Dodd Frank Sec. 1502: Are the costs for Congolese miners and US companies worth the uncertain long-term benefits?

On 21 May 2013, the House subcommittee on Monetary and Trade Policy (part of the Financial Services Committee) held a special hearing entitled, “The Unintended Consequences of Dodd-Frank’s Conflict Minerals Provision.”  The hearing’s focus was Section 1502 of the Dodd-Frank bill which requires American companies to provide evidence of due diligence in their supply chains for certain minerals classified as “conflict” sourced from the DRC and 10 neighboring countries

Map of DF 1502 The session highlighted the cost-benefit analysis of DF 1502.  The negative externalities include namely the widespread economic displacement of Congolese miners and failure to provide any tangible benefits toward enhancing security, ousting warlord groups, and/or improving working conditions of the Congolese people.   However, the session established that due diligence measures are being undertaken by American companies, local civil society organizations, and the Congolese government, which recently passed legislation requiring conflict-free certification.  Sophie Pickles (Global Witness) argued that these measures would not have been undertaken without DF 1502, while Rick Goss (ITIC) and David Aronson argued that such efforts were already underway independently, both internationally and locally, prior to the clause.

The overall theme of yesterday’s hearing was simple – What is more important? The institutional outputs for businesses or the tangible outcomes for everyday people? Answers to these questions are deeply rooted in the goals of DF 1502 and in the complexities of everyday life in DRC.

What is DF 1502?

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203; HR 4173) was signed into law on July 21, 2010 in response to the 2008 financial crisis.  Buried within Dodd-Frank (DF) was Section 1502, which requires companies sourcing certain minerals in the DRC and its adjoining countries to report on their due diligence measures to ensure that such minerals are “conflict free.” These minerals specifically include columbite-tantalite (tantalum), cassarite (tin), gold, and wolframite (tungsten) – or the so-called 3TG.

(a) SENSE OF CONGRESS ON EXPLOITATION AND TRADE OF CONFLICT MINERALS ORIGINATING IN THE DEMOCRATIC REPUBLIC OF THE CONGO.—It is the sense of Congress that the exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein, warranting the provisions of section 13(p) of the Securities Exchange Act of 1934, as added by subsection (b).

(b) DISCLOSURE RELATING TO CONFLICT MINERALS ORIGINATING IN THE DEMOCRATIC REPUBLIC OF THE CONGO.—Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m), as amended by this Act, is amended by adding at the end the following new subsection:

‘‘(p) DISCLOSURES RELATING TO CONFLICT MINERALS ORIGINATING IN THE DEMOCRATIC REPUBLIC OF THE CONGO.—

‘‘(1) REGULATIONS.—

‘‘(A) IN GENERAL.—Not later than 270 days after the date of the enactment of this subsection, the Commission shall promulgate regulations requiring any person described in paragraph (2) to disclose annually, beginning with the person’s first full fiscal year that begins after the date of promulgation of such regulations, whether conflict minerals that are necessary as described in paragraph (2)(B), in the year for which such reporting is required, did originate in the Democratic Republic of the Congo or an adjoining country and, in cases in which such conflict minerals did originate in any such country, submit to the Commission a report that includes, with respect to the period covered by the report—

‘‘(i) a description of the measures taken by the person to exercise due diligence on the source and chain of custody of such minerals, which measures shall include an independent private sector audit of such report submitted through the Commission that is conducted in accordance with standards established by the Comptroller General of the United States, in accordance with rules promulgated by the Commission, in consultation with the Secretary of State; and

‘‘(ii) a description of the products manufactured or contracted to be manufactured that are not DRC conflict free (‘DRC conflict free’ is defined to mean the products that do not contain minerals that directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country), the entity that conducted the independent private sector audit in accordance with clause (i), the facilities used to process the conflict minerals, the country of origin of the conflict minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity.

‘‘(B) CERTIFICATION.—The person submitting a report under subparagraph (A) shall certify the audit described in clause (i) of such subparagraph that is included in such report. Such a certified audit shall constitute a critical component of due diligence in establishing the source and chain of custody of such minerals.

‘‘(C) UNRELIABLE DETERMINATION.—If a report required to be submitted by a person under subparagraph (A) relies on a determination of an independent private sector audit, as described under subparagraph (A)(i), or other due diligence processes previously determined by the Commission to be unreliable, the report shall not satisfy the requirements of the regulations promulgated under subparagraph (A)(i).

