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Dodd-Frank Section 1502: Significance and Public Policy Implications


This presentation centers on a "Miscellaneous Provision" in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act which requires U.S. companies that use tungsten, tantalum, tin and gold …

This presentation centers on a "Miscellaneous Provision" in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act which requires U.S. companies that use tungsten, tantalum, tin and gold in their products to disclose whether or not they are sourcing "conflict minerals" and, if so, how they are implementing supply chain due diligence. Affecting a plethora of companies from smartphone to shoe manufacturers, Bayer’s cost model has the price tag of this law at USD 8 billion for U.S.-based companies alone, a model that was largely picked up by the SEC as well as the claimants in the subsequent lawsuit against the SEC. "What, there's tin in my shoe?" you ask.

In the Congo, where the law is known as the "Obama law," the future of thousands of people – a population that has seen 5.4 million perish in what has been the deadliest conflict worldwide since World War II – is, for better or for worse, affected. How does the law seem to be playing out? What, if anything, does this new legal precedent of corporate disclosure on an international affairs issue mean for sectors where systemic human rights abuses are entrenched through informal commodity extraction and obscure supply chains, such as with the palm oil (e.g. Indonesia), seafood (e.g. Thailand), cotton (e.g. Mali), and cocoa (e.g. Cote d'Ivoire) industries?

PhD Candidate Chris Bayer is an international development practitioner with ten years of work experience in Africa. As a consultant for the Payson Center, he was instrumental in designing and executing a number of research and capacity building projects in a variety of areas such as ARV management and child labor and in 2012 lectured at the American University of Nigeria. He is currently writing his dissertation on child labor monitoring in Ghana and is also substantively contributing to the discussion surrounding conflict minerals.

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  • 1. Dodd-Frank Section 1502:Significance and Public Policy Implications Photo credit: Resource GlobalPayson International Development Colloquium SeriesFebruary 27 2013 Chris Bayer PhD Candidate Tulane University
  • 2. DISCLAIMERThis presentation may havebeen prepared on electronic equipment that contains conflict minerals 2
  • 3. That sausage quoteThe Prussian minister-president Otto von Bismarckonce said: "Je weniger die Leute darüber wissen, wie Würste und Gesetze gemacht werden, desto besser schlafen sie nachts." "The less people know about how sausages and laws are made, the better they sleep at night." 3
  • 4. No country for old men, or anyone really• The Second Congo War (1998-2003) and the instability in its aftermath have killed an estimated 5 million people, mostly from disease and starvation• Deadliest conflict since World War II• Approximately 400,000 women were raped in one particularly horrific year - 2006Source: Robinson, Simon. The Deadliest War In The World. Time Magazine. May 28, 2006.http://www.time.com/time/magazine/article/0,9171,1198921,00.html 4
  • 5. For-profit belligerence• For almost two decades now, the Congolese government has essentially competed for control over mines with armed groups – domestic militias – foreign armies – own military • as there are criminal networks within the Congolese armed forces (FARDC) accused of conducting their own mining “operations”• The DRC is often described as a failed state 5Source: VOA. http://www.voanews.com/content/tracing-congos-conflict-minerals-101654353/124667.html
  • 6. USDS reports:• “armed groups and military units in some parts of the region have killed, raped, tortured, and abducted numerous civilians and burned and looted their villages in mineral rich areas, particularly near mines.• “They have also forced civilians, including children, to mine” or forced civilians to provide them with funds derived from the sale of mining• “Profits from the illicit sale of these minerals are then used to continue the cycle of conflict, facilitating the purchase of small arms used to commit abuses, and reducing government revenues needed to improve security.” – Robert Hormats Under Secretary of State for Economic, Energy and Agricultural AffairsSource: Huffington Post. http://www.huffingtonpost.com/bob-hormats/ending-the-conflict-miner_b_585403.html 6
  • 7. Conflict Mineral Proceeds• The Enough Project estimated that local militias made about $180 million from trading in these minerals in 2009 alone 7
  • 8. 8
