Tech Companies, the Congo and Dodd-Frank

by Nossaman LLP

MiningWhat do financial reforms in the U.S. and armed militias in the Congo have in common?  The answer might surprise you.

The fourth anniversary of the Dodd-Frank Act has prompted renewed discussion over the effectiveness of the legislation.  Legislators continue their debate over the Financial Stability Oversight Committee and the Volcker Rule.  Others question the value of stress testing.  But tech companies from Intel to Google are grappling with a hidden and newly implemented Dodd-Frank amendment – Section 1502.

Tucked under Title XV: “Miscellaneous Provisions” of the Bill, section 1502 seemingly has nothing to do with the financial industry, in the U.S. or elsewhere.  It focuses, instead, on U.S. companies who manufacture products–like smartphones and microprocessor and chipset components of electronics–that may contain “conflict minerals” – coltan, cassiterite, gold, wolframite, and their derivatives.  These materials have historically been mined in the conflict-ridden region of the Democratic Republic of the Congo–with the profits funding armed groups guilty of atrocious human rights abuses.

With the passage of the Dodd-Frank Act, any publicly-traded company that uses one or more of the listed elements must file an annual report with the SEC.  The report must identify the origin and supply chain for each mineral.  Most importantly, companies must now unequivocally state in their “Conflict Minerals Report” whether the minerals in their products came from a mine controlled by a militarized group.  And they must submit to an independent audit to ensure the integrity of their findings.

Where did this idea come from? The concept of section 1502 originated from a United Nations Security Council resolution passed in 2001 that condemned “all illegal exploitation of the natural resources of the Democratic Republic of the Congo [“DRC”], demand[ed] that such exploitation cease and stress[ed] that the natural resources of the [DRC] should not be exploited to finance the conflict in that country.”  It additionally called on member states to take measures to ensure that companies using Congolese mineral products within their jurisdiction were exercising due diligence on their suppliers and on the origin of the minerals they purchase.  It was brought to the U.S. by former Senator Brownback (R-KS) in 2008 as the Conflict Coltan and Cassiterite Act, but never received a floor vote.

Introduced again as the Congo Conflict Minerals Act of 2009, the additional support of former Senator Russ Feingold (D-WI) and Senator Richard Durbin (D-IL) helped fine-tune the idea into what became the Brownback Amendment.  Officially called section 1502, it was confirmed by unanimous consent pursuant to a voice vote and added to the 2010 Dodd-Frank Act during floor debate on the initial Senate version of that Bill.

Implementation of section 1502, just like the rest of the Dodd-Frank Act, has taken several years to develop.  The first Conflict Mineral Reports were due in June, and many companies missed the mark.  Other companies, such as Tesla Motors, simply submitted reports stating that they were “having difficulty determining the source for some of the raw materials [they] use.”  Some companies, like IBM and HP, discovered their supply chain included sanctioned countries like North Korea.

Next year’s Conflict Minerals Reports will likely be held to a higher standard.  With greater reporting detail, however, comes greater risk of inaccuracy.  As with any SEC filing, company executives who attest to the filing run the risk of civil and criminal penalties for a false or misleading filing.  And good intentions alone won’t be enough to prevent the SEC’s actions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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