‘‘(D) DRC CONFLICT FREE.—For purposes of this paragraph, a product may be labeled as ‘DRC conflict free’ if the product does not contain conflict minerals that directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country.

‘‘(E) INFORMATION AVAILABLE TO THE PUBLIC.—Each person described under paragraph (2) shall make available to the public on the Internet website of such person the information disclosed by such person under subparagraph (A).

Clearly, the stated goal of DF 1502 was to absolve US companies and consumers of any connection to armed groups in Eastern DRC that might be engaged in human rights abuses.  However, DF 1502 also requires:

(c) STRATEGY AND MAP TO ADDRESS LINKAGES BETWEEN CONFLICT MINERALS AND ARMED GROUPS.—

(1) STRATEGY.—

(A) IN GENERAL.—Not later than 180 days after the date of the enactment of this Act, the Secretary of State, in consultation with the Administrator of the United States Agency for International Development, shall submit to the appropriate congressional committees a strategy to address the linkages between human rights abuses, armed groups, mining of conflict minerals, and commercial products.

(B) CONTENTS.—The strategy required by subparagraph

(A) shall include the following:

(i) A plan to promote peace and security in the Democratic Republic of the Congo by supporting efforts of the Government of the Democratic Republic of the Congo, including the Ministry of Mines and other relevant agencies, adjoining countries, and the international community, in particular the United Nations Group of Experts on the Democratic Republic of Congo, to—

(I) monitor and stop commercial activities involving the natural resources of the Democratic Republic of the Congo that contribute to the activities of armed groups and human rights violations in the Democratic Republic of the Congo; and

(II) develop stronger governance and economic institutions that can facilitate and improve transparency in the cross-border trade involving the natural resources of the Democratic Republic of the Congo to reduce exploitation by armed groups and promote local and regional development.

(ii) A plan to provide guidance to commercial entities seeking to exercise due diligence on and formalize the origin and chain of custody of conflict minerals used in their products and on their suppliers to ensure that conflict minerals used in the products of such suppliers do not directly or indirectly finance armed conflict or result in labor or human rights violations.

(iii) A description of punitive measures that could be taken against individuals or entities whose commercial activities are supporting armed groups and human rights violations in the Democratic Republic of the Congo

This section presents a clear linkage between the law and the desire for the US government to assist in the end of conflict in Eastern DRC and security therein.  This would imply that the goal of DF 1502 is twofold – both to clean the hands of US companies and consumers of “blood minerals” and also to encourage security and peace in Eastern DRC by stopping the flow of conflict mineral trade.

Source of Conflict in Eastern DRC

To the credit of the panel at yesterday’s hearing, they did an excellent job of conveying the complexities of conflict in the DRC and in explaining how this has little to do (inherently) with the presence of minerals in the Kivus.  Conflict in Eastern DRC is tied to ethnicity, chronic state weakness, instability, and external meddling.

Aside from the honorable Rep. Gwenn Moore (D-WI4), the House subcommittee appeared to also have a firm grasp on the complexity of the situation and the fact that minerals do not cause conflict in Congo.

Detailing the bloody history of conflict in Congo is well beyond the scope of this blog, but for more details, see Jason Stearns’s excellent book Dancing in the Glory of Monsters and his blog.

The important thing to remember is that minerals do not necessarily drive the conflict and are not the sole source of financing for militias.  In addition, militias themselves may sometimes promote growth, offer important services, and provide security where the weak Congolese state fails (for example: Raul Sanchez de la Sierra of Columbia University is doing some interesting research on this and how it relates to market prices of key mineral sectors).

Institutional Outcomes of DF 1502

So what does DF 1502 actually require of companies? Here’s the OECD 5 step process that the SEC referenced as a “good starting point” according to a Deloitte debriefing in March 2012.

OECD Process

As Pickles pointed out in her statement to the subcommittee, many companies are indeed moving toward implementing due diligence processes to identify sources for their supply chains.  However, the biggest challenge is tracing minerals from smelters and refiners to the source mine.  This requires quite a bit of investment on the part of companies, as supply chains are complex and do not presently have accurate record keeping.

Supply ChainAs Sustain Analytics (an independent sustainability think tank based in the Netherlands) reported in October 2010,

“In tracing the origin of the 3Ts back to their source, refiners stand out as the critical link. Once mineral ore is refined into metal, it becomes impossible to distinguish the source of its composite materials. Prior to refinement, if the source of the minerals is documented and records are subjected to independent audits, then traceability of minerals is possible (p.9).”

