Thursday, September 19, 2013

Should you think twice before using your cellphone or brushing your teeth? Congress and the SEC think so.- Part II

I first became interested in the Dodd-Frank conflict minerals law after leaving my former employer, which managed other companies’ supply chains, and while serving as a founding board member of Footprints Foundation, a nonprofit that works with rape survivors, midwives and hospitals in the Democratic Republic of Congo ("DRC") (see here). During a fact-finding mission for the foundation to the DRC in late 2011, I observed the law through two lenses-- both as a compliance officer who used to conduct audits around the world, and as a board member trying to determine whether this law would really help stem the unconscionable violence which I witnessed first-hand when I saw five massacred civilians lying on the road on my way to visit a mine.  (Note, my blog posts reflects my views only and should neither be attributed to Footprints nor my former employer).  My 2011 trip and subsequent research convinced me that the conflict minerals law could have unintended consequences that Congress had not sufficiently thought through, and that the SEC, in writing the rules, had not adequately addressed. For an article that describes the mining in the DRC today and some of the compliance successes and challenges see here

For these reasons, I signed on to an amicus brief along with two experts on Africa to the suit brought by the National Association of Manufacturers, the Chamber of Commerce and the Business Roundtable, who argue that the SEC’s rule: (1) failed to create a de minimis exception to the rule for trace amounts of minerals in products or the manufacturing process despite the authority to do so; (2) applied the wrong standard regarding whether minerals originated in the DRC; (3) erroneously included non-manufacturers within the law’s purview; (4) provided a flawed phase-in period for reporting that requires large manufacturers to report two years earlier than the smaller companies on which they may depend on for data; and (5) violated the First Amendment by requiring companies to state on their website that their products are “not DRC Conflict free,” which may not only taint their brands but  may also be false or misleading.  The business groups also discuss the significant expense, arguing that the SEC failed to conduct the legally required cost-benefit analysis.

Our amicus brief, filed yesterday, focused on the potential for unintended consequences, specifically a de facto boycott on the region. We maintain that the SEC erred in failing to consider whether its final rule would advance the law’s objective of weakening armed groups in the DRC (which in my view could include the national army, which has also been implicated in rapes), and that the SEC compounded that error by exercising its discretion in ways that render its rule more likely to harm legitimate economic activity in the DRC and benefit the very armed groups that Congress sought to stifle. In essence we believe that the law will lead many companies concerned about the cost, safety and administrative burdens of compliance to simply pull out of the DRC and source their minerals elsewhere.  This will leave even more miners out of work exacerbating poverty in a country where the per capita income was estimated at $210 USD per year in 2011.  While conditions are improving on the ground somewhat, I also personally know of companies that are looking to bolster their supply chains in other countries.

In a recent law review article I argued that given the corruption endemic in the country, companies could put themselves at risk of their middlemen violating anti-bribery statutes to get minerals out of the country with “proper” certifications. By failing to disclose illicit payments, companies could also violate Dodd-Frank §1504, the resource-extraction rule that requires certain companies to report on payments to governments. (Note-the SEC is now re-writing §1504 after a court vacated that rule). More important, focusing on corporate buying power while not addressing the needs for judicial, infrastructure and security sector reform will not solve the problem. Indeed, the Government Accounting Office issued a report in July indicating that infrastructure issues are hampering compliance. As we pointed out in our amicus brief, the GAO also noted that according to numerous government and NGO sources, the DRC is incapable of certifying various mines as outside the control of armed groups, regularly inspecting them, stemming corruption, or halting smuggling. Furthermore, based on my research, the fighting, looting and use of rape as a weapon of war in the DRC occurs not only because of a fight for minerals, but also because of deep-rooted political and ethnic rivalries and disputes over land rights, among other things.

As observers have written, depending on the success of Dodd-Frank §1502, Congress could choose to legislate on a number of resources that have questionable provenance- tin and palm oil from Indonesia, wood from countries that do not place a premium on sustainability, cobalt from illegal mines, and “dirty water.”  Will Congress direct the SEC to be the watchdog over corporate responsibility for human rights in the supply chain? Should the SEC, which is supposed to maintain fair and efficient markets, even be in the business of dealing with human rights issues? Are corporate governance disclosures the right mechanism? More generally, what level of responsibility should US-based transnational corporations have when operating abroad in weak or failing states? Hint- I believe that it’s more than the reader might think from these last two blog posts. I will comment on these and other topics from the West Virginia conference on business and human rights next week.

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