Divergent views of new US rules on DRC and "conflict minerals"Published by MAC on 2012-09-12
Source: ipolitics, Guardian, mining.com, statement (2012-09-03)
Are they good law?
After a year's delayt, the US Securities and Exchange Commission (SEC) has enacted a rule that tasks manufacturers to ensure that none of the metals used in their products derive from mines run by military groups inside the DRC.
However, critics have argued that the divison between "manufacturing" and mining is vague, and in any case that smaller companies are being allowed up to four years to comply.
One commentator, Severine Autesserre, claims that the issue "has diverted attention from other key issues: poverty, corruption, land conflicts, the reform of local institutions."
She says the debate which led to the new ruling "has hindered the search for a comprehensive solution, she argues, leaving us instead with a series of poorly conceived technical responses".
The little Congolese rule that will change manufacturing
By James Munson
3 September 2012
The well-paved roads of Rwanda come to an abrupt end as the pale blue flag of the Democratic Republic of Congo comes into view.
A gravel road takes over at the border crossing known as La Corniche, on the northern shores of Lake Kivu, as crowds surround the state offices on each side applying to pass.
While many people work on one side and live on the other, or carry across foodstuffs to be sold on a daily basis, there are other goods making the crossing too - conflict minerals.
Gold, coltan, tin and tungsten pass through the DRC's porous borders, like the one at La Corniche, are usually smelted outside of Africa, and eventually end up in cell phones and other kinds of technology all around the world.
The illegal trade makes people outside of the DRC very rich, but it requires a constant, low-hum war to rage on inside.
Throughout the Congolese province of North Kivu, where La Corniche is situated, rebel groups litter the countryside subjecting miners to their rule and reaping the profits of ores that are sold to buyers outside the DRC.
While many analysts will say resources didn't start the first Congolese war in 1996 that has left the country in some state of disarray ever since, their trade is often blamed for keeping the DRC from ever progressing to full-fledged security.
But last week, the U.S. Securities and Exchange Commission adopted a new rule that will force manufacturing companies, some of them Canadian, to make sure that none of the metals they use in their products ever come from mines run by military groups inside the DRC.
"Canadian companies who also trade on U.S. exchanges are only waking up to this now," said Joanne Lebert, director of the Great Lakes Region programme at Partnership Africa Canada, an NGO that works extensively on conflict minerals on the continent.
"They may have found out about this a little belatedly, but it's important that Canadian companies pay attention to this," said Lebert.
The new rule, known as Amendment 1502, is not to be confused with another regulation passed on the same day, Amendment 1504, which will force extractive companies to inform the SEC of all the payments they make to governments in an annual form.
They're both sunshine laws meant to bring transparency to the extractive sector, but Amendment 1502 deals specifically with conflict minerals from the DRC.
All companies listed on a U.S. stock exchange that use gold, coltan, cassiterite (from which you derive tin) and wolframite (from which you derive tungsten) will have to prove to the SEC that the metals don't come from a mine that is feeding a military group.
That's going to be a tough job for companies, said Jean-Michel Laurin, vice-president of global business policy with the Canadian Manufacturers and Exporters industry association.
"If you're a company and you've got a plant in Mississauga and you're assembling parts for electronic products and you're supplying your minerals typically from a supplier, you don't know what the country of origin of every little thing is in your product," said Laurin.
"We've alerted a lot of our members about this legislation," said Laurin. "I think the challenge for a lot of them now is ‘How?'"
Lucky for them the SEC has already spelled this out.
Last year, the OECD completed a long and arduous process between governments, civil society and companies to create guidelines that defines due diligence in the case of tracing a metal's origins.
The SEC explicitly refers to the OECD guidelines in the rule.
While many of the rule's retails have yet to become clear - including just how high up the supply chain the source-tracing must begin - a legal analysis provided by law firm Fasken Martineau, which has a group focused on corporate social responsibility issues, spells out a few key points.
One of the most important aspects of the new regulation is that mining companies are not impacted unless they are involved in some kind of manufacturing.
And only companies who source the above-mentioned metals from the DRC's border countries have to follow-through and figure out their minerals' origins. That includes Angola, Burundi, the Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia.
