War – what is it good for? Well, for some it has actually proved extremely lucrative.
It is estimated armed groups in the Democratic Republic of Congo (DRC) have earned hundreds of millions of dollars to fund the conflict that has torn apart the country over the past 15 years, through the sale of the country’s rare and valuable natural resources.
“What started as a war over politics and ethnic grievances and politics has morphed into a war over control of strategic mineral reserves,” says Aaron Hall, a policy analyst at campaign group the Enough Project.
Because of this, in 2009 the US senators Dick Durbin, Russ Feingold and Sam Brownback (now governor of Kansas) sponsored the Congo Conflict Minerals Act, which was designed to stop money paid by US companies for these minerals funding this conflict. Although this legislation never passed into law, the minerals funding provision reappeared a year later, tucked away in the ‘miscellaneous provisions’ section of the mammoth 849-page Dodd-Frank Wall Street Reform and Consumer Protection Act. While this act was primarily a political response to the regulatory failings of the financial crisis, it also included Congo plans.
Section 1502 of Dodd-Frank establishes the requirement for US companies to make an annual disclosure if they use any ‘conflict minerals’ (or their derivatives) that originated in the DRC (or a country that borders it) in products. The legislation focuses on what are sometimes called the ‘3TG’ metals – tantalum, tin, tungsten and gold and the minerals from which they are extracted.
If companies do manufacture (or contract to produce) products that use these, the business will have to provide a report – independently audited – that details what these are and explaining the due diligence it has undertaken to establish the source. It is expected that around 5,500 firms could be affected by the new rules, primarily the end-users in the automotive, electronics and defence sectors.
The body responsible for enforcing these rules, the Securities and Exchange Commission (SEC), was supposed to publish the regulations for companies to follow by April 2011. But having delayed implementation last year, the SEC has again postponed their introduction until an unspecified point later this year. “We have missed the deadline on this one quite some time ago because it is so complex and it is so out of the ordinary for the SEC,” SEC chairman Mary Schapiro told a congressional committee last month. “The commission is working to finalise the adoption and I am hopeful in the next couple of months we will be done.”
But Schapiro did offer some clues as to what companies can expect. She said the SEC was working closely with industry, looking at the well-regarded OECD guidelines on due diligence and that there would be a “phase-in” period to allow businesses time to develop compliance schemes. However, she added, while trying to give “latitude and flexibility” to firms, the law itself leaves no room for exceptions.
The specific intention of the legislation is not 100 per cent clear. It does not prohibit sourcing from the DRC, nor place an embargo on exports from it. But this might have an unintended consequence as CEOs fearful of a knock at the door from the SEC order their firms to stop buying from the region, to avoid prosecution and the regulatory burden of disclosure.
In addition, a report by the United Nations Group of Experts on the DRC published in December 2011 said that, despite the actions of firms keen to comply with the Dodd-Frank provisions, there was little evidence that comptoirs – the middle men that buy raw materials from the mines – were making an effort to enhance due diligence.
But there is also evidence the situation is improving as a result of the pressure created by the legislation. Hall cites a recent visit to a mine that two years ago would not have been possible without payments and armed guards. But without the final SEC rule, progress is slower.
“One of the biggest impediments to progress over the past months has been the SEC,” he says. “The hesitation hurts progress and the sooner it releases the regulations, stakeholders involved in the process can move forwards.”
CPOs outside the reach of the regulations should not rest on their laurels either. In January, the European Commission said it would promulgate the use of the OECD guidelines among firms, and both Global Witness and fellow campaign organisation CCFD-Terre Solidaire have called for legislation similar to that in the US. “The reality is that if the EU doesn’t make the OECD recommendations compulsory, many companies won’t do the checks, thereby undercutting the firms that do try to do the right thing,” said Global Witness campaigner Annie Dunnebacke.
But the SEC’s delay is not a reason for companies to remain idle. Many firms, most notably those in the electronics sector, have been collaborating for some time to tackle the issue and put due diligence programmes in place.
“Companies can follow OECD due diligence standards and they can map supply chains – and a lot of companies are doing that, understanding their supply chains to the processing facility level or the smelter level where they source from,” says Hall.
The OECD guidance contains a five-step due diligence framework for organisations to follow for responsible sourcing. These steps are: establishing strong company management systems; identifying and assessing risks in the supply chain; designing and implementing a strategy to respond to identified risks; carrying out independent third-party audits of supply chain due diligence at identified points in the supply chain; and finally, public reporting on supply chain die diligence.
In addition to the framework, the guidelines also make clear the type of behaviour that should not be tolerated and the measures that can be taken for risk mitigation over issues such as supply chain security or misrepresentation of the origin of minerals and how to resolve these. It also highlights a number of red flags, such as if the minerals originate in a high-risk area or if suppliers have a track record of sourcing from the region, that should trigger due diligence.
The OECD code of conduct even has advantages over Dodd-Frank, says Rick Goss, vice president, environment and sustainability at the Information Technology Industry Council (ITI), one of the industry bodies collaborating on this.
“The OECD guidance adopts a well-regarded approach, a company at a different point in the supply chain has a different set of responsibilities. It tries to identify reasonable efforts that each separate pocket in the supply chain should take. This is far different from 1502, which put the full legal responsibility on the end-user,” he says.
