Impress Your Friends and Outflank Your Enemies: The Wronging Rights Guide to the Conflict-Mineral Regulations in Section 1502 of HR 4173

As Kate notes, the recent passage of new legislation on “conflict minerals” from the DRC has prompted much discussion from the aid-blogosphere. Predictably, the reactions have been mixed. The Enough Project is thrilled, which is hardly surprising, given their extensive campaigning around the conflict-minerals issue. Jason Stearns offers more measured support. Laura Seay at Texas in Africa is not a fan. Chris Blattman, showing himself to be a ninja of skeptical ambivalence, has not just one but two posts in which he somehow manages to criticize nearly every aspect of the new regulations, yet still come out in favor of them overall.

Therefore, this seems like a good time for a quick analysis of what the new legislation actually says. So, without further ado, I present:

Impress Your Friends and Outflank Your Enemies: The Wronging Rights Guide to the Conflict-Mineral Regulations in Section 1502 of HR 4173.

1. Who has to follow the new law’s requirements?

Not clear! The text of the bill amends Section 13 of the Securities Exchange Act of 1934 (which is codified in 15 U.S.C. 78m, if you’re interested in looking it up), by adding a new subsection (p) at the end. However, the new subsection (p) doesn’t specify who is bound by its requirements. It seems to leave that up to the SEC’s regulations, which haven’t been issued yet.

You see, paragraph 1(A) of the new law directs the SEC to issue regulations requiring “any person described in paragraph 2″ to comply with the new reporting requirements.

Easy, right? Just check paragraph 2! Well, except that paragraph 2 refers right back to paragraph 1(A). It defines “persons” as anyone (1) who is required to comply with the reporting requirements in paragraph 1(A); and (2) who manufactures a product that either (a) requires conflict minerals in order to function, or (b) requires conflict minerals as part of the manufacturing process.

So yeah, that’s a little confusing. As far as I can tell, this allows the SEC significant discretion to decide who must comply with the reporting requirements, as long as the category is limited to manufacturers of “products.” (Another term that isn’t defined yet! Isn’t law fun?)

(The Enough Project and the Washington Post appear to be under the impression that the law applies only to publicly traded companies, but I can’t figure out where they’re getting that idea from. I emailed Enough’s Laura Heaton, though, and will update this section if I get more information.)

2. What does the new law require people to do?

The new law’s requirements fall into two basic categories. The first category imposes new disclosure and auditing responsibilities on private citizens and corporations who manufacture products using “conflict minerals.” The second category orders the State Department to get to work on a “strategy and map to address the linkages between conflict minerals and armed groups.” Much as I love maps, I’ll focus on the first category in this analysis, because it’s the one that’s most relevant to the debate over the regulation of conflict minerals.

For the sake of clarity, I’ll begin with a few things the new law does not do. It does not outlaw conflict minerals, from the DRC or elsewhere. It does not create any new crimes. It does not apply to any person or corporation that’s outside the jurisdiction of the U.S. Securities and Exchange Commission, or SEC. (For the moment, it’s unclear who it actually does apply to, as will be discussed further below.) It does not specify any new penalties or punishments.

So what does the new law require? Well, for the next nine months, nothing. The law directs the SEC to develop a new set of regulations on the disclosure of “conflict minerals” used in the manufacture of products. Those new regulations aren’t due until 270 days after the law was enacted, so for now, a lot remains unclear.

However, the gist of the new law is that although nothing has been outlawed, an awful lot of things are about to become much more expensive, complicated, and difficult. Congress did specify certain things that the SEC’s new regulations must include, so I’ll explain those for now.

a. Initial Disclosure
First, all “persons” covered by the law must submit an annual report disclosing whether they used conflict minerals that originated in the DRC, or in an adjoining country, to manufacture any of their products.

(The definitions of “person,” “conflict minerals,” and “adjoining country” are discussed more below. If you just can’t wait to get there, feel free to scroll down and check them out now, and I’ll wait for you up here. Otherwise, in a nutshell, “conflict minerals” are coltan, cassiterite, gold, wolframite, or their derivatives; an “adjoining country” is one that shares a border with the DRC; and “person” is not yet fully defined, but will be some subset of manufacturers who use conflict minerals in their products.)

Manufacturers who can be certain that their conflict minerals didn’t come from that region are done: no more duties under the new law. They also get to pass go, and collect $200. Lucky bastards.

However, if the manufacturers use minerals that are from that region of Africa, or whose source is unclear, then the new law imposes some significant new investigation and disclosure requirements on them.

b. Audit Requirements
First, the manufacturer must conduct an “independent private sector audit” of the minerals’ origin and chain of custody, and certify the audit’s results. The audit must meet standards to be set through the coordination of three different federal agencies: the Comptroller General of the United States, the SEC, and the Secretary of State. If the audit is found to be unreliable, then the manufacturer will be in violation of the disclosure requirements, and the person who certified it might also be in very hot water personally with the SEC.