Through a series of steps a company must determine first the metals' country of origin. If it's one of the covered countries, they must then determine whether or not the metal benefitted parties to a conflict.
If the metals are found to be conflict minerals using the OECD guidelines for due diligence, then a company has to explain how it will source otherwise and mitigate its contribution to military groups.
The NGOs that pushed for Amendment 1502 took as their example the Kimberly Process, the leading mechanism for tracing a resource's origin, which in this case deals with diamonds, said Lebert.
While industry, civil society and governments have been divided on the Kimberly Process' success - some of its original backers now say it's broken - "when it comes to minerals, it is pretty well the only example that's out there," said Lebert.
A major hurdle part on the ground will be getting the DRC's neighbor governments, who have elements within them that are complicit in the illicit metals trade say international observers, to improve resource governance.
Amendment 1502 is happening in lockstep with efforts by the International Conference on the Great Lakes Region to do so, says Lebert.
"North Kivu remains a problem and the involvement of Rwanda is still very much a thorny issue and one that we're keeping our eye on," she said.
As the new responsibilities for manufacturing companies become more clear - they won't have to file the first reports until May 2014 - a similar regulatory regime is currently being set up in the European Union.
That leaves Canada, one of the biggest investors in the African extractive industry, following rather than leading, said Lebert.
"It's a shame that Canada is lagging so far behind because we are the biggest investors in terms of the mining sector in Africa and yet we are barely participating on these issues," she said.
Eastern Congo's poor left counting the cost of conflict-free gadgets
US legislation on conflict minerals has generated column inches, but is it hurting the very people it was designed to protect?
3 September 2012
There are more mobile phones and other wireless devices in the US than people. Each one probably contains small amounts of tantalum, tin, tungsten and gold. This fact, we're told, ties US consumers directly to villagers in the volatile, resource-rich eastern provinces of the Democratic Republic of the Congo (DRC).
Our insatiable demand for electronic devices is keeping brutal militia groups in business, goes the now familiar story, and cleaning up the mineral trade is the key to peace. This narrative, simple yet deeply controversial, has provided fodder for newspaper columns and galvanised campus and consumer groups across the US to demand "conflict-free" gadgets. Long-ignored by Washington, it has helped push eastern Congo centre stage.
In July 2010, a provision (section 1502) was added to the gargantuan Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring US-listed companies to investigate and disclose whether the tantalum, tin, tungsten and gold used in their products comes from the DRC or a neighbouring country. But now that the US Securities and Exchange Commission (SEC) has finally released long-overdue rules to implement what is known in eastern Congo as "Obama's law", the story seems anything but simple.
Analysts and observers are still poring over the SEC's 356-page "conflict minerals" rule, and comments continue to trickle out. But don't expect much celebration. Industry groups will continue to groan about the cost and difficulty of conducting detailed investigations of their complex supply-chains. Others have questioned whether it's appropriate to task the US capital markets regulator with humanitarian and foreign policy concerns.
The Enough Project and Global Witness, NGOs that led the charge for "conflict minerals" legislation, have issued relatively cheerless reactions. Both take issue, for example, with the SEC's decision to allow companies to describe the origin of their products as "undeterminable" for two to four years, depending on the company's size. Proponents of this "phase-in" period say it's necessary, given the time and effort required to mount such complex inquiries. Advocates say it's unacceptable, given immediate needs.
Much seems to hinge on the definition of "manufacturing", and on the judgment of SEC regulators as to who and what is covered by the rules. So far, mining companies and some major retailers that simply affix their brands to third-party manufactured goods appear exempt.
The contrast between the emotive campaigning around "conflict minerals" and the unglamorous work ahead is stark: the SEC's rules are only about disclosure. How much capacity will the agency have to review these reports? How involved will campaigners get in the important but tedious task of monitoring disclosures? This is complex stuff, demanding far more than signing a petition or calling a senator.
Still, few seem to doubt the Dodd-Frank regulations will have an impact on the profits armed groups extract from the mineral trade. But will it end the violence, as promised?
Critics argue that the focus on cleaning up the mineral trade - in itself, a noble aim - has simplified a complex conflict.
