The Dodd Frank Act (DFA) is well-known: it was drawn up after the financial crisis to increase stability and transparency in the US financial sector and to protect the rights of consumers. One little known section of this Act covers the use of certain commodities from the Democratic Republic of Congo (DRC) and its neighbouring countries. According to Section 1502, companies must disclose in their annual reports whether minerals from the conflict region are being used in their products or production processes. Even if this is not the case, companies are still required to submit proof of where the minerals came from, so that this can be verified. This must be done by an independent third party. The disclosure requirement applies not only to all companies listed on the US stock exchange but also affects their suppliers. German companies have thus already started receiving enquiries from their US business partners. The aim of the bill is to curb the use of “conflict minerals”, which are helping to fund rebel groups in the east of the DRC, by publicly naming and shaming the companies which use them, thus putting them under pressure.
After some delay, the rules of Section 1502 of the DFA are expected to be finalised by December 2011. As from then, the companies concerned will have 270 days’ time to obtain and disclose information about the origins of the minerals they use. The minerals in question include tin, tantalum, tungsten and gold from the Great Lakes region in East Africa, which, apart from the DRC, also includes Burundi, Rwanda and Uganda among others. The four commodities are also referred to as 3TG. The amounts produced in the conflict region are not so big that demand could not be met from other sources. But particularly in the case of tantalum, Africa accounts for a large part of global production: in the last 15 years, between 12 and 50 per cent, most of which comes from the eastern part of the DRC. Section 1502 can be extended to cover other commodities and regions if necessary.
A company’s 3TG origin report must be verified by an independent third party, presumably the company’s auditor. It is not yet known what documents will have to be submitted: simple copies of invoices will supposedly not be sufficient. The verified origin report must be attached to the annual report and published on the company’s website. So far it does not look as though there will be a transitional period or exceptions for small quantities. There will be no sanctions for failing to adhere to the rules, but California has already decided that companies which use conflict minerals or fail to comply with the reporting requirements will be excluded from bidding for state contracts.
The DFA applies to all companies which are listed on the US stock exchange and are thus subject to the rules and regulations of the Securities and Exchange Commission (SEC). But it also applies indirectly to these companies’ suppliers, and thus to European companies as well. 3TG are found mainly in electronic equipment; thus the telecommunications sector, the aerospace and automobile industries, but also manufacturers of jewellery, medical equipment or implants will be affected. Furthermore, not only must conflict minerals be identified in end products, but also in the production process, i.e. in machinery and equipment. Consequently, the new regulation will apply to other sectors too.
It is a long way from a mobile phone sold in the US to small-scale mining in Africa: to determine the origin of a mineral from the end of the international supply chain, the so-called product-related approach, will be a big challenge for firms. Very few are prepared for it. One way of keeping the reporting requirements manageable is the “one up one down” approach: each firm asks its direct suppliers and informs its direct customers. But that too is a very tall order for large companies with maybe more than 1000 products and over 100,000 suppliers.
First of all, 3TG-relevant products or production processes must be identified, then the relevant suppliers must be contacted and asked whether their products are “conflict-free”. According to companies which have reached this stage in pilot projects, however, less than 10 per cent of suppliers asked were able to answer this question. It is not clear what happens then: should the problem be escalated, should suppliers be changed or should they be educated? Suppliers who can prove the origin of their commodity supplies are likely to have a competitive advantage at any rate. As a result of these disclosure requirements, commodity partnerships, where one company is directly involved in the production of commodities, will become more popular: that way, you know what you’re getting. In the end, the DFA stipulations mean that companies will have to set up risk-based due diligence systems for commodities. Even if existing supplier management systems can be used to some extent, this will be a complex and time-consuming business. The SEC estimates the costs for the new reporting requirements at $71 million, but US trade associations see them at $9-16 billion.
