As mentioned during my inaugural post, I spent the last nineteen years in the private sector, most recently as deputy GC and compliance officer for a multinational Fortune 500 company that manages supply chains for other companies. As compliance officer, I with others spent time in various countries conducting training and risk assessments, interviewing employees in warehouses, assessing our agents and looking for opportunities for bribery, which would subject our company to liability under the Foreign Corrupt Practices Act, the UK Bribery Act and the admittedly under-enforced local laws.
At the same time, I became passionately interested in the struggles in the Democratic Republic of Congo (“DRC”), a country the size of Western Europe and the fifth richest nation in the world in terms of minerals. For those following the news, you may know that the country is set to announce the winner of its hotly contested election either today or tomorrow and there is such fear of violence after the announcement that many of the wealthy are already fleeing the capital.
Notwithstanding its vast wealth, the UN recently designated this former personal colony of Belgium’s King Leopold II, the least developed country and the rape capital of the world. I first learned of these issues via a 60 Minutes piece in which Anderson Cooper described the atrocities perpetrated by Rwandan genocidaires and Ugandan and Congolese rebel forces that control many of the mines containing the minerals necessary to produce cell phones, computers, cameras, electronics and component parts. Cooper graphically described the use of mass rape as a weapon of war, and noted that 5-6 million people have died during the various wars in the Congo, making it the deadliest conflict since World War II. I co-founded a foundation to raise money to provide surgeries for rape survivors and to train midwives to reduce the rate of maternal and infant mortality (www.footprints-foundation-org). A number of Hollywood celebrities have joined the large group of activists working to improve conditions in the Congo, most notably the odd couple of actor Ben Afflek and Cindy McCain (John’s wife, who has worked on Congo issues since 1994). Both testified knowledgably and passionately on behalf of their foundation the Eastern Congo Initiative during a Congressional hearing on the Congo last March.
My seemingly unconnected and disparate background as a corporate compliance officer and nonprofit board member became relevant when I learned about Dodd-Frank’s conflict minerals disclosure provision, which has not yet been implemented due to intense lobbying by industry groups and nongovernmental organizations. The provision requires U.S. issuers to disclose their use of “conflict minerals” (tin, tungsten, tantalum and gold) and describe the measures taken to conduct audits and due diligence of their supply chains with a statement as the “DRC-conflict free” nature of their minerals (this also includes the nine countries surrounding the DRC). The provision also charges the State Department with developing a Conflict Minerals Map and strategy to “address the linkages between human rights abuses, armed groups, mining of conflict minerals and commercial products.” The Comptroller and Secretary of Commerce must provide a list of all known conflict mineral processing facilities worldwide and report on the quality of the private sector audits.
When proposing the original Congo Conflicts Minerals Act of 2009 which led to Section 1502 of Dodd-Frank, Senator Sam Brownback (R-KS) explained, "metals derived from inhumanely mined minerals go into electronic products used by millions of Americans. In the Democratic Republic of Congo, many people - especially women and children - are victimized by armed groups who are trying to make a profit from mining 'conflict minerals.' The legislation introduced today brings accountability and transparency to the supply chain of minerals used in the manufacturing of many electronic devices. I hope the legislation will help save lives."
Dubbed a “name and shame” law by a congressional staffer, the SEC provision has no criminal penalties for issuers who use conflict minerals. Instead, the provision merely seeks disclosure so that the company that uses conflict minerals can face the reputational pressures from an educated public. The public, presumably, will choose to boycott products or divest from companies deemed complicit in the conflicts minerals trade with the attendant rape, kidnapping and child slavery. Films called “Blood on the Mobile” have gone viral online. Phone apps such as Free World and Free2work --“transparency shopping aids” -- allow you to see the “slavery footprint” of certain products and send a note directly from your smartphone to the company.
In short, the activist community is doing an excellent job shining a spotlight on the estimated 6,000 affected issuers and their hundreds of thousands of suppliers. Apple and Motorola are obviously subject to the law, but Kraft, which uses tin in its packaging of cookies will have to work with its hundreds of suppliers to ensure compliance. The California Transparency in Supply Chains Act goes into effect in January, and many U.S. universities have announced that they will divest their funds from companies that are not DRC-conflict free.
The SEC will issue its regulations any day now and the State Department has introduced a public-private partnership to work on the issue. An OECD pilot is also underway, although some believe that it will not succeed either because it does not go far enough or because it goes too far. The legislation will likely be one of the next targets for litigation by the US Chamber of Commerce and other industry groups using the same theories that undermined Dodd-Frank’s proxy-access provisions. A further hurdle for the legislation- a recent independent study from Tulane University found that the SEC had vastly underestimated the proposed costs of compliance.
Although many of the Republican presidential contenders have promised to dismantle Dodd-Frank, it’s likely that if conflict minerals legislation survives court scrutiny, it will be here to stay. It would be interesting to hear what Newt Gingrich, who wrote his PhD thesis on the Congo would have to say about that.
I initially felt conflicted about this well-intentioned law because of the unimaginable suffering going on in the Congo, but I was skeptical about the viability and the logistics of actually complying with it. Having conducted audits myself in the past, you never really know if you’re hearing the whole story or seeing everything that you’re supposed to see. None of the countries I visited in my former life had such allegations of corruption, public officials who go for months without getting paid, or known perpetrators of the Rwandan genocide and other rebel groups involved directly or indirectly in the supply chain.
My foundation work in Congo and Rwanda in September, my dialogue with local Congolese including rape survivors and NGOs, US business leaders, and activists on both sides of the debate and my former experience conducting audits confirmed my skepticism, although many want the law enacted immediately. While I don’t doubt the good intentions of the law and the urgency of stopping the rape, child slavery and forced labor, in my next post, I will discuss why I believe that the legislation will likely have serious unintended consequences, may hurt the very people its designed to help, and what Congress and the SEC should have done differently.
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