Section 1502 will mean that any company that uses so-called ‘conflict’ minerals that were extracted or delivered from the war-torn eastern region of the Democratic Republic of Congo (DRC) will be in trouble whether they were aware of the fact or not.

It is estimated that the Second Congo War, which has been caused by a desperate struggle for control of that country’s vast mineral wealth, has so far directly and indirectly lead to the deaths of 5.4 million Congolese since it started in 1998.

The mineral extraction sector in eastern Congo, which is marked by horrific human rights abuses, is controlled by militia groups and foreign and domestic military forces.

According to Chris Bayer of Tulane University in the US who has recently written a report on the matter for the US senators who sponsored Section 1502, the proceeds of the business flow into the ‘informal’ market or benefit neighbouring countries rather than delivering badly needed revenue to strengthen the Congolese state and enable it to take control over the region and resources.

Section 1502 is sponsored by Senators Sam Brownback, Russ Feingold and Dick Durbin as well as Representative Jim McDermott.

Mr Bayer said that the US politicians hope that the public disclosure of the supply chain from extraction to production coupled with the threat of steep fines for those that fail to comply as envisaged by Section 1502 will persuade companies to stop supporting the production of conflict minerals and encourage ethical sourcing instead.

As currently planned, however, Section 1502 does not actually ban or prohibit the purchase or use of conflict minerals. There are also currently no legal penalties aimed at those companies that use and buy the minerals. Moreover, there is also no mandatory requirement to find or evaluate alternative materials, suppliers or sources.

In some ways 1502 may be regarded as something of a toothless new rule.

But fines can still hurt and of course reputational risk is right at the top of the corporate agenda currently, particularly in Europe and the US. Given, the complexity of modern day supply chains, particularly when the raw materials come from such a loosely governed region as that surrounding the DRC, there is a real danger that many companies may be ignorant of their compliance in this activity and suffer serious red faces as a result.

Thus Section 1502 is designed to ensure that such companies are no longer able to use ignorance as an excuse for effectively funding violent and oppressive groups by not properly checking out where their raw materials or even secondary products came from, how they were delivered and who was paid for them.

Section 1504 is aimed at the wider resource extraction industry and requires all US and foreign companies registered with the SEC to publicly report how much they pay governments for the commercial development of oil, natural gas and minerals.

The US government and SEC appear to be taking the broader provisions of the Dodd-Frank Act very seriously and it seems to have sharper teeth than Sarbanes-Oxley.

To help generate investigations the wider Dodd-Frank act, for example, enables whistleblowers to claim a ‘bounty’ that can be worth up to 30% of the value of any fines imposed. The US government has also set up the marvellously named ‘Office of the Whistleblower’ to handle the tips.

The final rules became effective on August 12 and only 7 weeks later the whistleblower’s office published its first annual report.

It had already received some 334 whistleblower tips between August and September 30 with the most common complaint categories being market manipulation (16.2%), corporate disclosures and financial statements (15.3%), and fraud (15.6%).

Moreover the tips were not limited to the US. The office said that the commission received whistleblower submissions from individuals in many foreign countries including ten from China and nine from the UK.

Mr Van Wyk, the opening speaker at last week’s Institute of Risk Management South Africa (IRMSA) annual conference just north of Johannesburg, told the 200 or so risk managers present to watch out for Dodd-Frank and make sure that they are aware of its requirements and their responsibilities, especially if they are involved in the mineral and extractive industries.

“This (Section 1502) gives the ability to trace a mineral, for example, and all its impacts. Any company that uses a mineral that comes from conflict mineral areas in Africa could be fined and find themselves in trouble,” said Mr Van Wyk.

“The other part of this is the whistle-blowing element. This is commission-based and whistleblowers can potentially earn up to 30% of the value of the fine. The SEC has so many whistleblowers it can’t deal with it!” he continued.

Section 1502 is all about disclosure, knowing where your products are sourced from and making that public.

The UK Foreign and Commonwealth Office is taking it seriously and provides UK companies with a detailed brief on the likely content and implications of Section 1502 and 1504 for British companies, underlying how this will not be limited to companies listed in the US alone.

Mr Van Wyk told delegates at the IRMSA conference last week that Dodd-Frank and Section 1502 is based upon guidelines issued by the OECD earlier this year and forms part of a wider trend of similar internationally focused anti-corruption and corporate governance rules that try to ensure that bad practices are not allowed to slip through the gaps in the ever-expanding global economy.

“You need an increased focus on risk management…following the global economic crisis there is also an increased focus on whether companies properly report their risk, its growth and the state of their economic health to investors,” said Mr Van Wyk.

There is an international focus on anticorruption, greater cross-border cooperation between judicial and regulatory authorities, as well as significant new rules, the accountant told the South African risk managers last week.

