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12/25/2012 @ 8:02AM |576 views
My Nomination For Worst Law Of The Year: Dodd Frank On Conflict Minerals
It’s that time of year, when we look back on the one past and think about how we might make the next one better. And thus my nomination for the worst law of the past year. That’s the Dodd Frank regulations on the disclosure of the use of conflict minerals. Obviously, this will be controversial: and I most certainly don’t mean that there weren’t worse laws out there either. Rather, that a certain amount of professional expertise in this field leads me to the conclusion that this was indeed a very bad law. For it simply doesn’t achieve the outcome that its proposers were hoping for. Others with other fields of knowledge might well be able to top this one.
It’s worth going back a little. The Eastern Congo has been a vile slaughterhouse for near a decade now. Various gangs, militias and armies have roared back and forth across the landscape killing and raping as they go. The Eastern Congo is also home to extremely rich concentrations of certain minerals. And those minerals are also mineable with the most basic of technologies. Little more than human labour and a pickaxe is required for some of them.
This combination has led to those very same gangs and militias enslaving people to mine those minerals. The money raised being used to purchase the arms to pursue whatever the aims are: usually, to enslave more people to dig more minerals.
That this isn’t a desirable state of affairs should be obvious. Thus moves, largely driven by two NGOs, Global Witness and the Enough Project, to do something about this. And no one can deny that doing something would be a good idea. So full marks to the two organisations so far. However, it’s the actual implementation of the rules which I fear is at fault, not the intentions behind them. For the rules that have actually emerged make absolutely no difference at all to the particular problem that was used as the poster child to get the law passed.
For what we were told, the poster child for the cause, was that the mining of “coltan” (it’s actually columbo- tantalite but let that pass) to make our mobile phones was what was firing, contributing, to this violence and enslavement. Which could even have been true. But the laws that have emerged make no difference to this at all. There has indeed been a difference made: but not by these laws.
A little technical point. That “coltan” is used as the source of tantalum. About 8% or so of the world’s supply comes from this Central African region. Some portion of that (by no means all, nor even a majority) comes from those slave mines. The aim is to allow the continued operation of the non-slave mines while closing down the oppressive ones.
Tantalum itself is used to make the capacitors which go into electronic equipment. Our mobile phones, X-boxes, TVs and all the rest all use such tantalum capacitors. Global output is around some 100 billion pieces a year.
There were two conflicting visions of how this closing of the bad mines could be achieved. There were those like myself, who understood the industry, who pointed out that there are only a handful of factories that can process coltan into tantalum. Cabot in Germany, Starck in Germany, Ulba in Kazakhstan, a handful in China: maybe a couple of others but not many. We also have the ability to check where a particular consignment of coltan comes from: we have a database of the residual elements typical of each known mine and can thus check material, as with a fingerprint. To keep those slave mines out of the supply chain is therefore quite simple. Ensure that there is an inspector at the receiving dock of each of those less than a dozen processors and check each shipment as it comes in.
This is a reasonably cheap system, is effective, would work and so on.
That, however, is not the system that the law has mandated. Rather, the regulations under Dodd Frank insist that each consumer electronics company must detail whether it is using “conflict minerals” or not. Or rather, if it’s using minerals from Central Africa, whether it has checked that they are or are not conflict minerals.
This is obviously less efficient. We’re asking Apple, Samsung, HTC, Ericsson and the entire mess of other firms to go back and check their entire supply line. Instead of concentrating on that chokepoint of those few processors. So it’s not a good idea in the first place.
But then comes the really bad idea:
A company is considered to be “contracting to manufacture” a product if it has some actual influence over the manufacturing of that product. This determination is based on facts and circumstances, taking into account the degree of influence a company exercises over the product’s manufacturing.
A company is not be deemed to have influence over the manufacturing if it merely: affixes its brand, marks, logo, or label to a generic product manufactured by a third party.
For an electronics manufacturer (or any other manufacturer of any type at all) to have to label or monitor its supply chain it must actually be manufacturing. If you’re just buying off the shelf parts from someone else and assembling them then you don’t have to. You can just ignore the whole problem. And you don’t even have to check the supply chain of the people you’re buying the already made part from.