  • 9. 9Source: USDS. https://hiu.state.gov/Products/DRC_ConflictMinerals_2012May23_HIU_U540.pdf
  • 10. An epic looting saga• Atlantic slave trade starting shortly after the Portuguese rounded the Gulf of Guinea in 1491• Kongolese King Affonso I in 1526 wrote to the King of Portugal: ‘Each day the traders are kidnapping our people – our land is entirely depopulated’• Under the reign of King Leopold II from 1885 to 1908, ivory, rubber, and minerals were extracted under the threat of losing ones hands if quotas were not reached• Second Congo War involved eight African nations, as well as at least 25 armed groups• After the fighting, Zimbabwe (Mugabe) for The Atlas of War and Peace, example was rewarded with daily flights full of Earthscan 2003 minerals• All along, Congo (Brazzaville) has exported diamonds derived from the DRC – itself having 10 no domestic production
  • 11. The ghost of Rwanda 1994• The 1994 genocide still haunts the region• After the genocide, an estimated 2 million Hutu spilled into the Congo• To this day, between 6,000 to 10,000 (Hutu) Interhamwe troops fight under the FDLR banner• Paul Kagame (Rwanda) seems determined: • (1) to “neutralize” every last one of the Hutu Interhamwe, • (2) to provide security for Tutsi residing in Kivu, and • (3) access (and possibly annex) the very lucrative North and South Kivu districts 11
  • 12. M23– named after March 2009 peace treaty, was created by former rebel troops who claimed the peace treaty was not implemented M23– primarily made up of Tutsis– opposes the Hutu FDLR militia– are supported by Rwanda (Kagame)– has quite effectively leveraged discontented and unemployed population in eastern Congo– control several mining areas in the territories north of Goma– sights increasingly on gold – less “cumbersome” than 3T 12
  • 13. Conflict minerals: Not the cause – but a factor• In a 2001 report on the Illegal Exploitation of Natural Resources in the Congo, the United Nations implicated MNCs as "the engine of the conflict in the DRC"• A 2002 UN Panel of Inquiry revealed that a systematic and intimate relationship exists between economics and military activity in the DRC – Tantalum “permitted the Rwandan army to sustain its presence in the DRC. – “The army has provided protection and security to the individuals and companies extracting the mineral. – “These have made money which is shared with the army, which in turn continues to provide the enabling environment to continue exploitation” 13Source: UN Panel of Inquiry, 2001: Para 130, IHS
  • 14. Cui Bono?• Not so much the miners – Wages are kept artificially low through informal / child / forced labor: the miners earn between $1-5 a day working either for an armed group or for someone who pays off an armed group• Very much so the intermediaries (war lords, soldiers, smugglers), consolidators and exporters (of neighboring countries) – The prices of the minerals vary, but in the case of tantalum, for example, the ore can fetch up to 50 times that which miners earn• Ongoing exploitation of minerals throughout the Congo wars kept mineral supplies up and thus international prices lower• A status quo, mineral-consuming industries were perfectly content to perpetuate – even throughout the Congo wars 14
  • 15. Catch 22• Conflict Mineral proceeds flowed into the informal market or benefitted neighboring countries bypassing state coffers – precluding at least the chance for the Congolese state to become strong enough to assert control over the eastern regions of the country and its rich natural resources• Traditional state authority gave way to foreign military and domestic military might emboldened and enriched by mineral extraction• How to get into a virtuous cycle of payment of royalties/taxes -> state projection of power and security -> investor confidence -> FDI -> formalizing of informal sector -> more state revenue? 15
  • 16. The Campaign• A critical mass of support for conflict-free minerals gained traction in 2008• Largely led by civil society organizations such as the Enough Project, Global Witness, Raise Hope for Congo, Conflictminerals.org and Congo Siasa 16
  • 17. July 21, 2010 17
  • 18. D-F Section 15022010 Dodd-Frank Wall Street Reform andConsumer Protection Act Title XV: MiscellaneousProvisions – Section 1502 Conflict Minerals (P.L.111-203) “It is the sense of Congress that the exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein…” 18
  • 19. Main purpose• “… we understand Congress’s main purpose to have been to attempt to inhibit the ability of armed groups in the Covered Countries to fund their activities by exploiting the trade in conflict minerals.” – per the SEC• “Covered countries” being the “adjoining country” – as a country that shares an internationally recognized border with the DRC, which presently includes Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and ZambiaSource: SEC. Final Rule. http://www.sec.gov/rules/final/2012/34-67716.pdf 19