Such rules include the US Foreign Corrupt Practices Act (FCPA) that was originally enacted in 1988. That was updated in 1998 to broaden its net to international companies that do business with the US.

The US Justice Department explained that when the FCPA was first introduced American companies operated at a disadvantage compared to foreign companies ‘who routinely paid bribes and, in some countries, were permitted to deduct the cost of such bribes as business expenses on their taxes’.

A 10 year negotiation carried out through the offices of the OECD culminated in formal agreement with thirty-three other countries that signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

According to the US Justice Department the FCPA has had an ‘enormous impact’ on the way American firms do business. “Several firms that paid bribes to foreign officials have been the subject of criminal and civil enforcement actions, resulting in large fines and suspension and debarment from federal procurement contracting, and their employees and officers have gone to jail. To avoid such consequences, many firms have implemented detailed compliance programs intended to prevent and to detect any improper payments by employees and agents,” explains the department on its website.

Another more recent example cited by Mr Van Wyk at the IRMSA conference last week is the UK Bribery Act that became effective on July 1 this year.

The Act creates the following offences: active bribery, which comprises the promise or provision of financial or other advantage; passive bribery, which involves agreeing to receive or accepting a financial or other advantage; bribery of foreign public officials; and the failure of commercial organisations to prevent bribery by an associated person (corporate offence).

Under the current law imprisonment for up to seven years with an unlimited fine for such offences was increased to a maximum of 10 years’ imprisonment.

And again, as with Dodd-Frank in the US, the scope of the law is extra-territorial. Under the Bribery Act, an individual or company can be prosecuted for these crimes if the crimes are committed abroad. Non-UK companies can also be held liable for a failure to prevent bribery if they do business in the UK.

Under the Act, a company or corporate entity is culpable for board-level complicity in bribery, including bribery through intermediaries. And, there is also personal liability for senior company officers that turn a ‘blind eye’ to such board-level bribery.

“Bribery has no place in British business, at home or abroad. This new robust law reflects the UK’s role in the fight against bribery and paves the way for competitive but fair practice. Over time it will have a positive impact on the prospects of UK businesses through enhanced reputation for ethical standards, reduced costs and an international level-playing field,” states the Foreign Office.

As with Dodd-Frank Section 1502 ignorance is no excuse and won’t stop directors being sacked, fined or sent to prison under the UK Act.

“A company or corporate entity is culpable for bribes given to a third party with the intention of obtaining or retaining business for the organisation or obtaining or retaining an advantage useful to the conduct of the business by their employees and associated persons, even if they had no knowledge of those actions,” explained the Foreign Office.

But, as also under Dodd-Frank, the company and its individuals can defend themselves if they carried out the correct risk management procedures beforehand when dealing with third parties and can prove it.

“The company can invoke in its defence that it ‘had in place adequate procedures designed to prevent persons associated [with the company] from undertaking such conduct’,” explains the Foreign Office.

Section 1502 and 1504 of the Dodd-Frank Act should therefore not really come as a surprise to any business that does business in central Africa and is in any way reliant upon the mineral and extractive industries in the region.

Section 1502 has not been finalised yet and so its content and implications cannot be confirmed currently. But the UK Foreign Office is certain of a number of key elements.

First, it is clear that Section 1502 applies to all companies that manufacture products that contain ‘conflict minerals’. The act defines ‘conflict minerals’ to include gold, columbite-tantalite, cassiterite, wolframite and their derivatives.

The SEC's draft regulations indicate that a company for which any of the four minerals are necessary to the manufacture of its products must conduct a reasonable ‘country of origin inquiry’ to work out whether these minerals originate from the DRC or adjoining countries, according to the UK Foreign Office.

If the minerals do not, this conclusion and the report that led to it must be included in the company’s annual report to the SEC.

If the minerals do originate from the DRC or adjoining countries, or it cannot be worked out that they are not, the company would be obliged to compile an additional Conflict Minerals Report that discloses the due diligence measures they have taken. The DRC’s nine neighbours are Angola, Burundi, the Central African Republic, Congo-Brazzaville, Rwanda, Sudan, Tanzania, Uganda and Zambia.

“A company that uses ‘conflict minerals’ sourced from the DRC or adjoining countries—or ‘conflict minerals’ the origin of which cannot be determined—will have to disclose what due diligence measures it took to determine whether its minerals benefited armed groups. This due diligence would have to determine whether the conflict minerals used have directly or indirectly financed or otherwise benefited armed groups in the DRC. The company would also have to subject its report on due diligence to a certified independent third-party audit by a private firm in accordance with the SEC’s regulations and with existing standards for accounting practices established by the Comptroller General,” explained the Foreign Office.

The UK Foreign Office also stressed that all suppliers of manufacturers that use conflict minerals will be affected.

