Democratic Republic of the Congo Conflict Minerals & The Dodd-Frank Act - Crib Sheet
Under Section 1502 of the United States Dodd-Frank Act, US listed companies must disclose whether they use "conflict minerals" and whether these minerals originate in the Democratic Republic of the Congo. In this article BMI answers the most salient questions pertaining to the conflict minerals stipulations of the Dodd-Frank Act.
Core View: Conflict Mineral Regulations Pose Minimal Risk To Sector
The implementation of America's Dodd-Frank Act poses little risk to the growth of the mining sector in the Democratic Republic of the Congo (DRC). We maintain a bullish view of the country's mining industry, predicting that the sector's annual expansion will average 7.9% between 2014 and 2018.There are three key reasons for this outlook.
First, we doubt that the law is enforceable. A difficult operating environment in the DRC, combined with legal opposition in the US, will allow many American firms to continue their current operations. We note that most of the minerals exported by the DRC are refined or processed in Asian jurisdictions not covered by the law.
Second, we highlight the fact that conflict minerals make up a very small share of the DRC's total mineral exports. The country's mining sector is primarily based on the production of copper in the relatively stable province of Katanga. Efforts to address conflict minerals in North Kivu would, even if they were properly enforced, have a marginal economic impact.
Third, minerals currently being produced by rebel groups are already being exported illegally and they do not appear in official statistics. Were these exports to cease, there would be little effect on the formal economy or on headline production figures.
|Promising Growth Outlook|
|Democratic Republic of Congo - Mining Industry Value & Mining Industry As % GDP|
What Are Conflict Minerals?
Conflict minerals are minerals mined in conditions of armed conflict and human rights abuses, and which are sold or traded by armed groups. The main conflict minerals are cassiterite (tin), columbite-tantalite (tantalum), wolframite (tungsten) and gold. These are often referred to as the 'three-Ts' - tin, tantalum and tungsten (plus gold).
Conflict minerals are mined by a variety of armed non-state actors. The most prominent over recent years have been the Forces Démocratiques de Libération du Rwanda (FDLR) and rogue groups from within the DRC's armed forces. The Congolese national army has also been involved in the production and trade of conflict minerals.
While the problems posed by conflict minerals are particularly pressing in the DRC, they are also present in a variety of other countries. Several factions fighting in Sierra Leone's civil war (1991-2002) funded their activities by selling diamonds, a situation that popularised the phrase 'blood diamonds'
What Does The Dodd-Frank Act Stipulate About Conflict Minerals?
Under Section 1502 of the Dodd-Frank Act, any firm registered with America's Securities and Exchange Commission (SEC) must take efforts to avoid the use of conflict minerals from the DRC or any of the following countries: Angola, Burundi, the Central African Republic, the Republic of the Congo, South Sudan, Tanzania, Rwanda, Uganda and Zambia.
Firms active in those countries will have to provide a report outlining efforts they have taken to ascertain the sources of the minerals used in their products. An in-country investigation may be necessary. Products can only be labelled 'DRC conflict free' following an independent audit of these processes.
Firms unable to prove that their use of local minerals has not aided armed groups will be forced to publish a 'conflict minerals report' explaining how they intend to improve their due diligence efforts. These firms' products can still be legally sold.
Which Companies Are Affected By The Act?
The legislation applies to all firms listed with the SEC, including non-American companies. Firms fall under the provision of the act regardless of whether they actively produce the minerals themselves or use the minerals in the production of a finished product. Given that tin, tantalum, and tungsten are all used in a wide variety of high technology goods, the law would apply to American manufacturers.
It should be noted, however, that the law includes many exceptions and loopholes. Manufacturers are exempt if they affix their brand to a finished product made by a third party which they do not control. Given that most conflict minerals are processed in countries like China and then sold to American firms as finished components, it is unclear the degree to which the finals users will be liable. The law also specifically exempts mining firms that do not process or manufacture the minerals themselves.
What Is The Aim Of The US Government In Implementing This?
The goal of the American government - and of other states, such as the UK, which have similar laws - is to prevent the sale of minerals from benefiting armed groups in the eastern DRC. The law is based on the belief that many rebel groups in that country are heavily dependent upon money gained from mineral resources and that depriving them of this revenue will reduce their ability to operate.
Are These Efforts Likely To Succeed?
There are two reasons why efforts such as the Dodd-Frank Act are unlikely to have the desired effect; poor implementation and alternate revenue sources.
BMI believes that the enforcement of the regulations is likely to be patchy at best. A lack of state institutions in the DRC will make reporting difficult and allow unscrupulous firms to provide misleading information. Many shipments are likely to be exported under false production certificates. The complex and exemption-filled law will also prove difficult to enforce within the United States. American mineral users have recently won a legal case in which they claimed that labelling requirements were an unconstitutional breach of their freedom of speech. The SEC is likely to appeal this, but the legal situation remains murky.
Even were the act to be fully enforced, however, we note that rebel groups would be unlikely to reduce their operations. Many groups, including the recently defeated M23, have a minimal dependence on minerals as a source of funding. We expect that those that are reliant on mineral production would seek alternate sources of funding rather than abandon their activities. Armed groups could easily rely on funding from smuggling, racketeering, and the extortion of local communities. Providing fake production certificates and exporting minerals via third countries not covered by the act would, in and of itself, provide a new source of revenue for some groups
Would A Significant Crackdown On Conflict Mineral Exports Harm The DRC's Economy?
Even in the unlikely event that the production of conflict minerals were to decline substantially, we stress that this would have a minimal effect on the DRC's mining sector. Copper makes up the vast majority of mineral production in the DRC, and the production of this mineral would be unaffected. Gold output would also continue to rise due to projects such as the vast Kibali mine.
Given that most conflict minerals are extracted at small-scale facilities that do not appear in official statistics, any decline in production would have little impact on the formal economy. One exception to this could be in terms of employment; a coordinated effort that shut down artisanal mineral production could cause rising unemployment in provinces such as North Kivu.