In a paper published by the Centre for Global Development earlier this year, Laura Seay, professor of political science at Morehouse College in Atlanta, argued there is no reason to believe that armed groups won't just find other sources of revenue. The idea that they fight because of minerals, or the money they make selling them, is historically inaccurate, she says. Instead, Seay offers a series of reports that suggest Section 1502 has already put entire Congolese communities out of work as companies look for minerals elsewhere.
If the "conflict minerals" story has put eastern Congo on the international agenda, it has done so at a significant cost, argues Columbia University professor Séverine Autesserre. In exchange for attention, Autesserre says the issue has diverted attention from other key issues: poverty, corruption, land conflicts, the reform of local institutions. It has hindered the search for a comprehensive solution, she argues, leaving us instead with a series of poorly conceived technical responses.
There's little doubt that those who led the charge for "conflict minerals" legislation understood the complexities of the conflict in eastern Congo and few would argue that foreign firms should, however indirectly, continue to bankroll - and profit from - the activities of militia groups. But was it right to simplify the message and use stories of rape and sexual abuse to push it through?
SEC brings oil and mining transparency provision of Dodd-Frank to life
Oxfam America press release
23 August 2012
After two years, final rules released to help stem corruption in resource-rich countries
Washington, DC - Oxfam America, an international relief and development organization, applauded the US Securities and Exchange Commission (SEC) for finally implementing a landmark 2010 transparency law that will provide important information to investors and help stem corruption in resource-rich countries. The final regulations issued yesterday require oil, gas and mining companies listed on US stock exchanges to disclose the payments they make to host governments.
Known as Section 1504 or the "Cardin-Lugar" provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the law requires oil, gas and mining companies to disclose payments they make at the country and project level to the United States and foreign governments. Passed nearly two years ago, the law covers more than 1,100 companies, according to the SEC, including around 90 percent of internationally operating oil companies and many of the top international mining companies. This includes American companies such as ExxonMobil and Chevron, foreign companies, such as BP and Shell, and some companies from emerging markets such as China, India, Brazil and Russia.
"By approving final regulations yesterday, the SEC lifts the veil of secrecy on billions of dollars that flow every year from oil and mining companies to governments around the world and will arm citizens of resource-rich countries with information they need to track the amount of money their governments receive from oil and mining companies," said Raymond C. Offenheiser, president of Oxfam America. "We commend the United States for taking a leadership position on increasing transparency in the oil, gas and mining industry and the SEC for implementing Congress' intent and not caving under intense industry pressure."
Implementation of the law will put the United States in a position to influence a draft European Union law designed to complement Section 1504. The EU proposal requires both publicly and privately-held companies to disclose their payments to governments in countries where they do business.
"The SEC provision covers the vast majority of internationally operating oil companies and the world's largest mining companies, and with expected European rules covering even more companies, the transparency net will be cast far and wide," said Offenheiser.
Oxfam has urged the SEC to release final rules that conform to the statutory requirement as well as Congressional intent. While Oxfam is still reviewing the 231 pages of final rule text, the SEC largely appears to have done so. For example, the SEC rejected appeals from industry by not allowing any exemptions to the disclosure requirements for covered companies. Industry commentators had argued that a few countries prohibit disclosure but they did not provide convincing evidence. Oxfam America has made it clear to the SEC that such prohibitions are not known to exist and that creating such an exemption would invite foreign regimes to create new secrecy prohibitions.
While the new rules list all of the payments, such as taxes, royalties, dividends and bonuses companies need to disclose, they do not define the term "project". There is already a common understanding within the industry of what a project means and it's usually at the lease, license and concession levels. A company that doesn't use the definitions widely used by industry is most-likely poorly-managed and investors should be cautious. The SEC provided detailed guidance in the rule release to minimize company abuse of the flexibility provided. For example, the SEC said that a project can't be defined as a country, geologic basin or reporting unit.
Tight reporting requirements by the SEC will help to reverse the "resource curse" and the misuse of billions in oil and mining revenues. More than 1.5 billion people live on less than $2 a day in resource-rich countries.
"The communities in resource-rich countries like Ghana rarely share the wealth from oil and mineral extraction and the new requirements will certainly help close the gaps in the current system," said Hannah Owusu-Koranteng of WACAM, an Oxfam partner working and an Extractive Industries Transparency Initiative global board member. "The SEC has finally implemented the law and the project-level disclosure required must provide communities and local officials in Ghana with detailed information on the revenue flowing to government from gold extracted from their lands."