“Subject to the SEC's final regulations, a ‘satisfactory’ country of origin inquiry is likely to require suppliers to trace their minerals back. Satisfactory due diligence to determine whether minerals are ‘conflict free’ will likely require either a system of warranties, whereby each part of the supply chain guarantees the conflict free status of the material, or supply chain certification scheme, which will provide certification of the source of the material. Either way, due diligence requirements sufficient to meet SEC standards are likely to result in an upstream investigation to the point of mineral extraction,” it explained.

In a ‘know-your-customer’ system of warranties, a company would obtain a warranty from its immediate mineral supplier. In order to achieve credibility, a warranty must ultimately refer to the mineral supplier in the DRC or adjoining countries and verify that the minerals did not benefit armed groups in the DRC, stated the Foreign Office.

Also, a system of supply chain certification would require minerals to be tagged at the point of extraction, and their ‘unique identity’ noted at each point of transportation, processing, manufacture, retail and use. This would create a chain of custody that could be traced.

This will not be a simple process to organise and it will cost a great deal of money according to the experts.

The UK Foreign Office pointed out that ‘downstream’ due diligence could create compliance costs for those operating upstream and place administrative burdens at each stage of production and trade. “In many of the countries where due diligence or certification is proposed, the capacity of both the public and private sector to comply with the standards is limited,” it pointed out.

Limited state capacity to effectively oversee extraction, transport and export currently creates administrative bottlenecks in the normal course of events, continued the Foreign Office. “Further requirements to obtain verification such as through certification will exacerbate delays and provide new rent-seeking opportunities to governmental actors,” it added.

Because of the current lack of government capacity to enforce and monitor systems in countries like the DRC, it is likely that effective maintenance and oversight of these schemes will, in practice, become the responsibility of companies that have an interest in maintaining them, said the UK government department.

“To monitor and maintain effective chains-of-custody, early-warning systems, monitoring mechanisms and management-response procedures will have to be developed. Audits will be complex. The highest costs fall on activities from extraction to the point of refinery or smelting. Especially where tagging-schemes and chains of custody are introduced, refineries and smelters will be nodal points at which mineral origins can be verified. However, mineral traders that use multiple sources will still be faced by opaque supply chains, and may be forced to simplify and regulate their suppliers,” predicted the Foreign Office.

The UK government points out that systems of warranties are less administratively demanding but added that they provide an ‘increased risk of uncertainty’ within the supply chain because each buyer relies upon the verification of the supplier below. The Dodd-Frank Act only requires disclosure about the presence of conflict minerals in the supply chain and so companies, and their risk managers, will need to decide for themselves whether a system of warranties would provide sufficient verification.

“The private sector will be required to provide negative proof that the minerals they use are NOT sourced in the DRC if they want to avoid filing a conflict minerals report. And a company will not be able to declare its products ‘DRC conflict free’ unless it can show that its minerals do not benefit armed groups. Given that mineral supply chains are often long and complex, including many opportunities to ‘mix’ production, risk adverse companies should undertake an internal assessment on their suppliers to ensure full visibility over the supply chain and identify any blind spots,” it continued.

“Downstream companies affected by the Dodd-Frank Act may be forced to switch suppliers at short notice should their supplier be unable to provide them with details of their material’s source, especially in the early years of legislation’s implementation. Likewise, upstream companies may find that they are unable to provide sufficient clarity over their supply-chains for buyers who are required to report to the SEC and may run the risk of losing business. Changing supply chain protocol and sourcing requirements are likely to have cost implications for companies,” continued the Foreign Office.

The costs will not be small.

On September 26, 2011, faculty members Dr Elke de Buhr and Dr Laura Haas at Tulane University’s Payson Center for International Development were contacted by Jessica Simon of Senator Durbin’s office and asked to help provide a detailed estimate of what it would cost companies to implement the Act.

Chris Bayer, author of the subsequent report, explained the point of the exercise: “At the heart of the debate is how the SEC should calibrate regulation that implements the law in a manner consistent with the goals of the legislation without needlessly burdening industry and undermining American competitiveness,” he stated.

The Tulane University team estimates that the cost of implementing these actions would come to $7.93bn. Almost half of that total cost—$3.4 bn—would be met with in-house company personnel time. The other $4.5bn would be made up of spend on third parties for consulting, IT systems and audits. The bulk of the total costs—$5.1bn or 65%—would be incurred by the suppliers and the balance—$2.8bn or 35%—would be carried by the issuers or financiers.

“These implementation costs would however be borne by thousands of individual firms in lucrative industries such as the industrial, aerospace, healthcare, automotive, chemicals, electronics/high tech, retail and jewellery industries,” noted Mr Bayer.

And it does not stop there, according to the university team, as the economic cost could be as high as $100m a year for the US alone.