  • 20. 3TG• “Conflict minerals” are defined as tin, tantalum, tungsten, gold and their derivatives, commonly referred to as “3TG” – Guilty until proven innocent: under the law the term "conflict minerals" refers to all 3TG regardless if their provenance• The DRC accounts for approximately: – 15-20% of global tantalum ore production – 6-8% of global tin ore production – 2-4% of global tungsten ore production – .3% of global gold productionSource: BSR; Tiffany 20
  • 21. 3TG• Conflict minerals are as omnipresent as the ballpoint pen – and that is not just a metaphor: – Tin is found in solders, food can coatings, shoe soles, fluoride toothpaste formulations, and chemical applications such as catalysts and stabilizers – Tungsten, particularly resistant to deforming, is used in tools, aerospace components, electric lighting, ballpoint pens, electronics, as well as window heating systems, automobile horns, X-Ray machines, dental drills, golf clubs, darts, and remote control racing cars – Tantalum is present in automotive electronics, cell phones, computers, superalloys for jet and power plant turbines, cutting tools, as well as surgical implants and prosthetic devices – Gold, the most malleable and ductile metal, is used in jewelry, electronics, medical equipment, and aerospace, as well as sensors and pregnancy tests• Some products contain concentrated – others trace amounts 21
  • 22. D-F Section 1502 directives• Requires publicly traded companies in the U.S. to submit a report to the SEC that includes: – ‘‘(i) a description of the measures taken by the person to exercise due diligence on the source and chain of custody of such minerals, which measures shall include an independent private sector audit of such report submitted through the Commission…” – ‘‘(ii) a description of the products, manufactured or contracted to be manufactured, that are not DRC conflict free…”• Charges the SEC to operationalize the law in the form of rules 22
  • 23. Comptroller General’s charge• Requires the Comptroller General to submit to the appropriate congressional committees a report that includes: o An assessment of the effectiveness [of the law] in promoting peace and security in the Democratic Republic of the Congo and adjoining countries• Which may be the closest thing Congress will get to an official benefit appraisal 23
  • 24. USDS’s charge• D-F statutory law: – USDS to submit a strategy to address the linkages between human rights abuses, armed groups, mining of conflict minerals, and commercial products, which entails: o preparing a “plan to promote peace and security” in the Congo o monitoring and stopping “commercial activities involving the natural resources of the DRC that contribute to the activities of armed groups and human rights violations in the DRC” o Producing “a map of mineral-rich zones, trade routes, and areas under the control of armed groups in the Congo” 24
  • 25. Significance• First time a corporate disclosure law has been leveraged for a humanitarian purpose abroad – Unprecedented• Legal intervention which traverses business, diplomacy and human development interests• Global supply-chain ramifications• Darwinian game-changer: – The fittest is no longer the company with the most cut-throat practices and most obscure supply chain – But the company that is diligent, fosters a clean brand, has control over its supply chain – and can prove it 25
  • 26. Significance (cont.)• A law based on the following logic: – a requirement to publicly disclose whether or not conflict minerals were used, and that due diligence was performed, would change corporate procurement practices such that the liquidity of armed groups at the producing end of the supply chain would be curtailed – if not stifled• A law in which the principle of the matter apparently took precedence over cost/benefit implications – attempts were made by the SEC to calculate the cost, whereas no attempt was made to estimate the "benefit"26
  • 27. ImplementationIn order to disclose required information, companiesmust now perform five principal tasks: 1. Identify products/suppliers 2. Seek out and verify traceability information from those suppliers 3. Strengthen internal management systems through supplier engagement and risk management in view of performing due diligence 4. Instituting the necessary IT systems (to collect supply chain data and maintain auditable records for the SEC) 5. Auditing and reporting to SEC (and in some cases commissioning CMR audit) 27