Many industry- and government-led initiatives are underway to source minerals in DRC and its neighboring countries back to their mine of origin and to certify that minerals sourced by US companies are “conflict free”.

Some of these initiatives were already proceeding prior to DF 1502.  For example, according to the same Sustain Analytics report, the Electronic Industry Citizenship Coalition (EICC) & Global e-Sustainability Initiative (GeSI) formed an “Extractives Workgroup” in 2007 to investigate conditions at mines and provide companies with information to inform their decisions on sourcing and their initiatives to improve circumstances for miners.  In addition, the ITRI Tin Supply Chain Initiative (iTSCi) began developing a “bag and tag” scheme to mark conflict free minerals at the mine of origin in 2008 with a pilot phase in summer 2010 prior to DF 1502.  Lastly, the International Conference on the Great Lakes Region (ICGLR), the Federal Bureau for Geosciences in Germany (BGR), and the Organization for Economic Co-operation and Development (OECD) also had initiatives underway prior to DF 1502.

In response to DF 1502, numerous private and NGO initiatives have been founded to enhance supply chain knowledge.  For example, Motorola established its Solutions for Hope project, which was widely cited by Pickles in her testimony and is possibly, to-date, the only sourcing scheme that has successfully exported minerals certified as “conflict free” from DRC.  However, Solutions for Hope’s mines are located in the Katanga Province, which is not considered Eastern Congo and which is generally more secure. Katanga is home to (arguably) DRC’s only functioning local government outside of the capital of Kinshasa.

On the government side, the Public-Private Alliance for Responsible Minerals Trade (PPA), spearheaded by the US Department of State and USAID was formed to fulfill the Section C(1)(a) of 1502.  This initiative brings together governments, NGOs, and the private sector in an effort to responsibly source minerals.

Negative Externalities of DF 1502

As three of the four panelists at the hearing reported, the most devastating negative externality of DF 1502 is a de facto embargo on mineral exports from Eastern DRC, beginning with a temporary halt on all exports implemented by President Kabila in anticipation of the bill in 2010.

Delays by the SEC in establishing specific protocols for reporting led to a prolonged deliberation process for companies over whether or not to continue sourcing in the region at all.  Proponents of DF 1502, like Pickles, argue that now that these regulations have been made clear, increasing amounts of “clean” minerals are being exported from Congo; although it looks like these are primarily coming from non-conflict areas like Katanga.

An expert who was absent from the panel, Laura Seay (Morehouse College; Texas in Africa) estimates that 5-12 million Congolese have been directly, negatively affected by DF 1502.  The number could be much higher once we take into account local traders, farmers, and service providers who are no longer able to sell their goods and services to miners who are out of work.  In addition, whole communities have been hit hard because planes are no longer traveling to their remote locations to pick up mining shipments. According to Seay, these planes once carried essential goods such as fuel, salt, and candles.

Rep. Moore (D-WI4) reacted to the claims that Dodd Frank has led to massive economic displacement by stating,

“I’ve sort of heard this same argument with respect to some other sad parts of history here in the United States where (you know) it was a bad thing to free the slaves because they then would have no source of income…”

Her analogy stems from reports made by a variety of advocacy groups about the harsh, “slave-like” conditions in Eastern DRC mines.  Most notable of these is “The Congo Report: Slavery in Conflict Minerals” published by Free the Slaves, a Washington, DC based advocacy group in June 2011.

Based on interviews with 354 miners in Bisie and 388 children miners in Omate and Bibatama, the investigation found,

“Overall, 40% of respondents interviewed in Bisie were found to be in confirmed situations of slavery, with an additional 10% showing strong indicators of enslavement. Children proved especially vulnerable to exploitation, with over two thirds of child respondents in either confirmed situations of slavery or showing strong indicators of being enslaved.”

The report defines slavery as forced recruitment without pay, debt bondage (working without pay to cover debts), and peonage (forced labor after having been arrested on trumped up charges), sex slavery, forced marriage, and child soldiering/slavery. While these findings are saddening, they may not be representative of all areas of eastern DRC.

In addition, their definition of “forced labor” includes salongo, which is controversial at best.  Salongo is a day or afternoon of mandatory community service, which is common throughout DRC including among the FARDC.  This system is similar to umuganda, a monthly service day, in Rwanda.  While salongo can and probably often is coopted for forced labor, the principle is one of community service not one of slavery.

