On Monday, April 14, a U.S. Appellate Court struck down key provisions of the landmark 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act requiring many American companies to declare if they source conflict minerals from the Democratic Republic of the Congo (DRC). In a 2-to-1 split decision, the U.S. Appellate Court of the District of Columbia ruled that the reporting provisions under the Dodd-Frank Act and the U.S. Securities and Exchange Commission (SEC) mandate (click for the SEC’s conflict minerals disclosure fact sheet) are unconstitutional, as they violate companies’ First Amendment rights that protect them from “compelled speech.”
Under the Dodd-Frank Act, publicly-traded companies in the U.S. are required to investigate their supply chains and determine if they source tantalum, tin, tungsten, or gold (the so-called 3TG minerals) from the DRC and nine surrounding countries (i.e., covered countries). From there, such companies were to report their findings to the SEC, their shareholders, and in other publicly-available communication by May 31, 2014 – a month and a half from now.
The case was brought to the Appeals court by the U.S. Chamber of Commerce, the National Association of Manufacturers, and the Business Roundtable, who filed a lawsuit against the SEC on the grounds that this provision of the Dodd-Frank Act was unconstitutional. Despite the ruling, the case is far from over. From here, the Appeals Court has sent the case to a lower court for additional proceedings, and the SEC can attempt to appeal the decision with the Supreme Court.
What it Means…and What it Doesn’t Mean
Monday’s ruling means that publicly-traded companies in the U.S. are no longer required to publicly disclose if their products are not “conflict-mineral free”, as that label is a metaphor that unfairly aligns companies on either side of the Congolese war, whether or not they directly or indirectly finance armed factions. But the ruling does not absolve these companies from conducting “due diligence”, making a “good faith effort” to determine the source the minerals in their supply chain, and reporting their findings to the SEC and their shareholders. Thus, a heavy and costly lift remains for procurement teams and regulatory compliance officers.
A Noble Cause, but a Heavy Lift
While noble and lofty, the Conflict Minerals provision of the Dodd-Frank Act goes beyond a cursory review of a company’s supply chain, a pro-forma report to the SEC, and a savvy PR campaign touting their corporate citizenship and human rights record. Procurement teams, legal departments, financial executives, and a host of other corporate officers across the country have been grappling with satisfying the provision for the past four years.
Under the provision, any publicly-traded company in the U.S. with reason to believe that their products may contain 3TG minerals or mined in the covered countries – minerals that are “necessary to the functionality or production” of a product – must perform a “reasonable country of origin inquiry” on the minerals’ source(s). For some companies – for example, those with just a few products and a clear view into the sourcing pipeline or supply chain – it’s a fairly straightforward process. But for those companies that offer dozens or hundreds products that contain hundreds or thousands of globally-sourced components and sub-components – for example, auto manufacturers – the task quickly becomes overwhelming.
At scale, a procurement or compliance team has to examine every component of every product the company sells and determine if it qualifies under the provision. If it does, and if the team doesn’t know the minerals’ source, they must then begin a lengthy, convoluted, and potentially dead-ended task of tracing it back to the smelter in its country of origin. The procurement or compliance team has to inquire – at cost to themselves and with no expectation of remittance – with the source of the component or sub-component, which may or may not have the information on hand. The source then has to inquire with their source and assume the same cost and lack of remittance.
The cycle repeats until a company has performed enough due diligence and has made a good-faith effort to make one of three determinations. If they don’t source minerals from covered countries, or they do but they aren’t tied to armed factions, the company reports to the SEC that their products are “DRC Conflict Free.” If the minerals they source originate in the covered countries and profits from such sales fund armed groups in the DRC, their products have then “Not Been Found to Be DRC Conflict Free.” But if their sources or sub-sources don’t report back, or if they simply can’t determine their materials’ status, they report their products as “DRC Conflict Undeterminable.” They then have two-to-four years (depending on the company’s size) to make a more conclusive determination, otherwise they’d receive a default “Not Been Found to Be DRC Conflict Free” rating.
In any case, companies up and down the supply chain don’t have to stop doing business with such sources or groups, and don’t have to line up alternative mineral sources. They simply have to review, investigate, and report.
A Worthy Endeavor, or a Fool’s Errand?
By now, several questions should jump out at you:
- Who determines if companies have performed enough due diligence, or if their efforts were indeed good faith?
- What financial incentive do foreign sources and sub-sources have to review their supply chains to help U.S. companies comply with the law?
- What legal jurisdiction does the SEC have over these sources and sub-sources to compel them to investigate and report up?
- What good will come of this massive investigative and reporting requirement?
- And, at what cost to American businesses?
Initially, the SEC estimated that this provision alone would cost U.S. businesses between $3 billion and $4 billion initially, and then between $207 million and $609 million in later years. Conversely, it could not estimate how, whether, or when the law would improve conditions on the ground in the DRC.
“Here, the rule’s benefits would occur half-a-world away in the midst of an opaque conflict about which little reliable information exists, and concern a subject about which the Commission has no particular expertise,” the court opined. “Even if one could estimate how many lives are saved or rapes prevented as a direct result of the final rule, doing so would be pointless because the costs of the rule — measured in dollars — would create an apples- to-bricks comparison.”
Regardless, publicly-traded companies in the U.S. must still perform their due diligence and make a good-faith effort to investigate their supply chains. To that end, supplier information systems can help procurement and compliance teams as they embark on this global paper chase. Deploying supplier information systems that capture more information and provide more granularity than legacy Enterprise Resource Planning (ERP) tools will help companies ease some of the data collection and reporting burden placed upon them by Dodd-Frank, plus future regulatory statutes.
Many procurement and compliance officers agree that regulatory measures concerning other hot-button issues – for example, conflict minerals in Afghanistan, sweatshops in Bangladesh, or genetically-modified organisms here in the U.S. – are forthcoming. Thus, it makes even more sense to deploy these systems and sort out collection and reporting processes now, for DRC conflict minerals, while future regulation gathers steam and potentially goes into law.