  • 28. Affected industries• Impacts thousands of manufacturers of all sizes – ranging from Fortune 500 companies to companies with $10 million in annual sales – across multiple industries: • aerospace • healthcare • automotive • chemicals • food • electronics/high-tech • jewelry• Corporate interests which, in the aggregate, exceeding trillions of dollars in revenue per year 28
  • 29. Hourglass model of the mineral sector 29
  • 30. The D-F S1502 play (in 10 acts thus far)Act 1:In 2008 Enough!, Global Witness et al make serious noise about the Congo, and drum up a critical mass of awareness on the issueAct 2: In 2009 the Congo Conflict Minerals Act is introduced in the 111th Senate – but is not enactedAct 3: Senators Sam Brownback (R-KS), Dick Durbin (D-IL) and Russ Feingold (D-WI) succeed in adding Section 1502 to the Dodd-Frank Wall Street Reform Act of 2010Act 4:The SEC comes out with proposed rules, with a price tag of $71.2 million, clearly not having considered the full cost implicationAct 5:NAM’s back-of-the-envelope estimation has the rules cost $9-16 billion 30
  • 31. The D-F S1502 play (in 10 acts thus far)Act 6: The Chamber of Commerce argues that the proposed rules are too burdensome and should be withdrawnAct 7: Tulane, an impartial party, roped into this issue at the behest of Durbin’s office, publishes its own study in October 2011, critiquing the NAM and SEC cost estimates and offers a 3rd economic cost model that comes to $7.93 billionAct 8: SEC issues final rules which become law-of-the-land with its August 2012 vote, relying substantially on Tulane’s cost drivers, and revising its initial price tag to $3-4 billion, with the implied admission that their initial cost estimate was far off the markAct 9: Industry gets to workAct 10:U.S. Chamber of Commerce, NAM and the Business Roundtable sue the SEC, requesting that the “rule be modified or set aside in whole or in part” 31
  • 32. The “Tulane model”Task 3rd model estimation of costs1. Strengthening internal $26 million for the 5,994 issuers; $5.14management systems in view of billion for 1st tier suppliers to thoseperforming due diligence issuers, for a total of $5.17 billion2. Instituting the necessary IT $884 million for issuers who are smallsystems (to collect information companies; $1.68 billion for issuers whoand maintain auditable records for are large companies, for a total of $2.56the SEC) billion3. Commissioning CMR audit As only issuers are required to conduct audits: $81 million for issuers who are small companies; $126 million for issuers who are large companies, for a total of $207 millionTotal $7.93 billion (including internal company labor) 32
  • 33. “Extraneous” costs of transparency• Suppliers throughout the supply chain are customarily wary of divulging their suppliers / sources – Conversely, it gives issuers and top tier companies more information and control over their supply-chain• While the American market is the world’s largest, not all roads lead to Rome – Cons: • American competitiveness is potentially “hurt” if the international playing field is not level • Non-US bound market supplying companies would not necessarily bear the due diligence compliance burden • EU has not passed a similar CM due diligence/disclosure law – Pros: • US-bound supply chains traverse the globe many times over – law has a huge multiplier effect affecting more non-issuers lower down the supply chain than issuers • Big companies are not however going to bifurcate their supply chains into: (1) US bound (2) rest-of-the-world bound• The law makes companies vulnerable to: – Bad press from activists • "Nobody wants bad press!” – Lawsuits from shareholders 33
  • 34. The core of the suit1st Amendment: The required disclosure to describe products as “DRC conflict free” or “not DRC conflict free” violates the reporting companies’ First Amendment rights by making them engage in speech against their will2. Violation of the Administrative Procedure Act (APA): a. The SEC’s economic impact analysis – an obligation under the Securities Exchange Act of 1934 – was “woefully inadequate” b. Benefits not understood • The SEC itself “admitted it did not determine whether the rule will provide any benefits to the people of the DRC” – although it is “one of the costliest rules in SEC history”Source: Chamber Litigation.http://www.chamberlitigation.com/sites/default/files/cases/files/2012/Petitioners%20Opening%20Merits%20Brief%20-- 34%20NAM,%20Chamber%20of%20Commerce%20and%20BRT%20v.%20SEC%20(D.C.%20Circuit).pdf
  • 35. Possible counter-arguments1. Argument • Uh, did you mean you’ll take the 5th ?2. Argument To a: – SEC’s proposed rules were – compared with Tulane’s model – off the mark by a factor of 100 – SEC allowed extensive review period – heard all perspectives and referenced many – Revised rules – incorporating Tulane’s cost factors – was only off by a factor of 2 To b: – It was the Comptroller General’s task to “determine whether the rule will provide any benefits to the people of the DRC” – It was the SEC’s task to operationalize the law 35
