Behind the blood money

An iPhone can do a lot of things. But can it arm Congolese rebels?

That is the question being debated by a battalion of lobbyists from electronics makers, mining companies and international aid organisations that has descended on the Securities and Exchange Commission (SEC) in recent months seeking to influence the drafting of a Dodd-Frank regulation that has nothing to do with the financial crisis.

Tacked onto the end of that encyclopaedic digest of financial reform is an odd provision. It requires publicly traded companies whose products use certain minerals commonly mined in strife-torn areas of Central Africa to report to shareholders and the SEC whether their mineral supply comes from the Democratic Republic of Congo.

The measure is aimed at cutting off the brutal militia groups that have often taken over the mining and sale of so-called conflict minerals to finance their military aims. Just about every company affected by the law says they support it, but many business groups have also been pushing aggressively to put wiggle room in the restrictions, calling for lengthy phase-in periods, exemptions for minimal use of the minerals and loose definitions of what types of uses are covered.

Nearly every consumer product that includes electronic parts uses a derivative of one of the four minerals: columbite-tantalite, which when refined is used in palm-size cellphones and giant turbines; cassiterite, an important source of the tin used in coffee cans and circuit boards; wolframite, used to produce tungsten for light bulbs and machine tools; and gold, commonly used as an electronic conductor (and, of course, jewellery).

Given their broad application, the minerals have been a primary target of humanitarian groups concerned about genocide, sexual violence, child soldiers and other issues that have been common outgrowths of conflicts in Central Africa.

“We don’t think you need to have people being killed in order to have these metals in our cellphones,” said Corinna Gilfillan, who heads the United States office of Global Witness, which has worked on the issue for several years.

But manufacturers question the effectiveness — not to mention the practicality and expense — of tracing every scrap of refined metal back to its original hole in the ground.

“The challenge is that conflict minerals are a symptom,” said Rick Goss, vice president for environment and sustainability at the Information Technology Industry Council, a trade group. “The entrenched powers in these countries have plenty of other means to raise money. Simply cutting off one source of revenue to a warlord or military rulers is not going to stop the genocide.”

The Dodd-Frank law on conflict minerals is already having an effect in Eastern Congo, damping or halting production at many mines even before the disclosure regulations for companies are in place.

“It is causing, I would say, a sort of embargo on traders and diggers in Eastern Congo,” Serge Tshamala, an official at the Embassy of the Democratic Republic of Congo. “The longer it takes the SEC to come up with guidelines, the worse it is for our people.” Tshamala and other Congo government officials met with the agency’s staff members in June, urging them to speed completion of the regulations.

The agency is moving slowly, however. The Dodd-Frank law set an April 2011 deadline for completion of the rules. After proposing regulations in December 2010, the agency took comments for 30 days, and received so many suggestions that it extended the period by a month. After missing the April deadline, the agency in October conducted a roundtable for its commissioners to hear directly from manufacturers, mining companies, advocacy groups and institutional investors. This month, Mary L Schapiro, the agency’s chairwoman, said the agency hoped to complete the process “in the next couple of months.”

The commission already has decided to include a phase-in period to allow companies time to build networks to trace their mineral supply. But an exemption for use of trace amounts of the metals is unlikely, Shapiro said.

As Bennett Freeman, a senior vice-president for sustainability research and policy at Calvert Investments put it during the roundtable last year, a very small amount of gold is used as a conductor in a cellphone, “but when one takes into account the fact that there were 1.6 billion cellphones sold globally last year, that adds up to be a very significant volume of that particular metal.”

Still undecided — and the subject of more than 100 meetings between lobbyists and SEC officials since the rule was proposed — is just how the commission will decide who is covered by the conflict minerals requirement. The law says that the minerals must be “necessary to the functionality or production of a product manufactured by” a company.

Simple as it seems, that definition gives rise to a tangle of questions. Is mining “manufacturing”? Is a coffee can made with tin “necessary to the functionality” of the coffee being sold?

The hair-splitting answers to those questions will be the basis on which the law could be challenged in court, and it is that prospect that accounts for much of the agency’s deliberate progress in fashioning the rules.

Administrative law requires an agency like the SEC to conduct a cost-benefit analysis of rules. Last year, a federal appeals court cited insufficient cost-benefit research in striking down one of the agency’s new regulations, and SEC insiders say that decision has the agency operating in perpetual fear of a repeat occurrence.

There is little agreement on what it will cost companies to comply. The agency estimates companies will have to spend $71 million to comply with its regulations. The National Association of Manufacturers estimates the regulations will cost $9 billion to $16 billion.

Whatever the answer, part of the burden would fall on a given company’s supply chain — companies, that is, that are very likely not to be covered by the regulation’s reporting requirements, which cover only publicly traded companies.

Irma Villarreal, chief securities counsel for Kraft Foods, said during the SEC roundtable that Kraft produced 40,000 distinct products and used 100,000 suppliers, creating a Herculean task of auditing supply chains for conflict minerals.

Nonprofit groups that support the new regulation say a growing number of companies — Intel, Motorola and Hewlett-Packard among them, according to the Enough Project, a nongovernmental organisation that works against genocide and crimes against humanity — have already made significant steps to inspect and adjust their supply lines to avoid tainted sources of conflict minerals.

“Our hope,” said Darren Fenwick, a senior manager of government affairs for the Enough Project, “is that the rule is strong enough that companies in industries that aren’t doing anything will start to feel the pressure in their supply chains.”

© 2012 The New York Times News Service