Owusu-Koranteng added, "We encourage developing countries to enshrine similar requirements."
"Congress spoke two years ago through this bi-partisan measure and now the SEC has done its job by issuing these final rules," said Offenheiser. "Yesterday's vote would not have been possible without the tireless efforts of Senators Cardin, Lugar, Leahy and Levin, Rep. Frank and many other Congressional leaders who have pushed the SEC since 2010 to finish the job."
The information will not only benefit communities in Africa and in mining towns across Latin America and Asia, it will also benefit investors on Wall Street who will now have better information to assess high-risk investments. Companies will also benefit from better relations with local communities next door to their multi-billion dollar investments, creating better operating environments and more secure jobs for Americans. Companies will be required to comply with the new rules for fiscal years ending after September 30, 2013.
"The SEC has examined the facts and given its final word. It's time for companies to embrace this global wave of transparency which is, in the end, in their own interest," Offenheiser added. "American companies are not competitive because they make secret payments, but because they bring better technology, competitive fiscal terms, access to capital and efficient business practices. US companies will continue to win deals. No proprietary information will be revealed through payment disclosure and there is much to be gained for companies through transparent practices."
For more information, contact:
Jessica Forres, Extractive Industries and Humanitarian Press Officer
(202) 777-2914 (office)
(202) 460-8272 (mobile)
Conflict Minerals: How the SEC requirements will affect mining companies
24 August 2012
The SEC won't require mining companies to disclose whether they mined tin and gold in African conflict countries, in a long-awaited ruling released this week. However, manufacturers will have to make such disclosures, and will likely require their suppliers, such as mining companies, to make the same disclosures.
"We do not believe that mining is manufacturing, based on a plain reading of the provision," from the SEC final ruling. "We do not consider an issuer that mines or contracts to mine conflict minerals to be manufacturing or contracting to manufacture those minerals unless the issuer also engages in manufacturing, whether directly or indirectly through contract, in addition to mining."
The SEC ruled that mining is not manufacturing, but it does not give mining companies a free pass from the disclosure of conflict mineral requirements. The de facto regulation of mining companies through the supply chain will require a complex analysis of that chain and an audit paper trail to prove to manufacturers that they aren't supporting the killing of innocents in the Congo and other war-torn African states.
Manufacturers of commonly used devices, such as smart phones and electronic notebook pads, use the so-called 3 T's and G - tin, tantalum, tungsten and gold - in their manufacturing process. They are sensitive to a supply chain tainted by even any possible support of warlords who sell hundreds of millions of dollars of these minerals every year.
The SEC is a year late in implementing rules that were included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The SEC was directed to establish annual reporting requirements for SEC registrants who manufacture, or contract to manufacture, products that contain conflict minerals that are necessary to the functionality or production of those products.
Thomas Quadman, executive director of financial reporting policy of the U.S. Chamber of Commerce, recently wrote in an editorial on The Hill website that, "Congress was wrong to make the SEC a new vehicle to project foreign, social policy."
According to reporter Peter Schroeder of The Hill, manufacturers unable to determine the source of their minerals will be allowed to describe the minerals as of "undeterminable" origin for two years. Smaller companies will have four years to use that designation.
Manufacturers are serious about not using conflict minerals. Apple pointed out the impact to the mining industry well when it stated in its Apple Supplier Responsibility 2012 Progress Report that, "Apple's commitment to social responsibility extends to the source of raw materials used in the manufacturing of our products. We require that our suppliers only use materials that have been procured through a conflict-free process and from sources that adhere to our standards of human rights and environmental protection."
Guidance follows current association guidelines
Based on a small sample of conversations with mining controllers and CFOs, we believe that there is little understanding of this regulation. Several CFOs were unaware of the topic while others were very concerned about what and how they will have to report to their customers. Nonetheless, mining companies will have to live with the politicizing of financial reporting requirements. Here's how it is likely to work:
Affected companies will be required to disclose descriptions of the products manufactured, or contracted to be manufactured, that are not DRC conflict free; the entities that conducted the independent private sector audits in accordance with the standards established by the Comptroller General; the facilities used to processes the conflict minerals; and the efforts to determine the mines or locations of origin with the greatest possible specificity.