  • 36. SEC: Bring it ON!SEC spokesman John Nester replied by saying: “… we believe our legal interpretation and economic analyses are sound and we look forward to defending the rule that Congress directed us to write.” 36
  • 37. Has the train left the station?• Many firms are striving for a conflict-free supply chain, no matter whats going on in Washington – “A lot of companies feel its good business and the right thing to do” as lawyer Michael Littenberg points out• While others work with trade associations in private to throw a wrench in the wheel – See Global Witness’ list noirSource:http://www.law.com/corporatecounsel/PubArticleCC.jsp?id=1202576075043&Business_Groups_File_Challenge_to_SEC_Conflict_Minerals_Rule&goback=%2Eanp_4578112_1358531858799_1&slreturn=20130018125937 37
  • 38. Upsides of DFCM implementationVarious U.S.-based companies are saying the following:• Leveled playing field: same advantage / disadvantage• Identified opportunities for consolidation (vertical integration) and supply chain cost reduction – Potential big savings cutting out middle-men• Better risk management – Pre-emptive identification of risk such as reliance on sole-sourced suppliers• Improved supply chain performance management in terms of responsiveness and efficiency• Better able to respond to customer requests for CM-related information• Data and standards with which to conduct future supplier certification• Stable supplier policies• Confidence that company is positively impacting people around the worldSources: (1) KPMG. http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/public- policy- alerts/Documents/public-policy-alert-15-conflict-mineral.pdf 38 (2) Green Research. The Costs and Benefits of Dodd-Frank Section 1502
  • 39. Early positive deviants• Apple has announced it will require suppliers to use audited, conflict-free smelters• Intel has emerged as a leader for making the first commitment to producing a conflict-free product by 2013• Microsoft and Motorola split from the U.S. Chamber of Commerce for the Chamber’s efforts against the regulation 39
  • 40. Stakeholder responses to DFCM 40
  • 41. Conflict Mineral Survey by The Corporate Council – Nov. 26, 20124. How far along are you in preparing for conflict mineral compliance?(Total responses: n=55)(select only one)n=10 (18.18%) Were still in denialn=37 (67.27%) Weve begun to analyze our products, but havent begun implementing systemsn=1 (1.82%) Weve begun to revise our supply contracts to help complyn=3 (5.45%) We are very far along and dont believe compliance will be a problemn=1 (1.82%) Dont known=3 (5.45%) Not applicable 41Source: http://www.thecorporatecounsel.net/survey/Nov12_total.htm?goback=%2Eanp_4578112_1358045947753_1
  • 42. Source: Responsible Sourcing Network. What’s Needed: An Overview of Multi-stakeholder and industry Activities toAchieve Conflict-free Minerals. http://www.sourcingnetwork.org/storage/Minerals_WP.F_print.pdf 42
  • 43. Source: Responsible Sourcing Network. What’s Needed: An Overview of Multi-stakeholder and industry Activities toAchieve Conflict-free Minerals. http://www.sourcingnetwork.org/storage/Minerals_WP.F_print.pdf 43
  • 44. 3 promising market-based initiatives  closed pipe system (SfH) • Enhanced traceability / chain of custody • Good business sense (vertical integration)  bag-and-tag (ITRI) 1. Closing bag and weighing upon filling 2. Tagging (with bar code) 3. Weighing upon receipt  conflict-free smelter programSource: http://solutions-network.org/site-solutionsforhope/ 44
  • 45. Conflict-free smelter program statusSource: Conflict Free Smelter. http://www.conflictfreesmelter.org/index.htm 45
  • 46. Is the law working – in the short term? • The UN Group of Experts on Congo wrote to the SEC in Oct. 2011 saying: – “Dodd Frank and due diligence is working!” – “Since the signing into law of the Dodd Frank act, a higher proportion then before of tin, tungsten and tantalum mined in the DRC is not funding conflict.” Source: http://www.sec.gov/comments/s7-40-10/s74010-346.pdf 46
