In my last post I described the Dodd-Frank conflicts mineral provision, which requires U.S. issuers to discuss how they are managing and monitoring their supply chains to ensure that they are not sourcing conflict or blood minerals from the Democratic Republic of Congo or the nine surrounding nations. Although I am no expert, and do believe that something must be done to address the human rights crisis, this provision is a feel-good solution that may have serious unintended consequences and may divert attention and resources when they are needed the most.
Not even the strongest proponents deny the alleged rampant corruption, lack of rule of law, extortion of the artisanal miners by the rebels who control many of mines, ineffectiveness of the UN in certain circumstances, and smuggling of the minerals across Congo’s borders with the potential for laundering at various points in a global supply chain. For some companies, the supply chain is eight or nine layers deep and those suppliers may have every incentive to check the box and tell the third-party auditors whatever they want to hear. Most companies have visibility to the first and at most the second layer of their supply chains. The task is not impossible, but does take considerable time and effort for accurate due diligence.
Further complicating the issue, a presidential election occurred in November, which has already been tainted by allegations of corruption, fraud and violence. Violence may erupt throughout the country when the results ae announced. The UN maintains the largest peacekeeping mission in the world in Congo and would play a role in monitoring the process, but does not enjoy the support of many of the Congolese people. In fact, when I visited Bukavu in eastern Congo in September, I personally saw UN personnel trading donated clothes with villagers for minerals in broad daylight. Another UN employee was arrested a few months ago for trying to smuggle minerals out of the country. The UN does important work, but these irregularities don’t help their reputation.
Without a clearly thought out, thoroughly vetted and tested process on the ground, a responsible company seeking to comply would likely be in a position to engage in knowingly or unknowingly participating in the same kind of activity that the Foreign Corrupt Practices Act prohibits in order to gain the information needed for certifications or safe transport of the minerals. The same problems could arise as it relates to accurate disclosures under another sleeper provision of Dodd-Frank, Section 1504, which requires “resource extraction issuers” to disclose certain information regarding payments to either the U.S. government or a foreign government for the purpose of the commercial development of oil, gas, or minerals.
Even if the disclosures were “clean,” they would not likely be reliable given the situation on the ground. When I attempted with a group of local Congolese to get to one of the mines several hours outside of the city, we were turned back by the UN and the local village chief (ironically armed with his Nokia cell phone) who indicated that it would be too dangerous to continue because the rebels had murdered five people the night before and there was fear of further violence that evening. We actually saw the dead bodies on the side of the road when we were leaving, and the murders happened within a mile of the UN outpost. The UN serves as a peacekeeping force, not for security, we were told when they briefly detained us while we were meeting with villagers in Mwenga.
Safety issues aside, I considered the practicality of the required third party audit. I, a black female, was in a car on nearly impassable roads with other Africans and almost every person I saw during the drive up the mountains and through the villages to get to the mines looked in our car. Assuming that auditors chose to make surprise visits (which is impractical for many reasons), I imagine that when they take that treacherous drive, some local people could give ample warning to those at the mines if in fact there are child laborers or other illegal activities going on. I also saw numerous areas where small planes could land and load up on minerals, completely circumventing the process. In addition, artisanal miners, including children with picks and shovels, do all of the work often inadvertently mixing metals before they get to a smelter in Malaysia or some other foreign country. This makes the tracking and tracing much more difficult. The December 12th issue of Time magazine has an article on conflict minerals in which one of the people quoted echoes some of my concerns.
Further, unless the mines are permanently demilitarized and there is security sector and true governance reform within the DRC itself, companies may determine that there is no legal way to have conflict free minerals and may pull out of the DRC altogether, depriving many Congolese of their livelihoods, which for many is less than one dollar a day. Fortunately, at this point, no company has publicly announced plans to leave. But many on the ground argue that a de facto embargo has already occurred and they decry “the Obama law.” Although there is no evidence that the number of rapes has gone down while companies and local miners have started to prepare for the legislation or during the Congolese government’s own temporary mineral embargo last spring, the UN and others urge immediate implementation. On a positive note, the Congolese army, which has itself been implicated in many rapes, has publicly reiterated its zero tolerance policy for rape.
In addition, while the United States clearly has the most clout and the EU is now looking at drafting its own legislation, unless Asian countries enact similar rules, companies that are not subject to Dodd-Frank will exploit this loophole. China is already a significant player in the Congo and has no such legislation regarding human rights in the minerals supply chain.
Finally and most important, existing U.S. legislation could have addressed the crisis much more comprehensively and more successfully, possibly sparing millions of lives and preventing thousands of rapes. In 2006, President Bush signed The Democratic Republic of Congo Relief, Security and Democracy Promotion Act, sponsored by then Senators Obama and Clinton. Ironically, this law, which gives the Secretary of State significant powers to withhold funds and leverage over the President of Congo for failing to meet specific goals, has never been fully funded or implemented despite calls from Congolese elected officials and various advocacy groups to President Obama and Secretary Clinton to do so.
While a governance disclosure with no teeth may shame companies and bring much needed awareness to the rape, forced child labor and corruption in the Congo, the US government already had the tools necessary to achieve the goals and should now employ them in addition to a delayed conflict mineral disclosure provision which looks at the efforts of the pilot programs already in effect. One of the doctors we spent time with labeled Congo “NGO Nation.” There are so many hardworking local and international organizations that want to help. Many of their voices have been drowned out by the powerful groups of NGOs that focus on the conflict minerals soundbite.
Is this the opposite of regulatory capture in which the SEC feels that it can’t appear to be beholden to corporate America? Will other countries such as Mali, where 6 and 7 year olds to mine for gold to support their families be next in line for U.S. legislation? See a recent NBC news story here http://rockcenter.msnbc.msn.com/_news/2011/12/05/9213056-digging-for-gold-children-work-in-harsh-conditions-paid-with-bags-of-dirt.
Where does corporate responsibility start and stop? These are questions I plan to explore in coming months as the provisions become a reality.
My initial thoughts? On the conflicts minerals issue, Congress and the SEC faced intense public pressure from vocal, sympathetic interest groups with important and easily understood goals against what appeared to be obstructionist companies and corporate lobbying groups.
Rather than bowing to political pressure, the SEC should consider a delay of the implementation of the corporate disclosure provision for at least one year following the Congolese election and the completion of the OECD pilot, expected to conclude next August. The SEC has indicated that companies that comply with an international standard such as the OECD may comply with Dodd-Frank. The OECD has already produced a progress report, and it would be irresponsible to implement rules without the benefit of the full analysis. Of course there is a question as to whether a U.S. law that went through a legislative process should be subject to a voluntary international rule making body’s standards. But that’s beyond the scope of this post.
Although the crisis in the Congo is critical and transparency within the supply chain is non-negotiable, when lives are at stake, the U.S. must proceed with caution.
In my next post, I will discuss another well-intentioned Dodd-Frank provision- whistleblower.
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