Report

U.S. Companies Still Puzzling Over North Korean Gold Question

U.S. Companies Still Puzzling Over North Korean Gold Question

Dozens of American companies disclosed in Securities and Exchange Commission filings this week that they use North Korean gold in their products, raising questions about whether they violated comprehensive sanctions against the despotic regime. Now, some of those firms say that was a mistake while others continue investigating. The confusion illustrates how little companies know about their own supply chains even after collectively spending billions of dollars examining them.

As first reported by FP Tuesday, a new rule meant to force companies to reveal whether their products use minerals from conflict-torn central Africa has instead turned up a connection to pariah state North Korea. Ralph Lauren, Hewlett Packard, IBM, and about 65 other companies reported that the "Central Bank of the DPR of Korea," the North Korean central bank, was one of their sources for gold. Tractor-maker Deere & Co., hunting outfitter Cabela’s, kitchen store Williams-Sonoma, and GPS-maker Garmin also listed North Korea as a supplier of gold.

Just a small amount of gold from North Korea in a U.S. product — even if it was only a minor part of the product purchased from a third-party supplier in China or another country — would violate sanctions. "This broad prohibition applies to goods, services, and technology from North Korea that are used as components of finished products of, or substantially transformed in, a third country," a Treasury Department spokeswoman said.

Spokesmen for Ralph Lauren and Hewlett Packard say, on further inspection, they’ve found their products don’t contain North Korean gold, despite their SEC disclosures indicating otherwise. Other companies’ officials say they’re still investigating the situation; many companies didn’t respond to requests for comment.

The surprise revelation, or mistake, demonstrates how hard it is for consumers to know whether products they buy are inadvertently connected to dictatorships. And the new law that made companies report where they got their minerals provides few conclusive answers. As part of the 2010 Dodd-Frank law that overhauled financial regulations, Congress passed a provision requiring companies to annually report to the SEC their use of the so-called "conflict minerals," after concerns that the sale of tin, tantalum, tungsten, and gold from the Democratic Republic of the Congo support armed groups that terrorize civilians and use slave labor. Almost four years later, nearly 1,300 companies filed thousands of pages to the SEC by Monday’s deadline. But the information provides few conclusions and appears to contain significant mistakes.

"You’re asking them to create an auditing system that didn’t exist before," said KC Chang, an economist who tracks the gold market for consultancy IHS Global Insight. "Before this law, many companies didn’t really ask these questions."

The SEC now requires them to ask the questions, but not necessarily provide answers. After a last-minute court ruling in late April, the law was relaxed slightly. Three trade groups — the National Association of Manufacturers, the Chamber of Commerce, and the Business Roundtable — challenged the rule and notched a partial victory. Companies had to show that they’d investigated the origins of their minerals, but didn’t have to declare whether they contained conflict minerals. Companies are also thwarted by the complexity of their own supply chains and suppliers that aren’t necessarily forthcoming. The end result is that the filings vary widely from company to company. Intel filed one of the most comprehensive reports and declared its products conflict-free, but many companies said they couldn’t determine if their minerals were from DRC.

Ralph Lauren spokeswoman Winnie Lerner said the SEC filing that listed North Korea as a source for gold was a mistake and that the company is correcting it.

"The original filing contained some smelters that we don’t actually use, including the central bank of North Korea," Lerner said. "We will be re-filing with the SEC an amended list of smelters that we use."

Hewlett-Packard said it learned in January that some of its suppliers could be using North Korean gold and began investigating.

"To date, the information we have received indicates no minerals obtained from Central Bank of DPRK were included in HP products," spokeswoman Kelli Schlegel said in an email.

Kitchen store Williams-Sonoma said the company is still investigating too.

"As our Conflict Minerals Report notes, we are several levels removed from the mining of minerals and do not make purchases of raw or unrefined minerals," Leigh Oshirak, vice president for public relations, said in an email. "We believe one of our vendors received this information from a supplier and forwarded it on."

Many companies may have listed North Korea without even knowing it because they just passed along information from companies further down the supply chain without review.

Lawrence Heim, a consultant who helped some companies prepare their disclosures, said in his review of the filings, he’s surprised how many companies only asked their sellers to reveal their minerals’ origins and nothing more.

"About a third said that they didn’t do due diligence; they just relied on what the suppliers were telling them," said Heim, a director at The Elm Consulting Group International.

The trade-group trio fought the rule because they said it was too expensive and hard to implement.  The SEC had estimated compliance would cost companies about $4 billion in the first year and industry estimates were many times that. But it’s hard to know how much companies actually spent.

Intel launched what is widely considered one of the most thorough programs to root out conflict minerals. Five employees traveled to 21 countries and visited 86 smelters over five years, according to a company spokeswoman. But the company wouldn’t say how much its effort cost.

Although critics of the law say companies were handed an impossible task, proponents say the North Korea revelation proves they still have a lot more work to do.

"The conflict-minerals disclosures are historic, and companies really need to do a better job at really conducting the due diligence they are supposed to be doing under Dodd-Frank," said Sasha Lezhnev, who as a senior policy analyst with Enough Project advocated for the provision.

And now they may have to investigate not only whether their minerals come from DRC and neighboring countries, but also North Korea. Bruce Calder, vice president of regulatory compliance firm Claigan Environmental, said even if this disclosure turns out to be a mistake, minerals from North Korea could still wind up in U.S. products.

"There does look to be gold coming out of North Korea and moving through Chinese smelters but it would not appear as Central Bank of DPR Korea in a disclosure," Calder said.