SEC mandates businesses disclose use of conflict minerals

by Abby Seadler
Tuesday, October 16, 2012

Restive stakeholders crowded the auditorium at the U.S. Securities and Exchange Commission (SEC) on Aug. 22. They were anxiously awaiting the Commission’s final ruling on sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which would amend the Securities and Exchange Act of 1934 to include a conflict minerals disclosure statement. Commercial lawyers waited to see how the new disclosures would affect their clients, and industry representatives waited to see how the changes would affect their bottom lines. The verdict: In a three-to-two vote, the SEC ruled that U.S. businesses that file with the SEC must now disclose any conflict minerals originating in the Democratic Republic of the Congo (DRC).

In 2010, Congress passed the Dodd-Frank Act to protect American consumers, create a stable economic foundation for job growth, and try to prevent another financial crisis. However, sandwiched between provisions creating new regulatory agencies and restricting the use of federal funds for foreign governments is section 1502 on conflict minerals.

Section 1502 states: “It is the sense of Congress that the exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict characterized by extreme levels of violence in eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein …”

Since 1998, conflict over control of and access to basic resources such as water and precious minerals has taken more than 5 million lives: most of them children. Although the conflict officially ended in 2003, the fighting has continued, especially in the eastern portions of the country. The armed groups involved gain much of their income from locally mined minerals, especially tungsten, tin, tantalum and gold.

The intent of the ruling is to reduce the violence by limiting the flow of money from the mineral trade. Congress chose the SEC as the vessel to accomplish this goal under the assumption that, if given the choice, consumers would rather buy goods not containing conflict minerals than goods containing them.

The requirements under section 1502 call for full disclosure from companies that file with the SEC and use these metals in their products. If these metals are used, each company must conduct “reasonable due diligence” of their supply chains to determine whether they originated in the DRC or adjoining countries, and whether they helped finance armed groups. Though the ruling does not ban the use of these minerals, it does require that consumers be given the choice as to whether or not they wish to purchase those products.

The split SEC vote reflects the incongruous nature of the rules and a fundamental shift in the mission of the SEC. The two dissenters explained in a statement at the open meeting that although it was addressing a “noble” cause, the ruling would place an undue burden on American businesses, thereby discrediting the SEC’s original mission to protect and facilitate capital formation. They also emphasized that because the SEC itself is not an expert on humanitarian crises, an analytical gap exists between executing the rules and accomplishing the humanitarian goals at hand. The rules could, in fact, have the exact opposite effect, they explained: creating a de facto embargo through American companies shying away from the region lest their products be tainted by the scarlet letter of conflict minerals. This potential loss of economic involvement could cripple innocent workers in the region, and instead provide fertile grounds for other less regulated nations to take root in the area.

Despite the risk of unintended consequences, the international community is also acting to reduce the purchase of conflict minerals from the DRC. The European Union is beginning to introduce similar accountability laws, and the DRC government is implementing rules to help investigate supply chains in the region. The DRC Mines Minister in Kinshasa recently suspended operations at two Chinese mines accused of dealing with local armed groups, and a third Chinese mine was closed completely. Nonprofit groups are also coming forward: The British-based ITRI, a tin trade association, is setting standards for conflict tin, and activist groups such as the Enough Project and Global Witness are making sure these issues stay on people’s radar.

To counter the potential problems in scouring massive supply chains for small amounts of these elements, new technology is also being developed to help companies and consumers track the origins of conflict minerals. Richard R. Hark, a chemistry professor at Juniata College in Pennsylvania, and his students are developing a method to trace the origin of conflict minerals using laser-induced breakdown spectroscopy (LIBS) to generate atomic “fingerprints” for each mineral based on its unique chemical signature. This process would potentially allow companies to distinguish between minerals from militia-controlled mines and those from legitimate mining operations.

Hark is also working with Applied Spectra, a California-based company that builds LIBS systems, to develop a field-portable instrument. Though promising, the technology still faces challenges due to the complex nature of ore concentrates, and the inability of LIBS systems to accurately detect trace elements, said Frank Melcher from Germany’s Federal Institute for Geosciences and Natural Resources in an interview with Chemical & Engineering News (C&EN). Furthermore, thousands of sample spectra are needed to construct a database of mineral fingerprints so that companies can effectively determine the exact source of their materials, said Nancy J. McMillan, a geologist at New Mexico State University who has worked with LIBS for about a decade, in an interview with C&EN.

As for the United States, with the passing of section 1502, the focus now shifts to the State Department and USAID to come up with a strategy to address armed groups and the human rights abuses that abound in the DRC. The State Department is also charged with creating a conflict minerals map that would clearly outline the trade routes, mineral-rich zones, and areas under control of armed groups.

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