Congo-Kinshasa: U.S. Law Could Boost Costs But Promote Peace

| January 15, 2013 | 0 Comments

There are grounds for optimism that the Dodd Frank Act will contribute to the Congressional objective of promoting peace and security in eastern Democratic Republic of Congo.

Section 1502 of the 2010 US Dodd-Frank Act is lauded by its advocates as a progressive regulatory framework which will help prevent company complicity in a vicious cycle of mineral-fuelled conflict in eastern DRC. Critics have derided Section 1502 as an unworkable burden on business and claimed that it will harm local livelihoods in one of the world’s most underdeveloped regions. Whatever the intended – and unintended – consequences of the groundbreaking legislation, Section 1502 will introduce significant additional compliance costs. Given that the minerals covered under the Act feed into a wide array of consumer goods from mobile phones, to jewellery and to coffee machines, the legislation is important to consumers as well.

There are concerns that Section 1502 will not be effective in stemming the flow of mineral revenues to armed groups, given widespread cross-border smuggling into states with a weak regulatory framework (such as Rwanda and Burundi) and into countries not covered by the legislation (such as Kenya). The prevalence of endemic corruption in the region and the massive technical challenge of ensuring effective traceability policies may also mean mineral revenues continue to perpetuate conflict.

In addition, the brief November 2012 capture of Goma (the capital of North Kivu and a regional trade hub) by the M23 rebel group, and the continuing presence of the insurgents in the region, will make it even more difficult for companies to source minerals from eastern DRC. With the M23 rebels threatening to expand their campaign and even march on Kinshasa, the extremely uncertain outlook could make responsible mineral sourcing from large parts of North Kivu unviable for the foreseeable future.

Although the Dodd-Frank Act was passed in 2010, it took the US Security and Exchange Commission (SEC) until August 2012 to publish its controversial final rules implementing the legislation. With the Act due to come into force from January 1 2013, an estimated 6,000 companies listed with the SEC will need to be transparent about the source of columbite-tantalite (or ‘coltan’), cassiterite, wolframite, gold and their derivatives (namely tantalum, tin and tungsten) used in their products and manufacturing processes.

While it will not become illegal for the affected companies to use minerals which perpetuate conflict in DRC, the reputational damage of making such a disclosure in annual reports due from May 31, 2014, should act as a significant deterrent. As a result, the transparency requirements will cascade down supply chains from US-listed companies to suppliers across the world.

In a best case scenario, the new regulatory requirements will boost business and consumer awareness, and thus spur an increased commitment from US-listed companies and their supply-chain partners to source minerals from conflict-affected countries in a responsible manner. A number of market leaders in supply-chain traceability – such as Apple, HP and Intel – have put in place policies to reduce their exposure to conflict minerals. These measures include mapping vast supply chains, leading, in some cases, to the identification of hundreds of smelters used to process minerals.

The smelter tier is a logical level of depth for traceability in the supply chains of multinational companies. Tracing unrefined minerals further upstream may not be feasible. Nevertheless, even where companies have identified all the smelters in their supply chain, auditing refineries using minerals from DRC and verifying that they are conflict-free remains a challenging proposition. Indeed, the practicalities of sending auditors to conflict-ridden North and South Kivu is only one of a variety of obstacles to reliable certification.

Under Section 1502, US-listed companies are obliged to carry out a ‘reasonable’ inquiry into which country minerals in their supply chain are sourced from. However, the requirements for this test have not been clearly defined by the SEC, creating uncertainty for business. Indeed, greater clarity may only be established once a legal precedent has been set.

For critics, the cost of compliance will seriously undermine the competitiveness of affected companies during a period of weak economic growth in the US. Indeed, the SEC estimates that the initial cost of compliance will be between $3bn and $4bn, while the annual cost of compliance thereafter will be between $207m and $609m.

Moreover, some industry bodies have put the estimated cost of initial compliance much higher at $16bn. Given these costs and a perception in some quarters that the rules are unworkable, legal challenges from industry bodies are on the horizon, creating additional uncertainty for business.

The new regulations could also lead to higher prices for minerals such as tantalum, given that DRC is the source of around a fifth of global supplies of the element. Furthermore, artisanal miners in eastern DRC and the nine states which neighbour the country are likely to feel the effects of falling Western demand as medium-sized companies which are incapable of – or unwilling to – put in place supply-chain traceability policies and risk-averse investors withdraw from supply chains potentially linking them to conflict and human rights abuses.

While there is a clear risk that Section 1502 will result in a de facto embargo on sourcing certain minerals from DRC and its neighbours, there is still reason to be optimistic that the legislation will contribute to the noble Congressional objective of promoting peace and security in eastern DRC. However, the positive effects of the Act will only be felt in the long-term.

Robert Borthwick and James Warwick are analysts at Maplecroft, the global risk advisory firm

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