“As this economic impact analysis demonstrates, transparency and disclosure in the mineral/metal sector will come at a significant cost. As a sweeping law affecting a multitude of industries in the US, we regard Section 1502 as a ‘major’ rule as its effect on the economy will exceed $100m per year. The challenge facing the SEC is to fashion regulation that enforces the spirit of transparency and disclosure as envisioned by Dodd-Frank Section 1502, yet promulgate circumspect regulation that prevents undue burden being placed on the industries involved in the mineral/metal sector, and so avert whole industries extricating themselves from DRC originating minerals,” concluded the report.

But, as the UK Foreign Office points out, the benefits could be high for those who manage their risk properly, invest in compliance and do the right thing.

It pointed out that the DRC and surrounding countries remain ‘deeply impoverished’ and mineral exports remain significant for several countries including the DRC, Tanzania and Zambia. “For companies able to provide visibility over their supply chain, continued engagement with legitimate and compliant businesses in these countries should be encouraged as it both helps the economy of these countries, and assists local businesses in improving their work practice to meet international standards,” stated the UK government department.

It added that British companies that adopt due diligence processes and certification schemes may obtain competitive advantages over non-compliant competitors. “SEC-reporting companies that are risk-averse and concerned about their reputations may not wish to do business with suppliers that do not provide full visibility over their supply-chains, or which do not join credible attempts to certify production, once these measures come into effect. Provision of this visibility and proven efforts to conduct supply chain due diligence will be crucial for firms that wish to maintain effective commercial relationships with SEC-reporting companies,” it explained.

“The provision of detailed information to the public presents both risks and opportunities. Proactive companies that have full clarity and confidence in their sourcing and due diligence can use publication as an opportunity to demonstrate full compliance. A corresponding risk exists for companies who do not have confidence in their supply chains, as there is a risk that they will identify a supplier who is later identified as having integrity challenges further down the value chain. Given the significant interest in this issue by civil society, there will certainly be close examination of the published information, and even whether companies do or do not publish a report,” concluded the Foreign Office.

And this does not look like political window dressing either so possibly expect some of those rather blunt teeth available to police 1502 to be sharpened up in future.

The SEC held a public roundtable discussion on conflict minerals as part of its consultation for the Section on October 18 in Washington.

This discussion was attended by many political and industry big wigs and opened by none other than the chairman of the SEC herself, Mary L. Schapiro.

She explained why they were all there in typically forthright terms.

“Congress was concerned that the exploitation in trade in conflict minerals originated in the DRC is helping to finance conflict that is characterised by extreme levels of violence, particularly sexual- and gender-based violence, and is contributing to an emergency humanitarian situation. Our responsibility is to give affect through rulemaking to congressional intent,” said Ms Shapiro.

During the discussion, Yedwa Zandile Simelane, Senior Vice President, Corporate Affairs of AngloGold Ashanti, the South African-based gold giant, made some interesting remarks, however, that strongly suggested that US politicians may want to think again if they think they can fix African problems with distant rules dreamt up in a Washington think-tank.

Ms Simelane pointed out that AngloGold Ashanti, which is 53% owed by US shareholders, has 20 operations on four continents, which produced 4.52 million ounces of gold in 2010.

Nearly three-quarters of that came from Africa-based operations and the group operates gold mining in Tanzania and two projects in the DRC, besides its operations in West Africa and South Africa.

“Given this presence in Africa, AngloGold Ashanti believes we have an informed perspective on the proposed rules set forth by the SEC,” she said.

“I think I need to start by saying AngloGold Ashanti fully supports the state of congressional purpose of Section 1502, and that is to seek to end the exploitation and trade of minerals as a source of financing conflict in the DRC. We believe encouraging socially responsible economic development in this region must be recognised as an important part of the strategy to end the conflict and bring about peace and stability in the DRC,” continued Ms Simelane.

The South African representative said, however, until the issue of unregulated and illegal Tanzanian mining is addressed in the DRC, the aim of the regulations will simply not be achieved. And, the lack of accredited refineries in the region is ‘problematic,’ she added.

Better governments, stronger institutions on the ground in the DRC and security should be the prime concerns, pointed out Ms Simelane.

Then it became politically interesting.

“The SEC should be lauded for organising today's roundtable, which hopefully will serve to be for policymakers and the public on factors and issues that must be considered in the conflict minerals rulemaking,” she said.

“I think the SEC would have benefited from more African voices in today's discussion, [it would] have been useful to hear from the governments of nations such as Tanzania and the DRC, and those of the Great Lakes regions, whose citizens will be directly affected by this rule and are already being directly impacted by the de facto embargoes,” said Ms Simelane.

“Also missing are the African-based businesses that will directly be impacted by the rule, such as refiners, traders and manufacturers,” she added, bringing a further and wider complication into an already horribly complicated scenario for risk managers in Africa and worldwide to consider.

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