Which is where we get to the technical part of what a capacitor is. Which is an off the shelf part, not something that the electronics manufacturers themselves produce. They’re something they buy, by the tens of millions, then assemble. Thus the electronics assemblers, the Apples, the Ericssons, they’re not actually covered by Dodd Frank at all. Not for tantalum, anyway.
And the same will be true of the other metals on the list. Tungsten, tin and gold are also covered. But all of these, by the time they get to electronics, will be absolutely standard off the shelf components. Like solder perhaps, or simple gold bars for plating: these are simply not things that are being manufactured in the sense the law requires by those electronics companies.
So I’ve two rather contradictory complaints here. The first being that the law tries to set up a more complex than necessary system. Whereby we consumers put pressure on the electronics companies to avoid conflict minerals: that pressure coming from the fact that they must tell us if they use them. But the law itself then exempts the electronics companies because they don’t in fact have to tell us. Because they are not manufacturers according to the definitions of the law.
This is simply an extremely bad law.
We’re fortunate though in that despite the stupidity of the law something has been done. The EICC/GeSI initiative. Which has done what all of us in the industry said should have been done anyway. Concentrate on those few smelters, make sure they won’t take slave mined material, and the problem is solved. And as far as such problems can be solved, it is.
Which is really why the Dodd Frank regulations on conflict minerals get my nomination as the worst law of this year just passing. They set up an expensive and unwieldy system of regulation. Then provided a massive loophole through which all of the target companies could dive. In an attempt to solve a problem in a legislative manner when that very problem had already been solved by voluntary industry cooperation.
It’s possible there are worse laws out there this year. Your nominations will of course be accepted in the comments. But I concentrate on this one as it’s one that I recognise has gone wrong because I actually know this industry, in a manner that allows me to see why it has gone wrong.
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Tim, whereas I don’t disagree with you that this was the worst law created in 2012, or that it won’t solve the problem it was intended to solve, or that there aren’t better ways to achieve the desired outcome, I’d welcome the opportunity to hear you argue in front of the Apple Exec Mgmt Team that the law doesn’t apply to them.
To argue that because capacitors are standard off the shelf products (even as you know the finished products these go into all contain BOMS and are highly engineered e.g. manufactured) they don’t fall under Dodd-Frank is well, naive if not downright reckless advice.
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Well, I don’t have to convince the Apple board. I’d have to convince the SEC.
And I have linked to the specific regulation under the law so that people can make up their own minds.
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Sir: Your claim of a contract manufacturing exemption for electronics manufacturers is wholly incorrect. I suggest you revisit pages 61 – 67 of The Securities and Exchange Commission’s original final release from August 22 (the same section of the preamble from which the quote above was taken).
If your interpretation were correct, only companies directly manufacturing components/materials (e.g., capacitors and solder) would be subject to the regulation (assuming they are already under US SEC jurisdiction – and very few of those exist). It is abundantly clear that companies that consume those components/materials and incorporate them into their own products are subject to SEC’s conflict minerals regulation. This is the case even where contract manufacturers are used for the actual assembly or manufacturing on behalf of the company placing their brand on the product.
It is disappointing to see such factually incorrect information in Forbes. I hope readers view this article as an Op-Ed piece rather than one on which to rely in making compliance decisions.
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“It is abundantly clear that companies that consume those components/materials and incorporate them into their own products are subject to SEC’s conflict minerals regulation.”
Well, this is the point, isn’t it? It says that manufacturers are indeed covered. And then defines what a manufacturer is. And someone who assembles standard parts is not a manufacturer. According to that law.
Are capacitors a standard part? That’s something that will obviously have to be tested in the courts. But I would argue that they are, yes. Apple, Dell, HP etc, do not design capacitors, do not make them, they are parts that are made to standard designs and then purchased in bulk.
