Verisk 3E

Conflict minerals 101

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Courtesy of Verisk 3E

Blood diamonds have been replaced by a new hot-button topic - 'conflict minerals'. A core difference is that far more industries are affected with conflict minerals than with the diamond trade. Conflict minerals have taken public awareness by storm, with a massive regulation in the US that was passed in 2010 and came into force this year.

This law and the buzz surrounding the issue have sparked possible regulations in the EU, kicked off with a public consultation on the topic earlier this summer. Outside the scope of regulation, industry and international groups for years have been developing frameworks and standards to address the core problem.

For many years the UN, the EU, and many international organisations have been concerned about the extreme violence by armed groups in the Democratic Republic of the Congo (DRC), formerly Zaire. According to a study by Tulane University in 2011, millions of people have died in the DRC over the last 15 years due to this conflict, which also involves high levels of gender-based violence, rape and economic repression.

The crux of the issue is that these rogue military forces control many of the natural resources of the region and thus capture the income from their sale. Our businesses are unwittingly funding the violence. The various efforts described in this article all aim to get the money out of the hands of the rogue military forces and back into the hands of the workers and legitimate society, which the World Bank says, is more than 70% impoverished despite its vast and rich natural resources.

The US law
Global regulation on the issue has been kicked off by the US, which passed the Dodd Frank Wall Street Reform & Consumer Protection Act of 2010 (the Dodd Frank Act), with Section 1502 of that Act pertaining to Conflict Minerals. The law directly applies to US companies that are listed with the Securities & Exchange Commission under Sections 13(a) or 15(d), which means almost every publicly traded company in the US.

To be subject to the rule, these companies must also manufacture' products, or contract to manufacture products, and the product must contain tin, tantalum, tungsten or gold (3TG) that is 'necessary to the functionality or production' of the product. Companies that meet these criteria must investigate whether the minerals in their products originated in the countries covered by the law - the DRC or any of the nine countries bordering it.

The implementation of the US law began this year, and many affected companies have begun questioning their supply chains to discover facts like what sub-suppliers are in their supply chains and, ultimately, what are the facilities and mine of origin of the minerals used in their products.

Although it only applies to publicly traded companies that manufacture or contract to manufacture products that contain conflict minerals, the law in fact has a much wider impact. Private and international suppliers, distributors, importers, refiners and others have often had to field a massive number of information requests from the companies subject to the law.

Affected companies are required to seek and obtain 'reasonably reliable representations' from their suppliers regarding the facility used to process the minerals and the country of origin of the minerals. Suppliers often do not know their own supply chains, so this request entails a lot of work for them.

Challenges include communicating with suppliers, fielding requests, changing contracts, making public statements on the adopted conflict minerals policy and educating suppliers about why this information is necessary. It is especially challenging to do this across time zones and in different languages and has been a hurdle when proprietary information has seemed at risk.

EU next?
While European businesses have already been impacted by the requirements of the US law, more obligations may soon develop with a direct legal impact on EU businesses. The EU is considering modelling its own regulation from the Dodd Frank Act and has considered the OECD guidance that was published on the same topic in 2011.

The EU Directorate-General for Trade conducted a public consultation on a possible EU initiative on responsible sourcing of minerals originating from conflict-affected and high-risk areas from March to June this year. Many of these minerals end up in products sold to European consumers, though the EU says that few companies, states or consumers are aware of the extremely violent source.

The consultation's questionnaire content provides good insight into the possible direction that EU legislation may go. It posed such questions as whether an initiative should target specific segments in the minerals' supply chain, include exemptions for SMEs, or follow the EU Timber Regulation (995/2010) by requiring that the entity first placing a selected mineral - processed or not - on the EU market must provide evidence of due diligence, thereby giving reasonable assurance that its supply chain is conflict-free.

The European Commission indicated that it will use the results of the questionnaire to help it decide whether - and 'how in a reasonable and effective manner' - to complement and/or continue ongoing due diligence initiatives and support for good governance in mineral mining, especially in developing countries affected by conflict.

Canada considers
Another leader on such global issues, Canada is also considering a 'private member's bill' that would ensure Canadian companies are not using conflict minerals in their supply chain. Bill C-486 was introduced on 26 March, addressing corporate practices related to the extraction, processing, purchase, trade and use of conflict minerals from the Great Lakes region of Africa.

The author introduced a similar bill in 2010, which would have created a due diligence mechanism for Canadian companies to ensure that they are not purchasing minerals that finance conflicts. However, private member's bills in Canada are allocated restricted time for consideration and few become law.

Compliance tips
When it comes to complying with this type of law, it is wise for businesses to be aware of the unspoken landmines - regardless of regulatory requirements, the highest risk may be to a company's reputation and the risk of customer backlash is real if the business is perceived to fund conflict in the DRC region. The perception of a company's efforts could be a bigger threat than the EU's actual standard for legal compliance.

Business contracts may also be directly affected, as companies seek to ensure that their supply chains are conflict mineral-free. For some European companies, this means that if they cannot demonstrate that the minerals in their products or components are sourced from conflict-free areas, their business relationships will be at risk.

 Having a demonstrably strong company management system can help to solidify these relationships. Such a programme should include a conflict mineral policy, a system of controls and transparency over the mineral supply chain, a risk assessment programme and standards for how to remedy identified risks in the supply chain.

The response
Outside government regulation, many industry and international groups have led efforts to address the core problem of funding violence in the DRC and to assist compliance efforts with the existing regulation. The following are some of highlights:

  • The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected & High-Risk Areas has a special role in the US law, since it is recognised in the Final Rule as the only known international guide for due diligence practices
  • The Electronic Industry Citizenship Coalition and the Global e-Sustainability Initiative developed the Conflict-Free Smelter Programme, which helps compliance efforts by listing compliant smelters.
  • The Conflict-Free Tin Initiative was formed under Dutch leadership to form a conflict-free tin sourcing programme in the South Kivu province of the DRC. Motorola, RIM, Royal Philips Electronics and Alpha are some of the companies committed to participating
  • The International Conference of the Great Lakes Region (ICGLR) of Africa is an inter-governmental organisation that has led efforts to stabilise the Eastern Part of the DRC and other states affected by the crisis. The ICGLR was a partner in the writing of the OECD's Due Diligence Guidance
  • Solutions for Hope, created by Motorola, is a pilot initiative to source conflict-free tantalum from the DRC. Nokia, RIM, Intel, Motorola, and HP are some of the companies that signed on to participate
  • The ITRI Tin Supply Chain Initiative (iTSCi) is a joint initiative that assists upstream companies to institute the actions, structures, and processes necessary to conform to the OECD Due Diligence Guidance. According to the iTSCi website, it 'explicitly focuses on the practical implementation of a chain of custody system (traceability) from mine to smelter, and is designed for use by private sector operators'
  • The German Federal Institute for Geosciences & Natural Resources works with the DRC Ministry of Mines to develop a mineral certification programme

Many companies have developed in-house systems or have contracted with third parties to manage their conflict mineral and supply chain transparency obligations.

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