The DFA is the first mandatory requirement to execute more due diligence in commodity procurement, but the conflict minerals problem is also being tackled in other ways. For instance, this year the OECD published its “Due Diligence Guidance for Responsible Supply Chains”. Furthermore, there are other voluntary initiatives, some from companies, to exercise due diligence in the supply chain. For example, smelters, which have undergone an in-depth assessment over a certain period, are certified as “conflict free”, so that “good” raw materials can then be purchased from them.\
Another way of distinguishing between “good” and “bad” raw materials, is an analytical certificate of origin for a batch of commodities. The German Federal Institute for Geoscience and Natural Resources (BGR) has developed a sort of paternity test, which can confirm whether an ore sample derives from a certain mine. The BGR is compiling a database of mines in the DRC. Samples are compared with the typical profile of a mine and after further tests, such as age determination, the origin of the samples can be identified with 70 to 90 per cent certainty. This technically highly complex analysis takes several days, currently costs €1000, and cannot be carried out in Africa. However, there are long-term plans to set up a laboratory in the region.
The aim of preventing, or at least restricting, the distribution of conflict minerals from eastern Congo, where mining of these minerals has been in the hands of armed groups for over 10 years, is facing several hurdles. Companies are withdrawing from the whole region, because obtaining proof of origin is too laborious, and the DFA’s exact regulations have not yet been clearly defined. The result is a de facto embargo – which is exactly what was to be avoided so as not to jeopardise the existence of the numerous small producers in this region, who account for a large part of mineral production; these people would then be more likely to be recruited by the rebels. In addition, there has been an increase in smuggling, and unscrupulous companies are buying cheap commodities which are no longer being accepted by others. The UN group of experts on the DRC has reported that the UN due diligence suggestions have at least improved the situation as far as the 3Ts are concerned; however, as the recommended due diligence guidelines are hardly being implemented in the gold supply chain, the rebels have been focusing more on gold for funding.
Companies in Germany can obtain information on the subject of due diligence in the mineral supply chain from their trade associations and the German Mineral Resources Agency in Hanover. The EU Commission is likely to take the matter up too in the near future; it has just worked out suggestions for guidelines obliging mineral extracting companies to disclose all payments to foreign governments. With all the challenges facing companies, the product-related approach in the supply chain due diligence should be regarded rather as a long-term requirement: not only with regard to the situation in the DRC, but also as part of a trend towards more sustainability and transparency in products and their contents, which is increasingly required by end users too.
After some delay, the rules of Section 1502 of the DFA are expected to be finalised by December 2011. As from then, the companies concerned will have 270 days’ time to obtain and disclose information about the origins of the minerals they use. The minerals in question include tin, tantalum, tungsten and gold from the Great Lakes region in East Africa, which, apart from the DRC, also includes Burundi, Rwanda and Uganda among others. The four commodities are also referred to as 3TG. The amounts produced in the conflict region are not so big that demand could not be met from other sources. But particularly in the case of tantalum, Africa accounts for a large part of global production: in the last 15 years, between 12 and 50 per cent, most of which comes from the eastern part of the DRC. Section 1502 can be extended to cover other commodities and regions if necessary.
A company’s 3TG origin report must be verified by an independent third party, presumably the company’s auditor. It is not yet known what documents will have to be submitted: simple copies of invoices will supposedly not be sufficient. The verified origin report must be attached to the annual report and published on the company’s website. So far it does not look as though there will be a transitional period or exceptions for small quantities. There will be no sanctions for failing to adhere to the rules, but California has already decided that companies which use conflict minerals or fail to comply with the reporting requirements will be excluded from bidding for state contracts.
The DFA applies to all companies which are listed on the US stock exchange and are thus subject to the rules and regulations of the Securities and Exchange Commission (SEC). But it also applies indirectly to these companies’ suppliers, and thus to European companies as well. 3TG are found mainly in electronic equipment; thus the telecommunications sector, the aerospace and automobile industries, but also manufacturers of jewellery, medical equipment or implants will be affected. Furthermore, not only must conflict minerals be identified in end products, but also in the production process, i.e. in machinery and equipment. Consequently, the new regulation will apply to other sectors too.