So no, it isn’t abundantly clear that those who incorporate capacitors into their products are, in the terms set out in the law, covered by Dodd Frank on conflict minerals. That’s very much my point. I don’t think they are.
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In my opinion, the following text excerpted from page 61 is abundantly clear:
“We believe narrowing or expanding the definition of “manufacture” as suggested by some commentators would be inconsistent with the language and framework of Section 1502. For example, the NAICS definition, which a number of commentators suggested, appears to exclude any issuer that manufactures a product by assembling that product out of materials, substances, or components that are not in raw material form. Such a definition would exclude large categories of issuers that manufacture products through assembly, such as certain auto and electronics manufacturers, whom we believe are intended to be covered by the Conflict Minerals Statutory Provision.”
There are also several references throughout the preamble to the concept of components (such as capacitors) being incorporated into other products, which products then trigger applicability, such as this one (also on page 61):
“… the final rule applies to any issuer for which conflict minerals are necessary to the functionality or production of a product contracted by that issuer to be manufactured, including conflict minerals in a component of a product.”
I also suggest that if your interpretation were indeed correct, major stakeholders such as Enough, GlobalWitness, electronics industry associations and impacted companies themselves would have jumped on that very quickly (on opposing ends of the philosophical spectrum of course) after the final rule’s promulgation in August. Which they have not, because I am confident they do not share this view.
Time will tell shortly whether this is a legal argument to be taken up in the NAM/US Chamber/Business Roundtable law shortly.
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Tim – There do seem to be some inaccuracies in your comments that need to be addressed. The SEC Rules that publicly traded companies need to follow were finally released in 2012. The “Congo Conflict Minerals Act of 2009” was added to the Dodd-Frank Wall Street Reform Act and signed into law in 2010, so this is not a new law in 2012.
Since 2005 I have worked in the mining sector in both the DRC and Rwanda. I bring a very different perspective to this debate of addressing the responsibility of American business in the extractive industries and those alone the 3TG minerals supply chain. It is my opinion that the NGO’s you mention and others have taken the lead in developing solutions for business issues because the businesses involved in the 3TG minerals supply chain have avoided their leadership responsibilities. How can we in business ever expect motivated individuals with no executive business management experience to design a law that impacts business the way the conflict minerals act attempts to do?
I also suggest to you that there is great success in achieving the outcome the “proposers were hoping for”. Now every business in America and around the globe from electronics to automotive to aircraft manufacturers to industrial products are all beginning to look at the way business in different sectors of their supply chain operates.
This legislation is one small step in a process that hopefully will intensify. We in business must provide leadership and develop more creatively dynamic solutions to the way business is conducted in places like the DRC.Unfortunately the industry support groups so-called “traceability” programs put forward by the EICC and ITRI are not able to actually trace the minerals from the mine sites to the final products. The UN Groups of Experts and the OECD reports reveal that there is no “traceability” of minerals in the DRC or the surrounding countries. “conflict minerals” continue to be smuggled into the 3TG minerals supply chain and into our final products unhindered.
We in business need to realize that our income stream from mineral rich developing economies, like the DRC, will be much more secure when we find ways to develop creatively dynamic business practices and solutions instead of saying it is not our company’s problem because we don’t have a vertically integrated organizational structure and have no direct business relationships in the DRC.
It is indeed unfortunate that you say you have experience in some part of industry and freely admit that it should not be a concern of Apple to develop a responsible supply chain. This short sighted view of business has no place in the new American business model.We have already entered a new phase of American business development. The businesses that develop a responsible supply chain is a business that will also develop long term profitability and shareholder value. The choice is quite simple actually.
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“Unfortunately the industry support groups so-called “traceability” programs put forward by the EICC and ITRI are not able to actually trace the minerals from the mine sites to the final products.”
The technical detail of my argument is that it’s not necessary to trace shipments. There’s an easier way. Analyse the material when it reaches any of the (few) processors. We already have a system whereby we can tell which mine material comes from by its trace elements.
And yes, we really do have that capability. I know the German group that built that system of fingerprinting material through its trace elements. I’ve even actually got their results somewhere on this computer of mine.
