Conflict Minerals: Achieving “Conflict-Free” Compliance

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“Conflict minerals” were historically perceived as an issue for companies involved in mining and trade. For most companies, the term “conflict coltan” from eastern Democratic Republic of Congo (DRC) suggested a place well beyond the sphere of influence and interest of most northern-based companies. This changed when we published an article in the Financial Times in 2008 connecting the “conflict minerals” trade from a notorious mine in eastern DRC to household brands via a complex chain of intermediaries and brand manufacturers in Asia. This initial research exposed both the connectivity of the mineral trade from far-off eastern DRC, and the complex supply chain, which after export from Congo includes a chain of a dozen destinations.

Since then the risk of supply chain contamination has become a complex area of risk mitigation for brand companies, as many have found they had limited visibility into their supply chains beyond the second or third tier of suppliers.

Following effective advocacy by international NGOs, brand companies now face legislation in the Dodd-Frank Act 1502. It requires companies using tin, tantalum, tungsten and gold from the DRC and adjoining countries to ensure their extraction, trade and processing has not benefited armed groups or contributed to human rights abuses. It is no longer a remote African problem that brand companies can brush aside. Instead it requires proactive engagement and resources.

At time of writing, armed groups have control over parts of eastern DRC and atrocities continue. While the easiest way for companies to ensure their materials are “conflict-free” is to stop sourcing from the DRC and adjoining countries, this would be a catastrophe for the local people, as the minerals trade also feeds an estimated 1 million people. While companies cannot be seen to support conflict, they can also not be seen to undermine development.

A way out of this dilemma is for the companies to introduce systems of warranties that enable sourcing via third parties from the “conflict-free” parts of eastern DRC and adjoining countries. Industry, governments and NGOs are applying a number of assurance systems aiming for “conflict-free” compliance. While the applicability and effectiveness of the systems in an environment characterized by weak governance structures remains to be proven, by April 2011 SEC companies have no choice but to construct and implement as well as maintain the credibility of what will have to be robust systems.

An inherent feature to safeguard the effectiveness of the private company systems is to have them independently assured. Elements such as “stress testing” and due diligence verification are part of any successful assurance process. Following this, an appropriate assurance model in consultation with relevant stakeholders could be rolled out. For private sector companies, a “stress test” provides the opportunity to uncover faults in the system, and give time to address weaknesses, prior to the public “assurance process” being undertaken.

Regardless of whether companies are ready or not, the regulatory requirements are imminent. Like the diamond sectors before them, the DF Act and related measures might well lead to a significant reshuffling of the industry between those unable to comply and those who use compliance to leverage their advantage in the market.