility in the supply chains of European companies. Using the Dodd Frank Act as a basis, such legislation could be framed in a comprehensive manner to also include other countries of origin as well as other issues, such as poor working conditions or environmental degradation.
At the same time, SOMO recognizes that the rules are far from perfect, and that they provide a number of loopholes that would allow companies to continue business as usual, even if they are directly or indirectly fueling armed conflicts. More specifically, SOMO has identified three major weaknesses in the law, based on an initial analysis of the text of the SEC rules:
• Companies that only affix their brand, logo or label to a generic product manufactured by a third-party are excluded from the reporting requirements. At first glance, this seems to allow large retailers, a group that has lobbied hard against these regulations off the hook. Allowing such a group of companies not to exercise their due diligence may have the negative consequence of redirecting the flow of ‘conflict minerals’ to those retail-branded electronics products, rather than preventing such materials from entering international supply chains.
• Companies that have ‘no reason to believe that the minerals may have originated’ from the DRC or adjoining countries only have to disclose how they came to that conclusion, and are exempt from performing further due diligence. This could be interpreted as ‘rewarding ignorance’. As long as a company can argue that it is unable to determine the source of the minerals it uses, it does not need to file anything else (and avoid the added audit costs). Again, this might do little to prevent the flow of minerals marred with conflict from entering international supply chains.
• The SEC has allowed for a two-year grace period, in which companies are allowed to label their products ‘DRC conflict undeterminable’. This creates another, albeit temporary, incentive for companies to do nothing, preventing audit costs but also not contributing to blocking the financial flow to armed groups in the region. The ongoing severity of the conflict in the region implies the need for urgent action rather than more delays.
In addition to the issues identified in the recently released text, SOMO has previously raised concerns about the limited participation of Congolese stakeholders in this law-making process. Local civil society representatives have repeatedly called for an additional focus on state-building and security sector reform in the eastern DRC. These two complementary elements must be urgently undertaken to complement the current transparency efforts in order to achieve lasting peace in the DRC.
In recent years, several groups have warned about the negative effects of a de facto boycott and other developments as companies shift their supply chains away from the DRC. SOMO believes that a balance needs to be struck between regulations of international supply chains and local consequences. This can only be achieved through an inclusive process that fully takes local voices into account.