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Conflict-Free Cell Phones? DRC Is Big In Tantalum Exports
For years this phrase has conjured up images of warlords capturing civilians, often children, and forcing them to dig through slush and muck for diamonds that could then be sold to buy guns which would simply restart the process.
Efforts to raise awareness and stem the flow of these blood diamonds have proved relatively successful, with civil society monitoring and procedures such as the Kimberley Process ensuring that most diamonds mined can be linked back to slavery-free sources and the revenues do not go to fund conflicts.
Unfortunately, this has not ended the conflict-mineral problem; it has merely changed the issue from engagement rings to cellphones, laptops and other electronics.
The Democratic Republic of the Congo is among the world’s largest exporters of tantalum, tin, gold and tungsten. While years ago this would have taken a backseat to the conflict diamonds, the growth of portable electronics has made tantalum invaluable. It is a vital part of cell phones, laptops and other electronics. The same is true with tin and tungsten, while gold’s value is both obvious and extremely multifaceted.
Unlike diamonds, there is considerable difficulty in consumer-side regulation of conflict minerals in cellphones, laptops and other electronics. While an ordinary consumer may easily be able to enter a jewelry store and ask for evidence that a particular diamond was conflict-free, that same consumer may have considerable difficulty going into an Apple store and asking whether the iPhone or iPad contains tantalum mined with slave labor and/or was used to fund a seemingly unending conflict. With this in mind, the U.S. government sought to put in place protections on the supply-side.
Enter the Dodd-Frank Wall Street Reform and Consumer Protection Act, more commonly known as Dodd-Frank. Buried within this nearly 850-page behemoth of a financial regulatory bill are sections 1502, 1503 and 1504. Collectively, they attempt to regulate the flow of conflict minerals from the DRC and its bordering countries into products manufactured by companies doing business in America.
How these three rules are applied and interpreted going forward will play an important role in the plethora of industries that import minerals from the DRC and surrounding countries, including Central African Republic, South Sudan, Uganda, Rwanda, Burundi, Zambia and Angola.
The fundamental issue for these sections is disclosure. Section 1502 requires disclosure on the mine sourcing of any conflict minerals that originated in the DRC or adjoining countries. This also requires a full supply-chain audit from an independent auditor. Section 1503 requires disclosure on health and safety violations for mine owner and operators. Finally, section 1504 requires disclosure on all payments made to the U.S. or foreign governments. Taken together, these requirements seek to force accountability; reduce bribery and the creation of slush funds for weapons and other conflict-fueling materials; and ensure the health and safety of those removing the minerals from the ground.
While these disclosure requirements will not take effect until 2014, the Securities and Exchange Commission issued a rule in August 2012 in a similar vein, requiring that companies disclose whether such minerals “necessary to the functionality or production of a product” are conflict free.
It is this focus on disclosure that was challenged in the U.S. District Court for the District of Columbia. The National Association of Manufacturers, U.S. Chamber of Commerce and the Business Roundtable sued to stop the disclosure requirements on grounds that the S.E.C., in creating the rule, had failed to adequately analyze its costs and benefits, both to companies and to the Congolese people along with claims that the disclosure requirements “…run afoul of the First Amendment.”
In late July the court summarily rejected these arguments, stating that the SEC has no duty to analyze the costs to companies or the actual benefit to the Congolese people, tellingly stating “…Simply put, there is no statutory support for Plaintiffs’ argument that the Commission was required to evaluate whether the Conflict Minerals Rule would actually achieve the social benefits Congress envisioned…”
The First Amendment claim was dispensed with similar ease, with the court concluding that the rule met the necessary intermediate scrutiny standard (substantial government interest, regulation directly advances the government interest and there is a reasonable, though not necessarily perfect, fit between the two) and cited a prior Supreme Court case to seemingly give wide leeway to Congress to regulate such supply-side humanitarian crises in the future. “…Because of the changeable and explosive nature of contemporary international relations…Congress…must of necessity paint with a brush broader than that it customarily wields in domestic areas.”
Despite the rejection of these arguments at the District Court level, the vast majority of them have been rehashed for the appeal, according to Ciara Torres-Spelliscy, Stetson University law professor and fellow at the Brennan Center for Justice. Torres-Spelliscy goes on to write that the arguments are “…still weak. The First Amendment argument that the rule ‘compels’ speech is particularly silly. All SEC disclosure regulations make a company speak, whether it is about environmental liabilities or its own financial health.”
There is no reason to believe that either the SEC rule or the Dodd-Frank requirements will be rejected on appeal. They are probably here to stay. This means that all investors need to understand the requirements of Dodd-Frank before importing minerals from the DRC.
More importantly, it also gives companies an opportunity to do an extraordinary amount of good. Some companies have led the charge in this area and it is important to give credit where credit is due. According to the Enough Project, Intel, Motorola Solutions, HP and Apple have all been “pioneers of progress” in ensuring their supply chain is conflict free.
The same study states that the impact is tremendous, with warlords receiving only about 35 percent of their previous income from such minerals.
It is also notable that Motorola, GE and Microsoft have publicly distanced themselves from the stance on the Dodd-Frank requirements held by the various industry associations in the above suit.
There is virtually no limit to the amount of good that can be done if companies use their financial influence to turn the tides on a horrific civil war. Thanks to the SEC and Dodd-Frank, it is also the law.
Andrew Friedman is a human rights attorney and consultant who works and writes on legal reform and constitutional law with an emphasis on Africa. He can be reached via email at email@example.com or via twitter @AndrewBFriedman.