  • 47. Is the law working (cont.)The UN Group of Experts highlighted several more points:• “Production of minerals has shifted to an extent to (largely) non- conflict areas, such as North Katanga and Maniema”• Conversely, the effect “in the Kivus, unsurprisingly, has been increased economic hardship and more smuggling and general criminalisation of the minerals trade. It has also had a severely negative impact on provincial government revenues, weakening governance capacity”• Criminal networks continue to exist within the Congolese army• Thousands of miners have found work in the neighboring provinces of Maniema and northern Katanga• The FDLR’s control of mines has decreased over the past year, particularly in tin, tantalum, and tungsten mines• Congolese army criminal networks have seen their profits in the 3Ts fall over the past year• Gold is still funding armed groups in the Congo (easier to smuggle)Source: http://www.sec.gov/comments/s7-40-10/s74010-346.pdf 47
  • 48. Caveat!• Due diligence and “buying peace” through targeted purchasing power is only ONE – albeit a very important – measure among many of what should be a broader portfolio of policies and interventions to address this multi-faceted problem – Even if revenue doesn’t fuel the conflict, what’s next?• Otherwise, at best, this exercise will only serve to shelve our moral "guilt" by having clean cellphones 48
  • 49. State Department’s approach• Endorsement of OECD’s Due Diligence Guidelines• Public-Private Alliance for Responsible Minerals Trade (PPA) – sponsored by USDS and USAID in partnership with leading companies and civil society to support compliance with Section 1502 – seeks to advance “on the ground” solutions in the DRC and to demonstrate that it is possible to secure legitimate minerals from the DRC• Statement of July 2011: – encouraged compliance with Section 1502 – noted possible U.N. sanctions for individuals or entities that support the armed conflict and human rights abuses in the DRCSource: www.resolv.org/site-ppa 49
  • 50. USAID• Community Recovery and Livelihoods Project (CRLP)• A $20 million livelihoods project in eastern Congo• Four-year program (2012-2016) in the Kivus and Orientale provinces• Focused on people affected by sexual violence and the conflict minerals trade• Aims to reach at least 80,000 people• After all, durable peace does fundamentally hinge on the development of sustainable livelihoods 50
  • 51. Fixing the Congo - Security• Assign a highly experienced United Nations envoy to the Congo by the secretary- general to help broaden and strengthen the peace process – Envoy could work with the African Union in constructing a process that involves civil society and political parties from eastern Congo to deal with the war’s root economic causes – Have carrots (e.g. FDI guarantees) and sticks (sanctions)• Beef up U.N. presence that has the reach to stabilize the vast territories of the DRC – 20,000 are apparently not enough to ensure a tenable peace – Deploy the drones!• Open International Criminal Court cases against parties responsible for orchestrating or financing war crimes to help break the cycle of deadly impunity• Conduct comprehensive demilitarization with livelihood programs for ex- combatants• Build capacity and pay salaries – and actually pay! – to military, police and civil service, so that their livelihoods don’t depend on embezzlement and extortion• Ethnic military integration of military and police as Kagame has done in Rwanda – Introduce meritocratic systems to recruitment and promotions• Deploy UN drones 51Note: includes Willet Weeks and John Pendergast’s recommendations
  • 52. Fixing the Congo – sanction militia supporters• Secure assurances by its neighbors that they will cease relations with militias in the Congo• Scale up sanctions, if Rwanda’s support of M23 rebels continues – It might take more than symbolic cuts to make a meaningful impact • Overall, Rwanda receives close to $900m annually from external sources • The US gives Rwanda annually $196m - of this amount only $200,000 was cut • The UK withheld £21m of its budget support out of £75m pound sterling it gives Rwanda annually • Involvement of Eastern DRC earns them tenfold from illicit trade in minerals 52 Source: http://www.inyenyerinews.org/amakuru-2/foreign-policy-in-rwanda-a-discussion-with-deo-lukyamuzi/
  • 53. Fixing the Congo – markets• Guarantee concessions and business licenses to Rwandan and Ugandan companies – Integrating economies such that war would be too expensive – à la the European Coal and Steel Community (ECSC) – Rwanda and Uganda are natural trading partners who also offer mineral processing capacity• Make vast investments in infrastructure, particularly roads, the dismal lack of which incubates disorder – Could be through state-guaranteed (EXIM) deals such as the recent $6-9 billion China concessions-for-infrastructure deal• Promote government-backed FDI – Professionalize upstream supply chain sector• Formalize the extraction of the Congo’s vast mineral resources through regulation, transparency, equitable taxation, verified auctions, etc. 53Note: includes Willet Weeks and John Pendergast’s recommendations