“The other difference is the OECD approach allows for remedial action to be taken. If you as a company determine there has been a violation in the supply chain, it invites and encourages you to work with that supplier to remediate the issue. 1502 doesn’t have that type of provision – the way it is written you are responsible for funding conflict, or you are not. There is not the chance to say ‘yes we have this due diligence system in place, we identified an instance of non-compliance, but we’re still good guys because we took these steps’.”
Much of the technology sector’s work to tackle the problem has focused on the metal tantalum, as this is where the sector has the most buying power. Collaboration between industry bodies and member companies has led to the establishment of the ‘Conflict Free Smelters’ assessment programme, where smelters voluntarily submit to an independent audit to provide assurance that they are not using minerals that contribute to conflict. Pinpointing the smelters as an area for action made sense, says ITI’s Goss.
“The smelters are the logical bottleneck in the supply chain. There are estimated only 15-20 global smelters that process 85 per cent of global tantalum. You have tens of thousands of artisanal miners in the DRC and at the other end, you have thousands of end-users. You look at the 15 to 20 smelters and that’s the point where you can fix audit and verification procedures.”
As a result of companies such as the chip and processor manufacturer Intel working with organisations such as the Electronic Industry Citizenship Coalition and the Global e-Sustainability Initiative, there is a list of conflict-free smelters (see www.conflictfreesmelters.org). In addition to the audit, smelters agree to implement the OECD guidelines and assure that the smelter and suppliers provide supporting documentation around traceability.
Another collaborative scheme looking to tackle to problem is the Solutions for Hope project, established by Motorola Solutions and capacitor manufacturer AVX. The aim was to establish a ‘closed-pipe’ supply chain for tantalum with a secure chain of custody to prove the sourcing process does not fund conflict.
“This tightly controlled supply line will ensure conflict-free tantalum for these capacitors and allow time for a much-needed conflict-free verification system to develop in the DRC,” said Rich Valin, CPO at Motorola Solutions, launching the project last July.
According to Bill Millman, technical and quality director at AVX’s tantalum division: “A closed-pipe is essentially to reduce the number of people who would be involved in the financial and physical transfer of getting minerals from a selected site to the end consumer.”
Under the traditional comptoir model, négociants visit individual mines sites paying cash on an informal ‘bag-by-bag’ basis, with no taxes or documentation. These are then sold to a comptoir who, once enough for a full container is collected, would sell to an international trade who then sell to a smelter. “The traceability is just a mess,” says Millman.
“We decided with the closed-pipe we would choose selected mine sites buying directly from legal, permitted concession owners, deliver that material to a validated conflict free smelter and from that material make capacitors and sell those directly to the end-customer,” he adds. “So we had to move to a very regulated, transparent and pre-nominated number of players.”
It was also agreed that a world market price would be paid for the minerals, so it would not appear that the project was simply about securing a low-cost supply.
In March, AVX expected to deliver its first conflict-free tantalum capacitors to Motorola Solutions. “This has been a lengthy, difficult, complex, expensive operation and we are only talking about relatively small amounts of material. The pilot only represents 2 per cent of AVX’s total consumption,” Millman says.
He says three questions had to be answered to assess the scheme’s feasibility: Is it secure? Is it sustainable? And is it scale-able? The pilot appears to have proved the security, and support from the sector – Nokia signed up to participate in February – will make it sustainable. The challenge is no to see if the scheme can be replicated for other metals.
The US state department has also established the Public-Private Alliance for Responsible Minerals Trade, which brings together companies and industry representatives to tackle the problem from a supply chain point-of-view. It is investing $3.2 million, and aims to raise a further $2 million from industry, to support pilot schemes and audits.
While any progress in this area is to be welcomed, could the multitude of initiatives currently underway – even though widespread collaboration is in evidence – dilute their impact?
“I understand the frustration there are a series of disparate initiatives occurring right now and it would be beneficial to everyone if there was a single internationally agreed-upon standard for compliance for ethical sourcing for the region,” says Hall, citing the Kimberley Process to prevent conflict diamonds as an example. But he believes the passage of Dodd-Frank could be the stepping-stone to such an agreement, if the US government takes a leadership role.
The ‘3TG’ metals and their minerals
Tantalum (obtained from tantalite, columbite or coltan)
A strong conductor of both heat and electricity, tantalum’s primary use is in capacitors found in electronic products, such as computers, mobile phones and other consumer electronics. It also produces good alloys and is resistant to acids, giving it use in the aerospace and automotive industries.
Tungsten (obtained from wolframite)
Tungsten has the highest melting point of any metal, which makes it ideal as the filament in lightbulbs. Its strength also means compounds are used to create cutters for saws, drills and other tools. This characteristic also makes it popular in the creation of hard alloys used in industries such as defence. Because it has a high density, it is also used as ballast in racing cars.
Tin (obtained from cassiterite)
Tin’s low melting point means it is often used as a solder in the manufacture of circuit boards, or to join pipes. A low toxicity permits its most obvious use as a plating for cans to preserve food.
Tin as a cause of conflict is not a new phenomenon. Access to tin deposits was one of the reasons that prompted the Roman invasion of Britain.
While the jewellery industry is the major consumer of gold – around 60 per cent – the electronics sector also uses the metal for wiring and coating because it is an excellent conductor. According to the World Gold Council, only 166,600 tonnes of gold have been mined since the beginning of civilisation.
☛ Paul Snell is deputy managing editor at CPO Agenda’s sister magazine Supply Management