"Conflict Minerals" and the Supply Chain

Stephen DeAngelis

December 20, 2010

The general public has not paid a lot of attention to the portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act that deals with “Transparency for [the] Extraction Industry.” There is growing concern, however, among retailers and manufacturers about its potential effects (more on that later). The Dodd-Frank Act primarily concerns itself with financial reform and, rightfully, that topic is what has garnered most of the headlines. The section of the bill that most concerns manufacturers and retailers is the section on “Congo Conflict Minerals,” which is summarized below:

“Manufacturers Disclosure: [The act] requires those who file with the SEC and use minerals originating in the Democratic Republic of Congo in manufacturing to disclose measures taken to exercise due diligence on the source and chain of custody of the materials and the products manufactured.” [Brief Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act]

The act also “requires the State Department to submit a strategy to address the illicit minerals trade in the region and a map to address links between conflict minerals and armed groups and establish a baseline against which to judge effectiveness.” Clearly, the section on Congo Conflict Minerals seems out of place in a financial reform bill; but such oddities are not uncommon in Congressional legislation. From what I can discover, the sponsors of this section of the bill were Sen. Richard Durbin (D-IL) and Rep. Jim McDermott (D-WA).

If you are not familiar with African conflicts, you might wonder what is so special about the situation in the Congo that it deserves the kind of attention it received in the Dodd-Frank Act. Hollywood celebrity and activist Ben Affleck explains:

“Ask many Americans to name the bloodiest war since World War II and chances are that most would not know the answer. If you told them it was in Africa, they might guess Rwanda or the ongoing conflict in Sudan. They’d be wrong. By far the deadliest conflict was in eastern Democratic Republic of the Congo from 1998 to 2003. Eight African nations participated in the fighting on Congolese soil, many hoping to seize control of its vast mineral wealth. Some 4 million Congolese died during the conflict and nearly another 1 million have died in the lawless aftermath from starvation, conflict and preventable disease. Tens of thousands of children were forced to become soldiers, and as many as two out of three women were victimized by rape and other forms of sexual violence. This is still happening today.”

Power and money rest at the heart of this conflict as they do in so many others. Groups in the Congo are fighting for control over the Congo’s vast mineral resources hoping they will profit from their extraction. Unfortunately, most of the profits are being poured back into conflict rather than improving the quality of life for those in the region. Both activists, like Affleck, and groups he supports, like the Eastern Congo Initiative (ECI), are in favor of the Dodd-Frank provision concerning the Congo and want to see it stringently enforced. Affleck writes:

“Washington must implement the provisions in the Dodd-Frank Act designed to strengthen enforcement sanctions related to conflict minerals. Only in an equitable and transparent business environment can Congo’s mineral wealth pay for Congo’s future.”

A white paper released by Eastern Congo Initiative entitle “Strengthening United States Foreign Policy in the Democratic Republic of the Congo,” presents “actionable policy recommendations for the United States to take a leadership position that ensures the future stability and prosperity of the region.” [“Eastern Congo Initiative Releases Recommendations For United States Leadership To Secure Prosperous Future For Congolese People,” PRWEB, 30 November 2010]. The white paper mirrors Affleck’s comments by recommending that the United States “effectively implement the provisions in the Dodd-Frank Act designed to strengthen enforcement sanctions related to conflict minerals.”

Jason Stearns, a PhD candidate at Yale University who writes extensively about the Democratic Republic of Congo and the Great Lakes region, was a member of a panel discussing the region at a recent conference where Toby Whitney, the legislative director for Rep. McDermott, was also in attendance. According to Stearns, Whitney claimed that the legislation was specifically written to make “it easier for activists to target US companies who import minerals from the Congo.” [“US legislation on Congo’s ‘conflict minerals,’ explained,” Christian Science Monitor — Africa Monitor, 15 November 2010]. Stearns indicates that he learned a few other things at the meeting as well. He writes:

“First, and most importantly, there had been some debate among experts about the exact provisions of the bill. Toby clarified: The bill does not prohibit companies from buying conflict minerals. Instead, it requires them to carry out due diligence on their supply chain and to report back to the Securities and Exchange Commission what measures they have taken to find out whether they are importing minerals that fuel conflict in the Congo. ‘It’s a name-and-shame bill,’ Toby said. There will only be fines for companies that do not do good reporting and auditing. Companies that carry out all the correct due diligence and report back to the SEC that they are indeed importing conflict minerals will not be fined.”