It is a long way from a mobile phone sold in the US to small-scale mining in Africa: to determine the origin of a mineral from the end of the international supply chain, the so-called product-related approach, will be a big challenge for firms. Very few are prepared for it. One way of keeping the reporting requirements manageable is the “one up one down” approach: each firm asks its direct suppliers and informs its direct customers. But that too is a very tall order for large companies with maybe more than 1000 products and over 100,000 suppliers.
First of all, 3TG-relevant products or production processes must be identified, then the relevant suppliers must be contacted and asked whether their products are “conflict-free”. According to companies which have reached this stage in pilot projects, however, less than 10 per cent of suppliers asked were able to answer this question. It is not clear what happens then: should the problem be escalated, should suppliers be changed or should they be educated? Suppliers who can prove the origin of their commodity supplies are likely to have a competitive advantage at any rate. As a result of these disclosure requirements, commodity partnerships, where one company is directly involved in the production of commodities, will become more popular: that way, you know what you’re getting. In the end, the DFA stipulations mean that companies will have to set up risk-based due diligence systems for commodities. Even if existing supplier management systems can be used to some extent, this will be a complex and time-consuming business. The SEC estimates the costs for the new reporting requirements at $71 million, but US trade associations see them at $9-16 billion.
The DFA is the first mandatory requirement to execute more due diligence in commodity procurement, but the conflict minerals problem is also being tackled in other ways. For instance, this year the OECD published its “Due Diligence Guidance for Responsible Supply Chains”. Furthermore, there are other voluntary initiatives, some from companies, to exercise due diligence in the supply chain. For example, smelters, which have undergone an in-depth assessment over a certain period, are certified as “conflict free”, so that “good” raw materials can then be purchased from them.\
Another way of distinguishing between “good” and “bad” raw materials, is an analytical certificate of origin for a batch of commodities. The German Federal Institute for Geoscience and Natural Resources (BGR) has developed a sort of paternity test, which can confirm whether an ore sample derives from a certain mine. The BGR is compiling a database of mines in the DRC. Samples are compared with the typical profile of a mine and after further tests, such as age determination, the origin of the samples can be identified with 70 to 90 per cent certainty. This technically highly complex analysis takes several days, currently costs €1000, and cannot be carried out in Africa. However, there are long-term plans to set up a laboratory in the region.
The aim of preventing, or at least restricting, the distribution of conflict minerals from eastern Congo, where mining of these minerals has been in the hands of armed groups for over 10 years, is facing several hurdles. Companies are withdrawing from the whole region, because obtaining proof of origin is too laborious, and the DFA’s exact regulations have not yet been clearly defined. The result is a de facto embargo – which is exactly what was to be avoided so as not to jeopardise the existence of the numerous small producers in this region, who account for a large part of mineral production; these people would then be more likely to be recruited by the rebels. In addition, there has been an increase in smuggling, and unscrupulous companies are buying cheap commodities which are no longer being accepted by others. The UN group of experts on the DRC has reported that the UN due diligence suggestions have at least improved the situation as far as the 3Ts are concerned; however, as the recommended due diligence guidelines are hardly being implemented in the gold supply chain, the rebels have been focusing more on gold for funding.
Companies in Germany can obtain information on the subject of due diligence in the mineral supply chain from their trade associations and the German Mineral Resources Agency in Hanover. The EU Commission is likely to take the matter up too in the near future; it has just worked out suggestions for guidelines obliging mineral extracting companies to disclose all payments to foreign governments. With all the challenges facing companies, the product-related approach in the supply chain due diligence should be regarded rather as a long-term requirement: not only with regard to the situation in the DRC, but also as part of a trend towards more sustainability and transparency in products and their contents, which is increasingly required by end users too.
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