Please do understand that my argument is not that something should not be done. It’s that the specific method adopted is in my mind wrong. Inefficient and worse than an alternative method.
“It is indeed unfortunate that you say you have experience in some part of industry and freely admit that it should not be a concern of Apple to develop a responsible supply chain. This short sighted view of business has no place in the new American business model.”
I haven’t said that at all. What I have said is that in the specific case of tantalum for capacitors I cannot see that the Dodd Frank regulations from the SEC impose any legal requirement upon Apple at all.
Which is why I think it’s very bad law. It does not actually solve the problem it claims to set out to solve. And it also does so in a markedly less efficient manner than the private sector alternative.
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Tim – It does appear to me that some of the confusion in your article stems from your mixing elements from the Dodd-Frank legislation and the SEC’s view of the Dodd-Frank as developed in the Rules. The judiciary will have ample chance to pass judgment on both the intent of Congress and the SEC’s interpretation of the Dodd-Frank legislation.
As an American working in the resource extraction sector in the Great Lakes region of Africa it is encouraging to see that business is willing to address issues and ask questions of suppliers several levels upstream from their core business.
Accounting to the UN Group of Experts there is a need for industry to be motivated by legislation like the Dodd-Frank to do what it does best and what American business has always excelled at, namely developing creatively dynamic business solutions. Unfortunately because of the value of the upstream portion of the 3TG minerals supply chain there is immense financial gain to be made by keeping the supply chain as non-transparent as possible. The authors of the Dodd-Frank legislation correctly identified this reality and so they decided it was time to require the American companies that use these3TG minerals to begin to engage in some level of due diligence. My opinion is that this is exactly the intent of the Congress in reference to the Dodd-Frank legislation. It will be up to the judiciary to judge which of us is correct in our analysis of the legislation.
“There’s an easier way. Analyse the material when it reaches any of the (few) processors. We already have a system whereby we can tell which mine material comes from by its trace elements.” This proposal you mention has been put forward by Dr. Melcher of the BGR. There are 3 main failures with your suggestion. The cost for each sample is $1,000 and the test takes from 3 to 6 weeks to perform. According to the OECD there are over 21 tantalum smelters so the cost and time required to analyze all the samples would be impractical to complete in a timely manner considering how many containers of 3T minerals are smelted. There also “chain of custody” issues with the BGR and ITRI processes since there is no guarantee the samples that are submitted for smelting or “bagging and tagging” are actually from the mine sites or the shipment of minerals that are listed in the voluntary certification documentation. An additional issue is that the “country of origin” documentation is easily corrupted either as the minerals leave the country or at the ocean shipping ports. Due to the lack of transparency and corruption in the global 3TG mineral supply chain what verifiable assurance can ITRI or EICC certification programs give that any minerals in the supply chain come from the location noted on the documentation?
There is a process called “The Green Program” that utilizes American XRF technology and due diligence that exceeds the OECD guidelines, in a more cost effective and transparent manner.Unfortunately from my experience there are few in the upstream portion of the 3TG minerals supply chain who really desires a cost effective, transparent mineral supply chain for their own program and business reasons. However I do believe that the Dodd-Frank is one step in the right direction that Apple and every other electronics, automobile and industrial company in America now feel is at least necessary.
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“The cost for each sample is $1,000 and the test takes from 3 to 6 weeks to perform.”
I’m sorry but this is nonsense. Just 6 weeks back I had some tungsten ore (wolframite concentrate to be precise, exactly what is indeed produced in DRC) analysed. Cost was €400 and three weeks elapsed time. That including shipping it off from Germany to a Canadian lab, waiting for it to get to the head of their to do list etc. And that was one single sample from a new customer: so not including any bulk deals or regular customer discounts or speed ups.
And the tantalum processors don’t need to send samples away anyway. They all have their own analysis labs. They must do: for when you deliver to them they perform an analysis. Which they must do: for payment is per lb Ta2O5 contained. So obviously an analysis of Ta2O5 contained must be done. Depending upon the customer relationship there might be additional payments for W, Sn, Nb contents. Or subtractions for U and Th (and those will certainly be checked anyway). As will the Nb content be checked (if Nb is greater than 3x Ta content then the standard extraction technique doesn’t work).