That may sound like a strange law (i.e., it’s okay to import conflict minerals as long as you tell us about it), but legislators obviously understand the power of public scrutiny. Although the intent of the measure is to pressure rebels to stop fighting, the ultimate result may be that manufacturers cease using Congolese minerals. That is not a desirable outcome. Stearns continues:

“Since all these reports have to by law [be] made public by the companies, the cost for the company will be reputational. For example, we are already asking Yale University to make clear to the companies it invests in that it will not keep them in its portfolio if (a) they do not carry out all the due diligence required by Section 1502 of the Dodd-Frank bill; and (b) if they do indeed buy minerals that fuel conflict in the Congo. Since Yale has a $17 billion endowment and is seen as a leader in investments, a policy statement could be important.”

Despite the fact that Stearns claims that a company will suffer only reputational costs, there will clearly be other costs associated with the due diligence and reporting requirements of the bill. It is certainly no surprise, therefore, that resistance to those measures was put up by corporate interests. Stearn notes:

“Like many other congressional staffers, [Whitney] reported … intense corporate lobbying against the bill. In the end, he said, they had won out because it was difficult for a company to be seen as in support of rape in the Congo.”

That being said, some corporations haven’t given up their fight [“Retailers Fight to Escape ‘Conflict Minerals’ Law,” by Jessica Holzer, Wall Street Journal, 2 December 2010]. Holzer reports:

“Top U.S. retailers including Wal-Mart Stores Inc. and Target Corp. are battling to limit a new federal law that could force them to report whether their store-brand goods contain minerals from war-torn Central Africa. The requirement, part of the Dodd-Frank financial law passed in July, aims to pressure companies to spurn so-called conflict minerals—tin, tantalum, tungsten or gold from parts of the Democratic Republic of Congo or neighboring countries. Income from those minerals is blamed for fueling violence that has claimed millions of lives in eastern Congo, which a senior United Nations official recently branded the world’s rape capital. Under the new law, public companies using any of the four minerals from Central Africa must report what steps they have taken to verify the minerals weren’t taxed or controlled by rebel groups. Products that don’t contain minerals that benefited such groups can bear the label ‘DRC conflict free.’ Companies that fail to verify their sources can still sell their products, but could face embarrassment.”

Although manufacturers won’t have to change their packaging to include to the “DRC conflict free” stamp, I suspect that most of them eventually will. Holzer explains the range of products that contain potentially offending minerals:

“A broad array of U.S. companies, including makers of medical devices, cellphones, airplanes and machine tools, will be affected by the requirement because the minerals are in the products they manufacture.”

Since the law is aimed primarily at manufacturers, you might be wondering why retailers are entering the debate. Holzer explains:

“Less clear is the status of retailers, such as Wal-Mart and Target, who carry private-label goods. The Securities and Exchange Commission has the power to decide who is considered a manufacturer under the law, and so must comply with it. Some of the largest U.S. retailers argue they shouldn’t have to comply with the rule if they don’t exercise direct control over the manufacturing of goods carrying their own brands. The Retail Industry Leaders Association sent a letter making that case to the SEC.”

Traceability of a product’s supply chain is nothing new. Food suppliers, pharmaceutical companies, and clothing manufacturers have been wrestling with the problem for years. But traceability is neither easy nor cheap. Holzer continues:

“Tracing the source of minerals is a tricky task, companies say, because many intermediaries stand between them and the mines. They add that control of territory and transit routes in eastern Congo is always in flux. ‘I think a lot of companies will be challenged, at least early on, with indeterminate situations where they just don’t know’ the origin of their supplies, said Mike Loch, head of Motorola Inc.’s supply-chain corporate responsibility program. … Industry groups say the measure could backfire by forcing companies to halt all use of minerals from Central Africa, even ones untouched by armed groups. ‘This is the only form of economic activity and subsistence for hundreds of thousands’ of people, said Rick Goss, vice president of the Information Technology Industry Council, which represents high-tech companies. ‘The challenge is to allow our supply chains to continue sourcing from the region but to do it properly.’ Representatives from Best Buy Co., J.C. Penney Co., Costco Wholesale Corp., Lowe’s Cos., Wal-Mart and Target met with SEC officials last month to air their concerns, according to SEC records and attendees of the meeting.” The SEC must write rules by April to put the law into practice.”

Sen. Durbin and Rep. McDermott believe that “retailers who contract for the manufacture of goods should comply with the requirement.” If they don’t, they argue, “a large, nontransparent use of the black market for DRC conflict minerals would remain, directly subverting the policy intention of the law.” According to Holzer, one of the biggest concerns expressed by retailers “is how the SEC will define what companies must do to verify their products are conflict-free.” They note that gold will be difficult to trace because it is so easily smuggled. “Tiffany Co. is seeking a waiver for fine jewelers, arguing that it is impossible for jewelers to know whether the gold bars they buy contain recycled gold tainted by conflict.” Holzer concludes:

“The law’s timeline is also a worry. Some companies must begin reporting by mid-2012 whether products they made during their 2011 fiscal year contained conflict minerals. They say that’s too soon. ‘Ford and a number of manufacturers are very concerned about being able to complete the due diligence in the time we have allowed,’ said Monique Oxender, who leads Ford Motor Co.’s supply-chain sustainability effort. A Ford spokesman said the company purchases $50 billion of goods and parts each year from about 1,600 suppliers to make its vehicles.”