Others have claimed that even if miners are not slaves,

“The average wage for a miner is between $1 and $5 a day. The mines are also filled with child laborers between the ages of 10 and 16, now missing out on precious years of school.”

These claims are problematic, as is Moore’s analogy.   The average wage for a day laborer in metropolis areas like Kisangani and Kinshasa is $2-3, which is also the average wage for a miner.   On the other hand, an FARDC soldier makes $30-$50 per month, or less than $2 per day, and that is when they are paid by the national government.  In my anecdotal experience, soldiers’ salaries arrived on about 50% of the time and even then was systematically late and required soldiers to pay travel costs to go regional hubs for collection.

Yet, we don’t see the same sort of movement to ensure proper pay and working conditions for day laborers, agriculture workers, and/or FARDC soldiers in the DRC.  Is their plight less important because they don’t produce minerals that are important for US consumers?  I don’t hear any advocacy group shouting for the rights of Congo’s slave-soldiers.

As for children “missing precious years of school”, these children are forced to work because of abject poverty.  Without their wages, they and their families are likely to starve.  School is not an option for them because of both opportunity costs associated with not working and the direct, unattainable cost of school fees.

Moore’s central question related to the choices that miners have.  The answer is that there are few.  The wars in Congo ravaged the land, forcing farmers to move into the mining sector.  Today, families have generational linkages to mining.  Knowledge of farming has been depleted and would be difficult to relearn and risky in an area where the security is uncertain.  Mining provides a day wage, whereas farming requires a long-term investment, especially in areas where cassava, which takes 12 months to mature, is the primary crop.

The potential for non-farming and non-mining employment is even lower given the reduced rate of supply deliveries due to reduced air traffic post-Dodd Frank.  Pickles mentioned a former miner who was able to open a bakery as anecdotal evidence that Dodd-Frank has helped areas rid themselves of militias and develop economically.  This is a great story, but could be rather rare and is rather risky considering the continued uncertainty in the region.

Conclusion

What is the goal of DF 1502?  If the goal is for American companies and the US government to feel better about itself because it has taken measures to divest from armed militias and vigilante groups operating in and around DRC, then the institutional outputs are the only critical assessment of DF 1502’s success.

In this case, Pickles’s testimony that DF 1502 has resulted in “conflict-free” supply chains for Eastern DRC is solid and provides a good case for the continuation of the legislation.  If we can expect conflict free outputs to continue to rise, streamlining of clean mineral chains, and a decrease in the paperwork burden for US companies, then in the long-term DF 1502 may be a success for both American companies and the Congolese people.

But if we are more interested in assisting the Congolese people toward a more secure and stable future, then we also have to consider the reality that DF 1502 never had a chance of “ending conflict” in the DRC.  It only tackles one of many sources of revenues for militias and does not address the root causes for the proliferation of these militias in the first place.

In the short term, the legislation has done harm by displacing people from their only source of income, removing the impetus for regular supply planes to bring necessary goods to remote areas, and by also decreasing the income of those who relied on mining communities to sell their excess produce and services.  There is no clear indication that the streamlining of clean mineral chains necessary to restore exports to pre-2010 levels is achievable in the near future.  It may be possible in the long term, but is unlikely to produce any substantive positive changes in the security of Eastern DRC or the livelihoods of the Congolese people.

The Congolese people are entrepreneurial; they are among the world’s greatest survivors.  They will manage to adapt to the changes that DF 1502 has made in their communities, but this will likely result in further development of black-market channels, collusion with seedy groups, and the corruption of American businesses who are unable to comply with DF 1502.

As the only Congolese on the panel, Mvemba Dizolele (Hoover Institute), testified, perhaps the biggest problem with DF 1502 is that the Congolese government was only consulted “on the periphery” and were systematically relegated to sitting in the audience rather than at the table for key debates over the law and its implementation.

The security and stability of Eastern Congo ultimately rests in the hands of leaders in Kinshasa, not the US Congress or American businesses. Among other things, until the Congolese government 1) adequately equips, professionalizes, and most importantly, pays their soldiers; 2) implements widespread changes in how local governments are supported and funded through national revenues; 3) provides an avenue through which local communities can realize self-governance and reconciliation; and 4) engages in concerted diplomatic efforts to curb foreign interventions, conflict in the DRC will last indefinitely.  No legislation on the part of the US government is going to lead to lasting peace in the DRC.  Only the Congolese can decide that for themselves.

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