Conflict minerals update: what electronics manufacturers should know

We promised to keep you up-to-date with the evolving cycle of regulation around the use of Conflict Minerals in electronics manufacturing, and there’s much to divulge.

In my last blog post on the subject, I described the aims and reporting requirements of Section 1502 of, to give it its full title, ‘The Dodd-Frank Wall Street Reform and Consumer Protection Act’. Here I will provide an update on recent developments regarding the legislation and its considered effects.

The Dodd-Frank Act in brief

As you will remember from our first blog on conflict minerals, the original purpose of the Act was the need to respond to the poor financial regulations that existed at the time of the Enron/Arthur Anderson bankruptcy scandals and the 2008 financial crisis. The inclusion of a section on these minerals was a surprise to many, being related more to human rights, corporate social responsibility and foreign trade policy than financial regulation.

What impelled this inclusion was the wide number of reports emanating from organisations, such as the UN, OECD and Amnesty International, regarding the use of natural resources in the Democratic Republic of Congo (DRC) as a means to fund conflict, and the subsequent human rights abuses.

The Act was signed into US law in July 2010, but the first filings were not required until May 2014; the next are due 31^st May 2015. The Act requires only disclosure of these minerals within product manufacture; there are no legal consequences for companies that continue to source minerals from the DRC area. It was the legislators intention to create pressure on companies to act through the possible adverse brand impact that may result. The Act requires declarations, conflict free or not, to be made public through statements on the company’s website. This was considered to be the persuasive aspect of the legislation that should prompt companies, such as electronics manufacturers, to change or reconsider their sourcing policies and supply chains.

Challenges to the Legislation

In 2012, a challenge to the Securities Exchange Commission (SEC) rule was made jointly by three US-based groups - the National Association of Manufacturers, the Chamber of Commerce and the Business Roundtable. The concerns raised were that the rule was arbitrary and capricious, that the SEC had not carried out a proper cost benefit analysis (the cost of compliance was originally estimated by the SEC to be $71.2m, a recent study by Tulane University concluded that the real figure would be $7.93bn) and that it impeded the US Bill of Rights' First Amendment of the freedom of speech.

On appeal, the Court dismissed all but the last challenge, and agreed that companies could effectively be forced to declare products conflict mineral free when it cannot be proved beyond doubt that products within the supply chain are in fact free.

A recent ruling in the US food industry has supported this challenge and, in what is considered a significant and rare move, a decision was made by the US Court of Appeals to rehear the case; one of the judges in the hearing agreed with the challenge in declaring that by forcing a company to effectively confess to having “blood on its hands” was an obstruction to the right to free speech.

The full outcome of the appeal may well not be known before the end of this year, and companies are advised to continue to ensure they meet the existing reporting requirements.

Unintended or Intended Consequences?

There is much ongoing debate over the effectiveness of this legislation, with many commentators and academics believing that the US government is encroaching on what should be regarded a corporate or industry responsibility. There are divided views on whether declarations should be voluntary or mandatory, the ‘line’ being taken by the EU in their proposed legislation (which is not expected to be ratified before the end of 2015) is for a voluntary rule.

For the people of the DRC, it is suggested, there have already been both negative and positive consequences. The ‘all or nothing’ approach - set by the Act - to the DRC presumes that all mines there are under military control. But, whilst it is widely accepted that many are supporting the conflict, some artisanal mines are thought to be supporting only the local communities. These mines and local communities are reportedly being badly affected, as western companies withdraw from the area rather than trying to figure out which mines are or are not involved in funding conflict.

Another criticism of the legislation is that it is repressive and does little to support or develop the economic or welfare situation in the DRC; many would like to see more a proactive and constructive approach to the problem that involves the people of the DRC.

In spite of the contrary views of the effectiveness of the legislation, it is helping to highlight the challenging issues in the region, and even if that is all it achieves then raising awareness of this situation can only be positive for the people of the DRC.