Clear as Mud

Clear as Mud

A new disclosure rule that forces companies to investigate whether their supply chains include minerals sourced from war-torn parts of Africa isn’t living up to the expectations of watchdog and advocacy groups that pushed for it.

Trade of gold, tin, and other minerals from the Democratic Republic of Congo supports armed groups that terrorize, rape, and kill civilians, according to advocates who have for years pushed for the new rules.

But companies that for the first time last year filed reports with regulators about products that may contain so-called “conflict minerals” aren’t doing enough, according to a new analysis by Global Witness and Amnesty International, both strong supporters of the new disclosure requirements.

“Companies that shed light on their supply chains help prevent a harmful mineral trade that contributes to a conflict devastating Central Africa,” said James Lynch of Amnesty International.

The two NGOs looked at the filings of 100 companies out of the more than 1,000 that filed reports with the Securities and Exchange Commission (SEC) last June. They found that 79 percent of companies didn’t meet the minimum requirements of the law. And only 15 percent of companies said that they had contacted or tried to contact the smelters and refiners that process the minerals they use.

There’s a reason the reporting wasn’t up to snuff. Companies were not required to meet all elements of the rule in 2014 because parts of it have been tied up in court. The U.S. Chamber of Commerce and two other industry groups have argued successfully that certain provisions of the new requirements, ushered in as part of the 2010 Dodd-Frank law that overhauled the financial system, violate the companies’ right to free speech.

The SEC requires U.S. public companies to annually disclose their use of minerals that come from the DRC and neighboring countries, including Rwanda, Central African Republic, and South Sudan. But because part of the rule was frozen, companies currently need only submit information about their supply chains — and not declare whether their products are “conflict-free.”

The minerals are used in everything from jewelry to aerospace equipment. They are found in light bulbs, cell phones, and tin cans. As the SEC was writing the regulations, it faced a broad array of complaints — including from mining groups, jewelers’ associations, and trade groups for makers of cars, semiconductors, and medical devices. SEC Chief Mary Jo White said last month that the agency has spent $2.75 million writing the rule and later defending it in court.

Some of last year’s filings were so shoddy that they disclosed that companies used gold from the central bank of North Korea. If true, that would violate current international sanctions against Pyongyang. Many of the companies later attributed those disclosures to a mistake on a commonly used reporting template.

Nonetheless, some companies have decided to fully embrace compliance even while the courtroom battle continues. Four companies, including Intel and Philips, had their supply chains audited, even though regulators don’t yet require that.

Michael Littenberg, a partner with Schulte, Roth & Zabel, said he expects to see better information and more voluntary audits when companies file their 2014 disclosures on June 1.

“This year we are going to see a fair amount of changes in filings,” Littenberg said. “Companies are further along in putting in place their compliance framework and they have a lot more information than last year.”

But if they don’t, advocates of the disclosures have made clear they’re watching and ready to call out laggards.