In an article unrelated to the Dodd-Frank act but relevant to supply chain traceability, Paul Tyrrell insists, “We are approaching a tipping point … beyond which everyone will want to know the provenance of their products.” [“Buyers unravel the ethics behind the label,” Financial Times, 15 September 2010]. He continues:

“Traceability has become an especially pressing issue for the clothing industry in recent years, as stories of worker exploitation have emerged from the developing world. However, some supply chain experts believe all retailers and their suppliers should be preparing for the sorts of challenges [created by a requirement for product traceability]. We are approaching a tipping point, they say, beyond which everyone will want to know the provenance of their products. In May, the Global Reporting Initiative, a network of 20,000 organisations developing a framework for corporate sustainability reporting, published ‘The Transparent Economy’, a report that identified traceability as a key challenge in corporate reporting over the next decade. It also included a survey in which 86 per cent of GRI members rated ‘the importance of the ability of businesses to trace products through their entire life cycle’ as important or very important. The report’s lead author was John Elkington, the corporate responsibility and sustainable development expert who coined the term ‘triple bottom line’. He points out that the food and pharmaceuticals sectors have led the way on supply chain traceability because their products have such a quick and dramatic impact on public health.”

For those unfamiliar with the term “triple bottom line” (sometimes abbreviated as “TBL” or “3BL”), it refers to doing business with “people, planet, and profit” in mind. As Wikipedia notes, the triple bottom line “captures an expanded spectrum of values and criteria for measuring organizational (and societal) success: economic, ecological and social.” Despite corporate protests, consensus seems to be building that product traceability is going to become an integral part of supply chains. Tyrrell reports, “Ethical spending has grown significantly over the past two decades, in line with increased amounts of information on corporate activities entering the public domain.” The requirement for traceability will likely spawn the emergence of number of niche companies that specialize in the field — companies like Historic Futures. Tyrrell explains:

“This UK company has developed an online application called String, which enables users to see at a glance what has happened to a particular product at every stage in its supply chain. String can capture data about any event resulting in an output – for example, when raw materials are purchased from a third party, when production processes are performed on those materials and so on – including documentary evidence uploaded to the site. If anyone fails to provide such evidence, this is clearly visible to those further along the supply chain. ‘We’re not in the business of guaranteeing the data, we’re in the business of automating the audit process,’ says Tim Wilson, managing director. However, he says, it would be difficult for a user to falsify information and get away with it because the system allows for easy cross-referencing. ‘If you wanted to falsify your data, then you’d have to get everyone below you in the chain to falsify their data too. It’s a tiny problem compared with the patchy recording of data, which is already commonplace where no such system exists.”

Wilson hopes that Historic Futures becomes “the Facebook of supply chains.” If product traceability becomes a legal requirement that result in large penalties for non-compliance, I’m willing to bet that it will be difficult for one company to dominate the field. Tyrrell seems to agree.

“There are many other types of software designed to track supply chain data – most big suppliers of enterprise software, for example, offer supply chain management modules – but these are geared towards providing management intelligence. Where such data are made available to the public proactively as an aid to purchasing decisions, it is generally in basic form and needs only a simple database system accessible via the web.”

Supply chain traceability will likely remain a hot topic in the years ahead. Even individuals pressing for more corporate responsibility are skeptical that traceability will provide a solution. Tyrrell concludes:

“Critics point out that such systems do not in themselves guarantee ethical behaviour. ‘Supply chain auditing is currently a necessary but not sufficient tool to deliver assurance on labour standards,’ says Rachel Wilshaw, ethical trade manager at Oxfam, the development charity, which advises companies on how to trade more ethically. ‘Commercial audits in particular have delivered limited change for workers, added significant cost to the supply chain and, increasingly, do not provide reliable assurance about standards because of growing audit fraud.’ Advocates counter that supply chain transparency should, in itself, make it easier for independent observers to police standards and for consumers to make informed decisions. If a consumer wishes to boycott … jewellery because, say, a mining company they dislike is involved, then that is their prerogative. Previously, they would never have known how that jewellery got from ‘mine to market’.”

Consumers are going to be tested as to whether their ethics or their pocketbooks mean the most to them. Supply chain traceability and reporting doesn’t come cheap and those costs are likely to be passed along to the consumers. Historically, price has been king in the eyes of consumers.