Conflict Minerals and Supply Chain Accountability: What Your Company Needs to Know

Most people have probably never heard the term “conflict minerals.” However, for American businesses, the term is very important, and complying with the rules surrounding conflict minerals can be a serious burden on a company. Jane Luxton, a member of Clark Hill PLC, Washington, D.C., explains the issues involved and suggests some strategies for companies affected by compliance rules in this report.

Four key metals—tin, tantalum, tungsten, and gold—are the minerals of primary concern. These minerals are mined in a conflict zone in the eastern part of the Democratic Republic of the Congo and are sold through intermediaries to businesses all over the world. Luxton explains that these metals are used in a host of consumer products, including virtually all consumer electronics. And these minerals turn up in all kinds of products, including belt buckles and the trim on clothing. The “conflict” part of the term refers to the use by warlords of the money that these metals produce to fund armed conflict in the DRC and in adjoining countries. Moviegoers are probably familiar with Blood Diamond, the movie about the sale of diamonds to finance armed conflict in Africa.

Jane Luxton

Jane Luxton

The U.S. government has made a policy decision to try to suppress the use of conflict minerals. The issue is really a foreign policy concern. But, Luxton says, “since [the problem] was so intractable a foreign policy issue, instead it might be successfully tackled by what we are coming . . . to call ‘name and shame’ schemes.” The idea is to spotlight the use of these metals and to put peer pressure on manufacturers to find out if metals in those products come from the conflict areas. The idea is that businesses would find alternative sources, thus cutting off the funding crucial to the maintenance of conflicts.

In the U.S., the idea was incorporated into Section 1502 of the Dodd-Frank Act in 2010. The Act gets its enforcement by SEC regulations that force companies to look through their supply chains to see if any of the metal in their products originated from mines in the conflict regions. Luxton reports that the European Union is looking at adopting a similar approach to cutting off the supply of conflict minerals.

The idea is to spotlight the use of these metals and to put peer pressure on manufacturers to find out if metals in those products come from the conflict areas. The idea is that businesses would find alternative sources, thus cutting off the funding crucial to the maintenance of conflicts.

Luxton notes that compliance is a big task for companies, and she notes three kinds of issues in particular. “First is just the sheer logistical problem of complying with this.” There may be ten or more levels to look through from the time a metal comes out of a mine until it goes into a product. For example, the coordinator of conflict minerals compliance for HP estimates that about 1,000 suppliers in its chain ultimately provide a product to HP that may contain one of the minerals. In a smartphone, for example, the producer might have to go each of its suppliers and ask all of them to go to each of their suppliers for information. Luxton says that the SEC realized that companies would find it difficult or impossible to obtain complete information, so it established a phase-in period, and that period has been extended because of litigation. In the interim, companies are allowed to report that the source of a metal is indeterminable. However, companies that choose this course are expected to improve their performance each year.

That has led to a second big problem: some companies are taking it more seriously than others. Those who are not taking it serious “are risking brand vulnerability,” and this is already showing up, Luxton says. Watchdog groups are grading companies by the level of effort they put into compliance. Companies who are deemed not to be trying hard enough are getting pressure at shareholder meetings and are being blasted on the Internet. On the other hand, some companies are going so far as to advertise that their products are free of conflict minerals, something that requires a third party audit and considerable expense.

The third issue, Luxton says, is that the problem is not confined to conflict minerals. There are parallel “name and shame” schemes that have to do with human slavery. California is the best known of states that have adopted such laws. Companies doing business in California are required to disclose what they have done to eradicate human slavery in their supply chains. The U.K. has adopted a similar program. This has led to the filing of some class action lawsuits in California against companies that claim to have no slavery in their supply chains. Cat food containing fish, for example, may turn out to contain fish caught by slave labor in Thailand. Similar claims have been made that child labor is used to harvest chocolate in Africa.

Luxton says that there is always the risk that, when a company looks into its supply chain, it will get an unpleasant surprise. One problem has been the discovery that some of the gold in a company’s inventory came from North Korea, something that is subject to Treasury Department sanctions, criminal penalties, and fines. Violations of the Foreign Corrupt Practices Act might show up. A company’s attempt to comply with the conflict minerals rules might bring up some collateral legal problems.

Luxton says that, for a company with conflict minerals compliance problems, there needs to be buy-in from the very top of the company on down, including everyone who is likely to have a role in compliance. The upside of this is that companies who comply can get their stories out to the marketplace. Corporate responsibility is a good selling point.

Jane C. Luxton is a member of Clark Hill’s Environment, Energy, and Natural Resources Practice Group based in the Washington, DC office. She has extensive experience in environmental, regulatory, policy, and litigation matters, including federal and state environmental laws as well as international environmental regimes. Her practice includes advising clients on administrative law issues and compliance and reporting obligations related to sustainability and supply chain accountability. The Legal Broadcast Network is a featured network of Sequence Media Group.