Whether you get paid for a delivery of tantalite or not depends upon someone analysing that tantalite. So complaining that analysing tantalite is expensive just doesn’t wash I’m afraid.
It’s the same with cassiterite and wolframite/scheelite. No one at all is going to put this stuff into their processing system without having analysed it.
I’m all in favour of well informed corrections of my views and or facts. But this doesn’t qualify I’m afraid.
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Ever since there was a push to develop solutions for the “conflict mineral” problem there have been a whole series of solutions that have been put forth by so called experts who have never lived and worked in the mining sector in one of the most challenging areas of the world. The result is a “bag and tag” solution that allows 40% to 50% of the minerals with country of origin documentation from Rwanda that are actually from the “armed group” mines of the DRC (according to the UN Group of Experts). Currently no one questions if the simple ITRI “bag and tag” process actually provides “traceability” as ITRI has said it is able to accomplish. The recent UN Group of Experts and OECD reports identified that there is widespread smuggling of minerals into the ITRI “bag and tag” certification scheme. By extension the EICC smelter certification process is also corrupted with “conflict minerals”.
Your article does need to be called out because the foundation you use for your conclusions is flawed and lacking in practical knowledge of the upstream portions of the 3TG minerals supply chain in the DRC and Great Lakes. I am tired of so called experts coming to the east of the DRC and Rwanda for 2 weeks and then developing solutions that don’t work except in creating a “de facto embargos” (again according to the UN Group of Experts) in the process. How can we in the American business community be satisfied imposing an embargo and raising the taxes on the minerals from the poorest part of the global 3TG mineral supply chain to support the objectives of a domestic American law?
Lower cost American solutions that effectively combine American ingenuity with American technology and know-how to arrive at an American solution that will provide scientifically verifiable 3TG mineral traceability from the mine site in the DRC to the finished products in America is available.According to Dr. Melcher of the BGR the cost to develop a complete geologic mineral fingerprinting that will identify the exact location where the minerals originate is $1,000 per sample. With each amalgamation of the minerals, of which there is an average of 7 in the DRC and Rwanda prior to shipping, the original “mineral fingerprint” slightly changes and becomes less reliable. In order to develop a “mineral fingerprint” database there is a requirement for a “chain of custody” process for the mineral samples that must be sent from remote locations in the east of the DRC and other Great Lakes regions in Africa to Germany or other offsite locations because there is no technology in Africa to produce such a geochemical “mineral fingerprint”. Which mine operator or small artisanal mining group is going to be willing to pay this cost? Dr. Melcher is missing the geochemical “mineral fingerprint” data on perhaps 1,000’s of mine sites in the Great Lakes region. Are you suggesting that we raise the taxes on the minerals from one of the most improvised regions of the world to pay for this testing? ITRI and the governments of the DRC and Rwanda already impose a tax only on the minerals from the DRC and Rwanda of between $800 and $1,000 per ton. The “bag and tag” process has only intensified unspeakable human rights abuses and instability and continued corruption in the DRC than when ITRI first started their “bag and tag” operation.
Your comments on the testing process seemed to be referring to a more simple mineral assay and not the more complex geochemical “mineral fingerpringing” that is required by the BGR process. I do not know for sure, but I am not aware of ANY smelter that has the necessary technology to collect a proper geochemical “mineral fingerprint”. As you note it is possible to conduct a complex mineral assay for less than $1,000 but this is not the type of analysis that is needed to conduct a complete geochemical “mineral fingerprinting”.
We in the America business community need to do a much better job at developing creatively dynamic solutions and “re-shore” our global leadership in places like the east of the DRC. We can do it but not if we continue to outsource our leadership to non-profit NGO type organizations who don’t understand business profitability nor the practical realities on the ground of the mining sector in the Great Lakes region of Africa.