  • 54. Fixing the Congo – public sphere• Strengthen state institutions in the context of what is essentially a failed state – Reinforce pillars of democracy • Clean up corruption as was done in Georgia EITI (http://eiti.org/node/284/reports) – Revive democratic participation in Congo’s communities and decentralize important functions to local representative leaders – Also focus on the provision of basic services• Immigration / deportation – After the 1994 genocide in Rwanda, largely by the Hutus against the Tutsis, nearly two million Hutu refugees fled a counter-offensive pouring across the 54 border into neighboring Congo
  • 55. D-F Section 1502 a fluke?• Some would posit it becoming law a fluke because of the unusual circumstances in the aftermath of the Financial Crisis of 2007-2008• The SEC vote was a narrow 3-2 – two commissioners did not approve the rule• The law set a precedent in line with a greater emerging patternSource: SEC. http://www.sec.gov/news/speech/2012/spch082212dmg-minerals.htm 55
  • 56. A few milestones of disclosure law• Securities Exchange Act of 1934 – to help the symmetry of information assumption along, Congress crafted a mandatory disclosure process in which companies make information public that investors would find pertinent to making investment decisions• Home Mortgage Disclosure Act of 1975 – provides to the public loan data that can be used to assist: • in determining whether financial institutions are serving the housing needs of their communities • in distributing public-sector investments in identifying possible discriminatory lending patterns• Sarbanes–Oxley Act of 2002 – requires internal controls for assuring accuracy of financial reports – mandates enhanced financial disclosures 56
  • 57. The two other 2010“Specialized Corporate Disclosure” laws • Section 1503 requires any reporting issuer that is a mine operator, or has a subsidiary that is an operator, to disclose to the SEC information related to health and safety violations, including the number of certain violations, orders, and citations received from the Mine Safety and Health Administration (MSHA) • Section 1504 requires reporting issuers engaged in the commercial development of oil, natural gas, or minerals to disclose in an annual report certain payments made to the United States or a foreign government – Under the new “Disclosure of Payments by Resource Extraction Issuers” Rule adopted in late August 2012, issuers must disclose all payments (or aggregation of related payments) of $100,000 or more to foreign (and U.S.) governments for such activities 57 Source: SEC. http://www.sec.gov/spotlight/dodd-frank/speccorpdisclosure.shtml
  • 58. Global CompactGlobal Compact, a 1999 UN-spearheaded multi-stakeholder initiative resulting in the formulation of 10 CSRprinciples:Principle 1• Businesses should support and respect the protection of internationally proclaimed human rights within their sphere of influence.Principle 2• Businesses should ensure that their own operations are not complicit in human rights abuses. – DO NO HARM! - Don’t do business with human rights violators 58
  • 59. Long-term engagement prospects• Engaging the Congo is in our national interest o DRC is under-leveraged – offers high return on the dollar  e.g. the China deal: $ 6 billion worth of infrastructure in exchange for $50 billion dollars worth of minerals – which translates to a profit of 833% o One estimation has the DRC’s mineral deposits worth $24 trillion o The Congo rainforest is the world’s second largest carbon sink o If Afghanistan taught us anything is that the world can’t afford failed states• Relative security conditions a prerequisite for constructive engagement o Risk of engagement are high  Security, in spite of the 17,000 UN troops in the Congo  chaotic regulatory environment / broken contracts o Not deterring China / India 59
  • 60. Lessons thus far…• Due diligence and ethical sourcing should be part of the day-to- day corporate modus operandi – Had the 3TG-based sectors done it all along, this law wouldn’t exist• If you are an at-risk industry: try your level best to self-regulate in order to reduce legislative and reputational vulnerability – otherwise you could get Dodd-Franked• If you are a concerned NGO: aggressive campaigning and lobbying works – Reputational risk is an incredibly big threat – especially in light of web 2.0 • U.S. consumer is increasingly aware • ease and speed of voicing/spreading opinions is growing even faster• Sunshine law as applied to international affairs is a shiny new tool brandished by government (and civil society actors who push for it)• A “crisis” in the U.S. financial system was used to induce a “crisis” in mineral-based industries – prompting decisive reform60