This audit requirement has the potential to be hugely burdensome, because those kinds of audits tend to be very expensive and time-consuming. It’s not hard to see why. Not only is there limited information about conflict areas available, it’s also inherently difficult to tell where minerals have come from, especially if they have already been processed. In combination, those factors mean that investigating minerals’ sources and supply chains won’t be easy. It’s true that “difficult” is not “impossible,” but it is usually “expensive.” Especially because the most important pieces of information here are the ones that will be the hardest to obtain: where the minerals were mined, who mined them, and what relationship the miner had with the region’s “armed groups.”

Providing this kind of information will be difficult for artisanal miners (excellent euphemism alert!) and other small suppliers who are only involved at one stage of the supply chain. So, this seems likely to push minerals from the DRC and its environs further into black and gray markets. (Which is definitely great, because when I think of “markets in which illegal armed groups are unlikely to thrive,” “black ones” come top of the list.) Conversely, because a manufacturer can avoid the costly audit requirement entirely if it’s sure that none of its minerals came from the DRC or its neighbors, I would expect this provision to be a huge boost to large corporations that control mines in other regions of the world and handle their own processing and trading, because they will be able to charge more money for the regulatory safety they offer.

c. Reporting Requirements
After the auditing’s done, the manufacturer has to compile a report that describes in detail (1) the audit and its results, (2) any other due diligence measures that it undertook in order to document the origin and supply chain of the conflict minerals it used, and (3) any products it manufactures that are not “DRC conflict free.” The report has to be submitted to the SEC, and made publicly available on the manufacturer’s website.

Products are only “DRC conflict free” if they don’t contain any minerals that “directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country.” Needless to say, that definition is really, really broad. The distinction between “finance” and “benefit” suggests that an “indirect benefit” would not have to be financial in nature, leaving the options for what would qualify wide open. And “armed groups” include any groups from the DRC or its adjoining countries that have been identified as human rights abusers in the State Department’s country reports on human rights – and as of now, that definition doesn’t carve out exceptions for national armies or UN peacekeepers. (More on that definition below.)

This places the burden on the manufacturer to prove a negative: that the minerals at issue didn’t benefit any armed group, even indirectly. Otherwise, for each non-DRC-conflict-free product, the manufacturer must report “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.” Once again: very difficult information to get, even more difficult information to trust. Complying with this requirement will be expensive.

The other due diligence requirements, beyond the audit, won’t be clear until the SEC issues its new regulations. However, the text of the law suggests that they won’t be mere formalities. The statute specifies that relying on due diligence processes that have been “previously determined by the Commissioner [of the SEC] to be unreliable,” is not enough to constitute compliance with the new law.

3. Some Definitions! We Love Definitions!

  1. “Conflict Minerals”: the new law defines “conflict minerals” as either (A) coltan, cassiterite, gold, wolframite, or their derivatives; or (B) any other mineral or its derivatives that the Secretary of State later determines to be “financing conflict in the Democratic Republic of the Congo or an adjoining country.”

    This is interesting for two reasons. First, the definition isn’t limited to minerals that actually come from the DRC or an adjoining country. So, for instance, gold is now a conflict mineral, no matter where it’s from, or when it was mined. I can understand the reasons for using such a broad definition -if gold from the DRC is interchangeable with gold that was mined 500 years ago, then it’s worth paying attention to the overall market. However, this means that the regulatory burden of the new law will potentially fall on a very broad group of businesses, not just the gadget manufacturers that have been the focus of the media campaign for this new law.

    Second, the Secretary of State can add minerals to the list if they’re financing conflict in an “adjoining country,” but not in the rest of the world. So, minerals that fuel conflict elsewhere aren’t “conflict minerals.” Hear that, petroleum?

  2. “Adjoining Country”: The new law defines “adjoining country” as “a country that shares an internationally recognized border with the Democratic Republic of the Congo.” (It’s not clear to me why they didn’t just list those countries specifically. Perhaps that option was rejected as an unwarranted leap of faith that those borders would remain stable over the next few years?)

  3. “Armed Groups”: Somewhat confusingly, not all armed groups are “armed groups” for the purposes of the new law. Rather, to qualify, a group must (a) be an “armed group,” and (b) be identified as “perpetrators of serious human rights abuses” in the State Department’s annual human rights report on the DRC or any “adjoining country.” A couple of potential issues here.

    The first is that there’s no carve-out for government or UN forces. As noted in the latest State Dept. report, the FARDC has been responsible for significant human rights abuses. However, including them in the definition of “armed group” means that no minerals can be labeled “DRC conflict free” unless they did not indirectly finance the army, which presumably includes legitimate taxes collected by the government in Kinshasa. Is it just me, or is that not actually a great way to encourage or strengthen legitimate governmental capacity?

    Second, under this definition, if a group isn’t specifically mentioned in one of the State Dept. reports, it doesn’t count for the purposes of the conflict-minerals law. It’s unclear how this would work for groups like the Mai-Mai, who are often discussed in the State Dept. reports as if they are one category of armed actor, but are actually disparate local militias that may or may not be connected to each other, or to other rebel organizations. So, is just being labeled a Mai-Mai militia group enough to be considered an “armed group” under this definition? Or must the State Dept. report reference a specific militia by name in order to count?

