At a hearing last week before a subcommittee of the House Financial Services Committee, the members heard testimony regarding the Dodd-Frank conflict minerals provision. The Chair expressed concern that the provision was causing more harm than good, while the ranking member saw more hopeful signs. The bottom line? No surprise – it’s a mixed bag.
A GAO representative discussed the GAO’s 2015 report, which studied conflict minerals disclosures filed by public companies with the SEC for the first time in 2014, as well as State Department and USAID actions related to the U.S. conflict minerals strategy in the covered countries. (See this PubCo post.) While 94% of companies in the sample performed due diligence, 2/3 could not determine if their products came from the DRC countries and none could determine if the minerals in their products were used to finance armed groups in the DRC. These results reflected the challenges companies faced in obtaining data from their suppliers. The GAO analysis concluded that, “the exercise of due diligence on the source and chain of custody of conflict minerals yielded little or no additional information, beyond the [reasonable country-of-origin inquiry], regarding the country of origin of conflict minerals or whether the conflict minerals that companies used in 2013 in their products benefited or financed armed groups in the Covered Countries.” In some cases, the GAO saw benefits in the DRC region, as miners were able to earn double the price for minerals certified as conflict-free. There were also programs designed to protect artisanal miners and local communities and to provide alternative livelihoods. However, smuggling continued to be prolific and fraud called into question the integrity of the mineral tracing.
A law professor from the University of Utah discussed the results of his empirical study of filings by companies in the S&P 500. He concluded that the rule wasn’t working very well because the filings did not provide “sufficient insight” into conflict mineral supply chains for shareholders or consumers to determine which companies were committed to conflict-free sourcing. As a result, there was no “sorting” possible because no companies were really conflict-free. However, he thought the problems could be repaired. Some of the problems he attributed to a mismatch between what the SEC anticipated companies would do to comply and the actual practices that developed, which were to use the centralized systems available through the Conflict-Free Sourcing Initiative. As a result, he suggested, the rule does not ask companies the right questions and should be revised to recognize the more streamlined CFSI process as it has developed. One of his arguments is that the multi-tiered structure that the SEC set up is too complicated and could be simplified to eliminate much of the duplication ( e.g., companies tend to perform the reasonable country of origin inquiry and the due diligence together, not separately as the rules seem to suggest, leading to duplication of disclosure in many cases). His study also found that only about a third of companies identified the smelters and refiners used to process their conflict minerals because the suppliers provided information only at a “company” level, not at a “product” level, and the companies could not determine which smelters were used for processing minerals in the components actually supplied to the company for use in its products. The professor’s recommendation: “Require that companies list all smelters and refiners in their products’ supply chains, along with the countries of origin of the minerals processed at those facilities, regardless of whether they can determine if minerals from particular processing facilities are found in their products.”
SoapBox: Really? How does that help the sorting process? Doesn’t that just taint the products of all the customers of that supplier even though 99% may be buying components that are conflict-free?
A business law professor from Indiana University questioned whether the SEC was really the right agency to develop rules and monitor progress on the conflict minerals issue. (My guess is that a number of people at the SEC feel the same way.) In her view, addressing human rights goals is beyond the SEC’s mandate and expertise. Moreover, the SEC has no way to measure progress on achieving humanitarian goals, and, as disclosure rules, its rules are toothless because there is no penalty for using minerals that are not conflict-free.
The CEO of a capacitor manufacturer argued, however, that the rules have been successful for his company, a major user of tantalum. His approach was to have his company open a mine in the DRC that was vertically integrated and employed a closed-pipe system that was audited and validated as conflict-free. That effort led not only to conflict-free minerals, but also to stabilization of prices for the company as well as positive effects for the surrounding community, with new jobs, schools and a hospital.
The Rwandan Minister of Mines also testified. He believed that the conflict minerals provision had had a deleterious effect on business in his country, although it may have had a positive effect in the DRC. In particular, he contended that his country’s minerals were conflict-free before the conflict minerals provision was put in place and conflict-free after; however, the costs of compliance were greater than the taxes earned, causing his country to lose other development opportunities. Moreover, mineral revenues were down because, he argued, his country had been unfairly tarred with the “conflict” label. In effect, he contended that the rule does not appropriately distinguish among the countries in the region. Nevertheless, he acknowledged that monitoring of the conflict minerals process had improved and that, even if the conflict minerals rule were rescinded, Rwanda would continue its more robust practices.
Whether this hearing leads the Congress or the SEC to take any action to modify the conflict minerals rule remains to be seen.