Public scandal: Outrage in the US about working conditions in Africa and the use of child labour prompted the legislation (photo by Zama Coursen-Neft for Human Rights Watch)
If you were looking for a dry-sounding, user-unfriendly name for a piece of legislation, you’d have to go some to do better than the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, section 1502. But from the start of this month, manufacturing companies big and small, on both sides of the Atlantic, are having to acquaint themselves with this apparently arcane bit of Americana.
That’s because, on 2 June, companies that come under the US Securities and Exchange Commission (SEC) were required to have produced a declaration that their products do not contain any “conflict minerals”.
Conflict minerals are defined by the act as those derived from sources that are caught up in the unpleasant and long-running chaotic civil war in the eastern part of the Democratic Republic of Congo (DRC) and its immediate neighbours.
The minerals in question – coltan, a source of tantalum; cassiterite, a tin oxide ore; wolframite, which produces tungsten; and gold ores – are often extracted under conditions that breach basic human rights using slave labour and child labour. The ability to undercut reputable sources of the minerals through these abuses provides revenues to local warlords and rebel groups, which prolongs the conflict and suffering.
The public face of this kind of linking of minerals and morals has been the “blood diamonds” controversy, but conflict minerals are more complex. Tantalum, tin, tungsten and gold (3TG) are used in thousands of components, especially in electronics and telecoms applications such as mobiles and MP3 players, but increasingly across the range of “smart” products.
“Procurement people don’t buy gold, they’ll buy a compound that has gold in it,” says Howard Heppelmann, manager of the supply chain segment at manufacturing software and systems group PTC. “But the thing about this legislation is that it has no ‘de minimis’ exception: it doesn’t matter if it’s one microgram, it still counts.” The law also specifies that it is products rather than supply chains that have to be attested as conflict-free.
Companies have to take responsibility for what they put out into the market; they can’t claim ignorance or blame their suppliers; they have to pursue the source of the materials in their products right back to where they came out of the ground, and then they have to file an annual return. The first returns, for the 2013 calendar year, were due in on the first Monday of this month.
In practice, those returns are likely to be a damp squib. For the first two years that Dodd-Frank applies, 2013 and 2014, companies are allowed to register “undeterminable” for the conflict minerals section, and as many as 90% could do so. But that is only a stay of execution: from 1 January 2015, they’re going to have to collect real data and disclose it. And the law is only part of it. Conflict minerals compliance is seen by many as a “corporate social responsibility” issue, a moral obligation as well as a legal one. The US legislation followed some very public moral outrage by the then US Secretary of State Hillary Clinton on a visit to central Africa in 2009, and influential groups such as Intel have announced their intention to be “conflict-free”.
That hasn’t, though, stopped legal challenges to the regulation. In April, the US Court of Appeals in the District of Columbia ruled in a case brought by the National Association of Manufacturers, the prime American industry trade body, against the SEC that the law’s requirement for a “public statement” of conflict-free products amounted to a demand “to confess blood on their hands” and was therefore a violation of the free-speech first amendment to the US constitution.
While the courts ponder this, the SEC has declined to defer the first deadline for reporting.
There’s quite wide support for the regulation and the court upheld the general thrust of it. And because the legislation requires the stock-exchange-regulated US companies to delve down supply chains to the point of origin of minerals, there are implications for suppliers worldwide – back to the extraction points and base-metal smelters in Africa. This is not just an American issue.
“We have long been concerned about the extra-territorial reach of the US law,” says Ian Rodgers, the director of UK Steel, the metals sector of the EEF manufacturers’ organisation. “UK manufacturers supplying into the US have been required by their customers to comply with the Dodd-Frank provisions,” he says.
Because the American rules have been building up for a while, many UK firms with US contracts know about them: “Many will have been required to go through the compliance regime by customers,” says Rodgers. But some very big businesses in affected areas of manufacturing are having to keep a close eye on proceedings. In particular, distributors, an important part of the supply chain in electronics especially, are being wary.
RS Components says that it works closely with its suppliers to ensure that its due-diligence procedures comply with the rules, and it very much supports the principle of the US regulations. “As a distributor, however, these rules present genuine challenges because RS is significantly removed from the manufacturing process,” it says.
Premier Farnell, another distributor with worldwide sources and outlets, has involved itself pretty heavily in the formulation of policies and processes and its European head of compliance and legislation, Gary Nevison, has been highly vocal through websites and blogs about developments. An aspect that concerns him, and others, is that the US regulation on conflict minerals is spawning others: the European Union put out a set of proposals in March, and Canada and Australia are also developing rules.
The concern is that, although the due-diligence processes conjured up by these different sets of proposed legislation are broadly the same, the scope is likely to vary.
Nevison notes that, while the EU and Canadian proposals target the same 3TG materials, Canada appears to be looking beyond the large SEC-regulated companies that the Americans have covered for rules that will apply to all firms,
irrespective of their size and including component makers.
Europe’s proposals, meanwhile, appear to be seeking to avoid one of the aspects feared from US experience – that risk aversion will deter sourcing from “good guys” in the DRC as well as from the bad. EU regulations, due perhaps later this year, are likely to be less prescriptive geographically, opening up possibilities for action against exploitative and abusive operators in other regions, such as Latin America.
Ian Rodgers at UK Steel says there are good points in the EU approach, in that the current idea is to restrict the impact of the rules to importers of ores and metals rather than going further down the supply chain. But, he adds, broadening the geographical reach may introduce other issues. “While Dodd-Frank applies to minerals sourced from DRC and surrounding areas, the EU would cover sourcing from ‘areas in a state of armed conflict, fragile post-conflict as well as areas witnessing weak or non-existent governance and security, such as failed states, and widespread and systematic violations of international law, including human rights abuses’.
“This is potentially a lot wider than just the DRC and therefore will be costlier to apply – for example eastern Ukraine could conceivably fall within scope. It would effectively leave it to each ‘responsible importer’ to determine for itself which areas fall within this definition at any given time, leading to uncertainty.”
No one’s yet saying that other minerals might be involved. But Afghanistan is, for example, the biggest supplier of lithium, and its industrial practices are, in politically difficult times, also uncertain. The current focus on 3TG is something of a test case: will it improve things and reduce conflict? The only certainty is that this is a topic that is not going to go away: “conflict minerals” is a phrase we’d better get used to.
How to automate the reporting process
The product design, development and information group PTC has a set of routines within its analytics systems aimed at manufacturing companies that can be adapted to automate the record-keeping and report-writing needed to demonstrate compliance with conflict minerals regulations.
Supply-chain business manager Howard Heppelmann says PTC has adapted its materials compliance systems to meet the new rules. “The Restriction of Hazardous Substances (RoHS) rules for electronics have been in place for several years, and there has been the ELV end-of-life recycling rules for the automotive sector and the Reach legislation for materials,” he says.
In addition to their final product compliance roles, systems for RoHS and Reach are used by designers to verify their choices early on in development. “Traditionally, you let designers finish their work, including who they’d like to source from, and only when you were getting ready to manufacture would you start asking questions,” says Heppelmann. “We recognised that you can create a lot of value by integrating the regulatory obligations for materials right up front.”
Where Reach, RoHS and ELV target primarily the chemistry, the conflict minerals regulations will be looking at geography, but Heppelmann says that the data-collection system adapts simply and means the process and the reports that are needed can be pretty much automated.