I hope this is helpful to y’all. I’m one sleepy blogger now, but if I have time tomorrow, I’ll try to post about my reactions to the arguments that Laura et al. have raised.

10 thoughts on “Impress Your Friends and Outflank Your Enemies: The Wronging Rights Guide to the Conflict-Mineral Regulations in Section 1502 of HR 4173

  1. Extraordinarily clear outline of conflict minerals regulations.

    Perhaps the Enough Project and the Washington Post are conflating publicly registered companies with companies subject to SEC reporting requirements–I imagine that any company large enough to be part of the conflict minerals supply chain and was not very narrowly held would have to report to the SEC under HR 4173.

  2. Forgive me for being excessively cynical (and please note that while I work with rare metals and their minerals, I have no contact with DRC or any of the adjoining countries, not with supplies from them)but the heart of it seems to be here:

    "First, the manufacturer must conduct an "independent private sector audit" of the minerals' origin and chain of custody, and certify the audit's results."

    Who would like to bet on it being people from the Enough Project who end up charging to do those audits?

    Sounds like a nice enoguh job creation scheme really…..

  3. I have one little question that seems to be an appropriate one to ask lawyers.

    It is my understanding that under international law only governments or their agents can commit a human rights violations. Illegal armed groups not tied to a government can violate international humanitarian law but can't commit a human rights abuse in this narrow legalistic sense. I wouldn't nitpick over this except that this is a law we are talking about, right? So isn't there a big loophole here? Could it be that the only armed group under this law could turn out to be the FARDC?

    I know that the annual State department reports on human rights does not define human rights in this narrow, legalistic sense. But what would happen in an actual court case?

  4. @Mike,

    That remains a large issue of debate. Nigel Rodley wrote on this in the early 1990s and probably sums up the answer quite well:

    Non-state actors can't violate human rights unless they take on the qualities of a state actor. So, in certain conflicts, where the non-state actor has significant control over an area or where they perform state-actor-like functions, they can, in fact, violate human rights standards.

    Now, there are some (and I think Enough Project would be one of them) who argue that non-state actors can violate human rights, but it's still an issue of debate.

  5. Hi Mike,

    I don't anticipate that being an issue here. Jurisdictionally, international law does often draw a distinction between state and non-state actors. However, that doesn't mean that non-state actors can't violate human rights. Human rights belong to the rightsholder, and if someone violates them, then a rights violation has taken place. The state/nonstate actor distinction is relevant to the separate questions of whether the rights violation also violates international law, and whether international law could be the basis for a lawsuit or prosecution in a particular court.

    I realize that I just managed to construct a paragraph consisting almost solely of the words "human," "rights," and "violate," repeated in various combinations and tenses, which may have been confusing! So, here's an analogy to try to illustrate my point:

    Say you have $100. You live in the country of Spagatland, in which all citizens have a right to keep their own money, and spend it as they wish. In order to protect that right, Spagatland has made it a crime for one citizen of Spagatland to steal money from another citizen of Spagatland.

    One day, you have the misfortune of being robbed of your $100 by an incorrigible hooligan from the neighboring nation of Mikedonia. He violated your rights: that money was yours, and he stole it from you. However, because Spagatland's criminal law only covers crimes committed by citizens of Spagatland, the robbery didn't violate that law, and the Spagatland courts will have no jurisdiction to prosecute the hooligan from Mikedonia who robbed you.

    Human rights law is similar. If someone murders you, then they've violated your human right to life. However, depending on the circumstances -including whether the murderer was a state actor or state agent- the murder may or may not be a violation of international law, and may or may not fall within the jurisdiction of any international legal institution. That's what most people think of when they think about "human rights," so I think that's probably led to some confusion in how these issues get discussed.

    To come back to the new conflict-minerals regulations, the definition of "armed group" focuses on whether the group has been identified in the State Department's reports as a perpetrator of "serious human rights abuses." On my reading, that is a question about what the State Department's reports say, not about how international law would apply. I could imagine a situation where someone might attempt to argue that the reports are inaccurate, or that a violation should not be considered "serious," but it's not clear whether that would actually constitute a valid defense to violating the disclosure requirements. However, I don't see a state/nonstate actor distinction being important here.

    Hope that helps.

  6. ewaffle,
    I think you might be right about the conflation of public companies & companies subject to SEC reporting requirements. (In case anyone's wondering, those groups overlap, but aren't the same.) Laura Heaton from Enough was kind enough to respond to my email, but we don't seem to have quite ironed the issue out yet.

  7. Thanks for the helpful comment! Since you seem to be taking questions, here's mine:

    The DRC has an awful lot of neighbors (9, 10 if we count the DRC), all of whom produce gold and other minerals in various quantities over a space that is probably 1/3 of Africa. How would this impact investors in countries like Tanzania, Sudan, Zambia which have moderate to large gold industries thousands of KM from the DRC? And also, does Tanzania count if it shares a lake border, but not an overland border?

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