Because the SEC determined that mining is not manufacturing, mining companies publically traded in the U.S. will not be required to report the disclosures required under the Dodd-Frank Act. Still, all mining companies that mine the 3 T's and G will be indirectly affected by the Dodd-Frank Act through the initiatives that have been undertaken by various manufacturing companies, their respective industry associations, and other organizations, since these mining companies are at the beginning of the supply chain.
Also in its final rules, the SEC decided to allow SEC registrants to follow the Organization for Economic Cooperation and Development's (OECD's) Due Diligence Guidance for Supply Chains of Minerals from Conflict-Affected and High-Risk Areas on a ‘safe harbor' basis. These guidelines were developed through a multi-stakeholder process including the OECD, 11 countries of the International Conference on the Great Lakes Region, industry, civil societies, and the United Nations.
This is good news for SEC registrants in the manufacturing industry, as some of their widely-recognized industry associations have already developed policies and procedures which include, or contain elements of, the OECD guidelines.
These include the Electronic Industry Citizenship Coalition's and Global e-Sustainability Initiative's Conflict Free Smelter Certification and the Responsible Jewelry Council's Chain of Custody Certification programs. Additionally, many manufacturing companies have applied their industry association or OECD guidelines into their own internal supply chain policies and procedures. These manufacturing companies include industry giants Apple, Dell, Motorola Solutions, LG, Intel, GE, Boeing and Ford.
How it will work
Because it is the intention of the manufacturing industry to produce products that are conflict-free, more transparency and auditability will be required of every link in the supply chain. For mining companies this will mean providing documents to their customers - primarily smelters and refiners - that prove the minerals or metals remained conflict-free from the mine site to the locations where their customers accepted delivery.
Per the OECD guidance, mining companies should provide the following information to their customers:
(1) All taxes, fees or royalties paid to government for the purposes of extraction, trade, transport and export of minerals.
(2) Any other payments made to governmental officials for the purposes of extraction, trade, transport and export of minerals.
(3) All taxes and any other payments made to public or private security forces or other armed groups at all points in the supply chain from extraction onwards.
(4) The ownership (including beneficial ownership) and corporate structure of the exporter, including the names of corporate officers and directors and the business, government, political or military affiliations of the company and officers.
(5) The mine of mineral origin.
(6) Quantity, dates and method of extraction (artisanal and small-scale or large-scale mining).
(7) Locations where minerals are consolidated, traded, processed or upgraded.
(8) The identification of all upstream intermediaries, consolidators or other actors in the upstream supply chain.
(9) Transportation routes.
Additionally, the OECD recommends in the Supplement on Gold to its due diligence guidelines that gold mining companies should provide/perform the following:
(1) Assign a unique reference number to each output, e.g. bar of gold doré, or container of alluvial gold, and affix and/or imprint that reference number in such a manner that its tampering or removal will be evident.
(2) Adopt physical security practices over gold such as sealed security boxes for shipment in such a manner that tampering or removal of content during transport will be evident. In conflict-affected and high-risk areas, such physical security practices should be verifiable by appropriate and trusted third parties (e.g. customs authorities, independent auditors, Industry Programs or Institutionalized Mechanisms).
(3) Support the implementation of the principles and criteria set forth under the Extractive Industry Transparency Initiative (EITI).
So, even though mining companies publically-traded in the U.S. will not have to make the disclosures required by the Dodd-Frank Act - since mining companies do not ‘manufacture' the minerals and metals that they extract - compliance by SEC registrants in the manufacturing industry will trickledown such that all mining companies that mine the "3 T's or G" will have to have the procedures in place to help ‘prove' to those manufacturing companies that the minerals and metals contained in their products are conflict-free.
About the author
Dan Edwards, CPA, is a manager of business advisory services in the Denver office of Hein & Associates LLP, a full-service public accounting and advisory firm with additional offices in Houston, Dallas and Orange County. He specializes in technical GAAP and SEC advisory services, as well as SOX 404 implementation services, and also leads the firm's mining practice area. Edwards can be reached at 303.298.9600.