  • 61. More lessons …• Legislative due diligence: to reduce ambiguity (uncertainty) and discord (potential litigation), commissioning an independent, 3rd party (preferably academic institution) to conduct a 360° cost-benefit analysis before a law is passed should be considered good public policy • to help government agencies in their rule drafting • to predict nature and scale of impact • to plan according to projected impact – Universities should pro-actively offer such services – Could be commissioned by a tasked congressional committee inviting experts representing a variety of stakeholders, with drafts and public comments• It truly is a chain: a new policy yank on the manufacturer end is felt all the way down the supply chain – Yes, even in China • China for example “has stopped purchasing tantalum on the spot market, because of the conflict minerals legislation... ” 61Source: MetalMiner. http://agmetalminer.com/2011/01/20/tantalum-prices-about-through-the-roof/
  • 62. Hitting that regulatory sweet spot• If the impact of D-F Section 1502 proves to be little, is there another approach that would promise a greater impact to take the “conflict” out of minerals?and• more generally speaking, how can one hit the regulatory sweet spot on similarly complex human rights / humanitarian issues perpetuated through commodity extraction? – incentivizing good behavior all around – minimizing regulatory burden for the private as well as the public sectors 62
  • 63. Sector-specific regulation triage Degree of regulatory burden & reputational risk1st line: 1. Industry self-regulation and enforcement (B2B accountability, trade association-led)2nd line: 2. Public-private protocol – with SMART targets (private certification, 3rd party oversight)3rd line: 3. International gov.-backed certification scheme (hard law, 3rd party supply chain audits)4th line: 4. Verified corporate due diligence and disclosure (hard law, 3rd party audits)5th line: 5. Sanctions / blacklists (backed by trade embargoes, GATT) 63
  • 64. Conflict – commodity link• In the last 60 years, at least 40 per cent of all intrastate conflicts had a link to natural resources – this link doubles the risk of a conflict relapse in the first five years • as per the United Nations Environment Programme (UNEP)• Since 1990, at least 18 violent conflicts have been fuelled by the exploitation of natural resources – whether ‘high-value’ resources like timber, diamonds, gold, minerals and oil – or scarce ones like fertile land and water• With how many other armed groups, with “resource imperatives” causing human rights violations, are we indirectly doing business? 64Source: UNEP. http://postconflict.unep.ch/publications/pcdmb_policy_01.pdf
  • 65. Universality of the D-F Section 1502 principle 65
  • 66. Violent conflicts in 2011 Source: Heidelberg Institute for International Conflict Research 66
  • 67. 67Source: USGS. http://afghanistan.cr.usgs.gov/hyperspectral-maps
  • 68. Grassroots action• Leverage your own sphere of influence – talk about it and use social media – it’s the critical mass that makes or breaks…• Use your own purchasing power wisely – check out: http://www.raisehopeforcongo.org/companyrankings• What is Tulane’s investment policy on Conflict Minerals?• Start a petition at change.org targeting a non-performing company, or your favorite gadget manufacturer, recommending to: – actually do due diligence and engaging the promising market-based solutions that have emerged in the Congo – pass on the costs to the consumer: “I’d be happy to pay the few extra dollars/cents per unit knowing that the materials in my product was responsibly sourced and produced”• Recycle electronics• Launch a “buy peace” campaign – driving home the point that through purchasing power one can make important contributions to peace – Tulane did participate in the Conflict Free Campus campaign – kudos!• Follow the issue 68 – e.g. through Google alerts
  • 69. 69
  • 70. Q&AQ: Disclosure law acts as a de-facto sanction against entirecountries! A1: That’s not what the UN Group of experts found in the Congo A2: Lots of companies continue to responsibly source from DRC using technology-enhanced traceability A3: One can sub-nationally target and monitor good and bad actors (companies, militaries, smugglers, etc.)Q. Disclosure law opens the door for litigation – which isexpensive for everyone and is therefore not the best way to"direct" or "move" corporate behavior A: Indeed – sunshine law should be one of the last legal bids in the array of public policy optionsQ. Securing the conflict area, getting the diplomacy right(esp. with Kagame and Museveni), and then applying as muchpublic health as possible would be a much more direct route A: Yes, but that wouldn’t address the economics – the bloody money trail 70