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

Apple hasn’t released pre-order numbers yet for its highly anticipated iPhone 5s and 5c, but if media reports and my own call to the Apple Store are any indication, throngs of consumers will be lining up tomorrow to get the latest product.  It’s very likely that most of the customers have no idea of the highly successful campaign against Apple and other electronics manufacturers that led in part to Dodd-Frank §1502, the conflict minerals provision which is now up on appeal to the DC Circuit. Incorporated into Dodd-Frank only days before its passage, it aims to focus investor and consumer attention to potential corporate complicity in human rights abuses in the Democratic Republic of the Congo (“DRC”), a country where the United Nations recently deployed drones against rebel groups and where over five million have died due to civil wars, malnutrition, disease and poverty in recent years. Eighty thousand people were displaced from their villages due to fighting between rebels and the army in just the last month according to a report out today from the UN. A UN representative once called the country was once called the “rape capital of the world.”

The law affects an estimated 6,000 companies--almost half of all US publicly-traded companies-- and hundreds of thousands of suppliers worldwide because so many products use one of the four regulated minerals, often mined by hand, known as the ”3Ts +G”. Specifically, these are: (1) columbite-tantalite also known as tantalum, which is used for cell phones, computers, surgical implants and wind turbines; (2) cassiterite, or tin, used for coatings for food cans, solders, catalysts stabilizers, shoe soles and even fluoride compounds in toothpaste and mouthwash; (3) wolframite (tungsten) used for light bulbs, aerospace components, and machine tools; and (4) gold used as an electronic conductor, for jewelry, and in medical equipment, anti-lock brakes, stained glass, and home pregnancy kits (in nanoparticles). Anyone who buys thread or diapers is also using these minerals.

The rule  requires domestic and foreign companies regardless of size that file reports with the SEC to conduct due diligence and disclose the origin of minerals in their products from the DRC or adjoining countries to ensure that they are not funding rebel groups engaged in rape, torture, the use of child soldiers, exploitation of children and other activities that have, in part, led to one of the world’s largest and most protracted humanitarian crises.  Depending on the company's findings, the rule also requires a private sector audit and the filing of a Conflict Minerals Report that describes the due diligence. Large companies must file their first disclosures in May 2014 for activities occurring in calendar year 2013. Some companies have 10,000 to 50,000 suppliers and several layers in their supply chains. Their suppliers can have multiple levels and subcontractors within their own supply chains.

Significantly, the law does not prohibit the use of conflict minerals. It merely requires companies to disclose if they are using them or if they cannot determine whether or not their products are “DRC-conflict free.” This law relies on consumers and investors to pressure firms that depend on corporate social responsibility programs to enhance their images to change their business practices. Last week, the SEC received a petition for rulemaking requesting a temporary delay in disclosure and an alternative disclosure, due to the expense and time required to comply.

Regardless of the law’s fate in the US, companies that operate in Canada and the EU may face similar legislation. In some sense the proposed rules are broader than Dodd-Frank §1502  (e.g. applying to recycled and scrap metal) and in some cases more narrow (eg. the level of companies in the supply chain). The European Commission received recommendations from NGOs that seek legislation regarding all natural resources originating in any conflict-affected or high-risk areas worldwide. On the other hand, an August report by Oeko-Institut, an organization that guides policymakers in the EU, notes that (1) smuggling by armed groups in DRC has increased; (2) a comprehensive DRC policy that includes but does not rely solely on regulation of conflict minerals is the only way to provide meaningful assistance to the DRC; and that (3) extensive mandatory verification and reporting requirements based on downstream due diligence can cause “embargo reactions”  from those who source from the country. I agree and will discuss why in Part II.

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