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Supply Chain Disclosure Laws Sputter

Europe is pushing ahead with rules designed to make companies disclose whether they use minerals mined in conflict zones, but efforts already underway in the United States are having mixed results. This summer, U.S. companies started making public whether their products possibly contained minerals from the Democratic Republic of the Congo (DRC). Advocates of that ...

Photo by Junior D. Kannah/AFP/Getty Images
Photo by Junior D. Kannah/AFP/Getty Images

Europe is pushing ahead with rules designed to make companies disclose whether they use minerals mined in conflict zones, but efforts already underway in the United States are having mixed results.

This summer, U.S. companies started making public whether their products possibly contained minerals from the Democratic Republic of the Congo (DRC). Advocates of that law argue that trade in minerals from the DRC supports armed groups that terrorize, rape, and kill civilians.

Now, European companies could start similar reporting as early as next year. The European Union issued proposals in March aimed at reducing trade that supports conflicts not only in the DRC, but also in other parts of the world consumed with armed conflict or lacking basic governance and security. But those measures would be voluntary, meaning that only companies that opt in to the program would have to investigate their supply chains.

Proponents of the crackdown on so-called "conflict minerals" are ramping up criticism of that regulatory approach, which is set for debate in the European Parliament later this year.

"The EU has proposed legislation it claims will tackle the problem, but the draft law only goes so far as to suggest companies voluntarily check and declare the source of their minerals," said Michael Gibb of Global Witness. "This legislation will not meaningfully reduce the trade in conflict minerals."

Global Witness, Amnesty International, and more than 20 other organizations on Tuesday, Sept. 23, called on European leaders to make the rules binding and force more companies into the new regime. Specifically, consumer companies should be covered, the groups argued. EU consumers buy millions of laptops and cell phones from China, which imports more than $138 million worth of minerals from Colombia, the DRC, Rwanda, and Burundi, according to Global Witness. As written, only corporations that decide to join the program would report.

While the EU weighs how to proceed, U.S. companies are already learning more, and telling more, about their supply chains. The U.S. provision, which was part of 2010’s overhaul of the financial regulatory system, commonly called the Dodd-Frank Act, requires companies to examine whether their supply chains could contain gold, tin, tantalum, or tungsten from the Democratic Republic of the Congo.

The minerals are used in everything from jewelry to aerospace equipment and are found in everything from light bulbs and cellphones to tin cans. Mining groups, jewelers’ associations, and trade groups for makers of cars, semiconductors, and medical devices all weighed in on the rule while the Securities and Exchange Commission (SEC) was writing it.

After a multiyear legal battle, in April regulators triumphed over trade groups fighting the rule. But the business groups, including the Chamber of Commerce, won an important minor victory — a federal court invalidated part of the law that would have required businesses to declare their supply chains "conflict free" or not "conflict free." As a result, many of the disclosures filed with the SEC in June simply stated that executives didn’t know whether their products contained minerals from the DRC.

More than 1,300 U.S. companies complied with the law, including providing results from surveys of thousands of their suppliers. But it’s unclear how much of that information is reliable. Only four companies audited those supplier surveys, according to a report by law firm Schulte Roth, & Zabel.

Intel is widely considered a leader in the conflict-free effort and was one of the four companies that conducted a voluntary audit.

The California-based maker of semiconductor chips started ridding its supply chain of conflict minerals five years ago, before it was legally required to do so. Although few firms are matching its efforts, Intel says the law spurred some companies to action.

"We did see more companies stepping up to do something, whereas before they may have been sitting back to see how it played out," said Carolyn Duran, who leads Intel’s conflict-free program. "So the legislation drove companies to take some action."

And more corporations may see the value in auditing their suppliers after dozens reported in June that they used gold from another despotic blacklisted regime: North Korea. The surprise revelation — or mistake — showed how little some companies know about their own supply chains.

Lawrence Heim, director at Elm Consulting Group International, helped some companies prepare their filings. He said the North Korea disclosures made businesses realize they need to scrutinize their suppliers. As a result, he’s getting a lot more phone calls.

"It highlighted the fact that companies need to improve their efforts to review information coming in," Heim said.

And it’s not just the private sector that can’t figure it out. This month, the Commerce Department released a report, required by the Dodd-Frank law, listing more than 400 facilities that process tin, tantalum, tungsten, or gold. But the department said it didn’t have the ability to meet the law’s other requirement — distinguishing which smelters and refiners dealt with minerals that fuel conflict in the DRC.

And it’s hard to judge how the new requirements are improving human rights or stemming the violence in the DRC. The United Nations estimates that at least 2.6 million people have been displaced by war, after decades of fighting between militias. Aid groups estimate that twice that number have been killed. And the government is still battling armed groups in the eastern part of the country.

The Chamber of Commerce, which led the charge against the conflict-minerals provision, maintains the provision does nothing but raise companies’ expenses.

"Sitting here in Atlanta, it’s very hard to judge the effectiveness of any of it," said lawyer Jeffrey Perry with law firm King & Spalding, who advises companies on the new disclosures. "I can tell you, it has been very expensive for companies to put processes in place and train people to comply with the rule."

 @jtrindle

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