On May 31, 2014, the reporting of the importation and use of “conflict materials” became mandatory in the United States. The Dodd-Frank Wall Street Reform Act (“Dodd-Frank”) directed the Securities and Exchange Commission (SEC) to promulgate rules for disclosing the use of certain minerals exported from the Democratic Republic of the Congo (DRC) and nine other countries and used extensively in, among other items, consumer electronics. Last month, the EU passed a similar law requiring compulsory checks as to the supply chain of conflict minerals starting in 2021. Companies operating globally need to be cognizant of where they may be subject to such ever-increasing import and use regulations.
The Conflict Minerals Law
“Conflict diamonds,” also known as “blood diamonds,” have long been the subject of regulations promoted by various humanitarian groups around the world. Global trading in such diamonds has funded bloody conflicts in the DRC and elsewhere in Africa since the early 1990s. Recently, other goods and minerals have become a part of the basket of commodities used to fuel civil wars as well as enable profiteering by despots who aid and abet war crimes.
US and EU Definitions of Conflict Minerals
Under the US law, companies must disclose the use of conflict minerals that are necessary to the functionality or production of a product manufactured by them if the minerals originated in DRC, Angola, Burundi, Central African Republic, Congo Republic (distinct from DRC), Rwanda, Sudan, Tanzania, Uganda, or Zambia. The minerals included in the regulation are gold, columbite-tantalite (an ore that is used in the production of capacitors), cassiterite (an ore used to produce tin for soldering circuit boards), and wolframite, a source for tungsten. The EU rules will apply to importers of tin, gold, tungsten, and tantalum in an effort to ensure that such raw materials do not come from conflict zones nor are they used to finance armed conflict.
The US law requires that regardless of a company’s fiscal reporting year, it must file a disclosure report on Form SD every year by May 31 covering raw materials used during the previous calendar year. The report must include an independent third-party audit that traces the supply chain of conflict minerals and a statement asserting that based on reasonable inquiry, the reporting company has determined the source of the minerals being audited. If a company cannot determine the source, then it must confirm that it exercised due diligence in attempting to obtain that information. It is estimated that some 12,000 companies need to comply with the US Conflict Minerals Law even if they are lower-level handlers and not actual manufacturers.
The EU regulation allows exemptions for small importers such as dentists and jewelers, who will not be required to trace the origins of the presumably small quantity of raw conflict minerals that they bring into the EU. Other exemptions apply to products that are particularly difficult to trace, like recycled metals and manufactured products.
However, some critics see even those loopholes as unacceptable allowances: “These volume thresholds that exempt companies from complying with legislation are dangerous loopholes. They could let minerals worth millions of euros enter the EU free of any scrutiny,” according to one NGO spokesperson. Last year another EU conflict minerals activist also objected to the proposed exemptions, stating: “We want to have a mandatory system for all of the supply chain.” But regardless of the various origin-tracing regulations, cellphones, laptops, and virtually all other consumer electronics will continue to contain some percentage of minerals whose sale funded some level of conflict somewhere.