New Rules On “Hot Rocks” Further Impact Corporations and Financial Institutions
The Democratic Republic of Congo (formerly known as Zaire), or DRC, has been called one of the most violent places on earth. A long-standing zone of economic and military strife, this area is no stranger to sanctions programs and intervention efforts to bring peace to this war-torn region of the world. Many efforts since 2006 have included various economic sanctions programs concerning “conflict minerals” mined from this region.
The term ‘conflict minerals’ has been used in orientation to mining and extraction of minerals in conditions of armed conflict and human rights abuses, notably in the eastern provinces of the DRC by the Congolese National Army, and/or various armed rebel groups, including the Democratic Forces for the Liberation of Rwanda (FDLR) and the National Congress for the Defense of the People (CNDP), a proxy Rwandan militia group, to name a few.
The looting of the Congo’s natural resources, however, is not limited to domestic actors alone. During the Congo Wars, Rwanda, Uganda and Burundi especially benefited from plundering the Congo’s resources – continuing to smuggle resources out of the Congo to present day.
‘Conflict minerals’ are metal ores that, when mined and then sold or traded, have played key roles in helping to fuel and fund conflict and human rights exploitations, since the mid to late 1990’s, in the eastern portion of the DRC. The primary conflict minerals are comprised of what many refer to as the “3TGs”: mineral deposits of tantalum and niobium, tungsten, tin, and gold, and their derivatives.
Mines in eastern Congo are frequently located away from populated regions, often in both remote and treacherous areas. A recent study indicates that armed groups are present at more than 50% of mining sites. At many sites, armed groups – often affiliated with rebel groups, or with the Congolese National Army – illegally levy (tax), strong-arm and otherwise extort civilians to forcibly work in the mines; often including women and children in these forced labor efforts. Both the Congolese National Army and the rebel groups have been known to repeatedly use rape, torture and other forms of violence to control the local population.
Minerals mined in Eastern Congo pass through the hands of various middlemen as they are shipped out of Congo, through neighboring countries such as Rwanda or Burundi, to East Asian processing plants.
Because of this, the US Conflict Minerals Law generally applies to raw materials originating (or claimed to originate) from the DRC, as well as the neighboring countries of Angola, Burundi, Central African Republic, Congo Republic (a different nation than DRC), Rwanda, Sudan (and South Sudan), Tanzania, Uganda, and Zambia.
Diverse international efforts to sever the link between mineral commerce and the conflict in central Africa have been ongoing for some time through sanctions initiatives put into place by the United Nations, the European Union and through US Treasury Sanctions promulgated by the Office of Foreign Asset Control (OFAC).
Through implementation of The Dodd–Frank Wall Street Reform and Consumer Protection Act, the U.S. Securities and Exchange Commission (SEC), is also fully entrenched in the issue of ‘conflict minerals’ from the Great Lakes Region of Africa.
Section 1502 of Dodd-Frank instructs the SEC, in consultation with the U.S. Department of State (USSD), to promulgate regulations requiring certain companies, to submit annually, a description of the measures taken to exercise due diligence on the source and chain of custody of ‘conflict minerals’. The provision specifically mandates three steps for companies to follow:
Determine if tin, tungsten, tantalum and/or gold are used to make its products.
1. Determine if the metals they use originated in the DRC or neighboring countries. If the metals did not originate in affected nations, companies must report how the company determined the metals’ origins.
2. If the metals were from DRC or adjoining countries—or the source is unknown—companies must trace the supply chain for the source and furnish “Conflict Minerals Report” (CMR) on those due-diligence efforts
Under this rule, companies will file their first specialized disclosure report on May 31, 2014, for the 2013 calendar year and annually on May 31 in subsequent years.
The intent of this provision is – through increased transparency of companies‘ sourcing practices – to deter the extreme violence and human rights violations in the DRC and neighboring countries funded by the exploitation and trade of these ‘conflict minerals’, which are used in a wide variety of products. Key industries impacted by conflict minerals include aerospace, automotive, computers, communications, construction, electronics, glass, industrial equipment (including tools and machinery), jewelry, lighting and medical and dental equipment.
U.S. component manufacturers soon will legally be required to disclose their usage of conflict minerals to the federal government. And to further complicate things, several states including California, Maryland (and soon to include Massachusetts), and cities like Pittsburgh, PA and St. Petersburg, FL have passed their own legislation requiring compliance with Section 1502.
With preparation time rapidly running out, many companies are “traumatically unprepared for these new regulations. According to a recent survey from information and analytics provider HIS, more than one-third of responding firms indicate that they have not initiated their compliance planning.
One issue being raised focuses on the strain that this added due diligence puts on the company-supplier relationship, especially with respect to due diligence conducted upstream beyond the second tier and third tier companies. The strain may be more pronounced in certain countries where companies tend to place an abundantly high value in maintaining goodwill with existing suppliers and do not want to impose upon those relationships. A compounding reality is that there are not 20 or 30 choices for these minerals. Gold maybe but niobium and tantalum, may be not. Another issue is (as always) the cost of compliance, regarding time spent to conduct this due diligence. And, there is considerable insecurity among issuers and even advisors as to exactly how to fully comply.
The Organization for Economic Co-operation and Development (OECD) and industry associations have created due diligence guidance related to Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. The OECD guidance provides the following:
• An overarching due diligence framework for responsible supply chains of minerals from conflict-affected and high-risk areas
• A model mineral supply chain policy providing a common set of principles
• Suggested measures for risk mitigation and indicators for measuring improvement which upstream companies may consider with the possible support of downstream companies; and
• Two Supplements on tin-tantalum-tungsten and gold tailored to the challenges associated with the structure of the supply chain of these minerals.
The OECD Guidance also includes specific due diligence recommendations articulated on the basis of companies’ different positions and roles in their supply chains. (Additional information is available in the pdf document noted in the endnotes to this article .)
Companies using these conflict minerals, or their refined metal derivatives, should first consult the red flags listed in each Supplement in the OECD Guidance to determine if the due diligence processes described therein are applicable.
Key elements in this process should include adoption and implementation of the following five-step approach (at a minimum):
1. Establish strong company supply management systems
2. Identify and assess risks in the supply chain
3. Design and implement a strategy to respond to identified risks
4. Carry out independent third-party audit of smelter/refiner’s due diligence practices
5. Report annually on supply chain due diligence
However, exactitude on certain issues, such as to “What specific degrees of certainty must organizations know where their conflict minerals came from?” still loom large in the compliance process. Questions such as these seem unlikely to be fully answered in the very near term.
One thing is for certain: this issue is not going away. Corporations are required to make the effort to implement appropriate compliance programs regarding conflict minerals. Financial institutions that engage in trade finance must also be sure to properly incorporate proper monitoring provisions relative to conflict minerals in place in light of both new and existing regulations and compliance programs that both address trade and economic sanctions.
Establishing a comprehensive framework that embodies not only this latest Rule 1502 under Dodd-Frank, but also existing global economic and trade sanctions and your internal policies and procedures that address supply chain issues concerning Bribery and Fraudulent Misrepresentation of Minerals Origin, Trade-Based Money Laundering and Physical Security Issues into a cohesive program seems to offer the most cogent approach. But, the clock is ticking…
By Shaun M. Hassett, CAMS, CDDP, Financial Examinations and Evaluations, Inc.