How the Conflict Minerals Rule Failed

Enforcement was left up to consumers, and many legitimate mining operations were shuttered.
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Enforcement was left up to consumers, and many legitimate mining operations were shuttered.
A mine in the Democratic Republic of Congo.

A mine in the Democratic Republic of Congo. 

Between 1998 and 2007, more than 5.4 million people died in the Democratic Republic of Congo due to mass displacement, food shortages, lack of medical infrastructure, and other causes stemming from the country’s long civil war. While fewer than 10 percent of the deaths were directly attributable to violence, the rise of the country's warlord-led militias was seen as the major driver of the humanitarian crisis that befell the region. Remove them from power, and the area would stabilize.

The warlords had been able to maintain their dominance through the obvious methods: obtaining massive numbers of weapons they purchased on the black market. To stop the influx of weapons, it would be necessary to cut off the money supply, much of which came from selling off valuable minerals found in the DRC's mines (estimated to be worth $24 trillion). In many cases, it was American corporations doing the buying.

This problem was on the minds of the lawmakers behind the 2010 Dodd-Frank Act. In the back pages of that massive legislative package was a 10-page rule (Section 1502) requiring companies to disclose whether or not their products contained conflict minerals from the DRC or neighboring regions. (In 2012, the Securities and Exchange Commission approved and clarified the rule, extending it to 356 pages.)

Overall, it's a well-intentioned rule: Keep warlords from profiting off an exploited labor force, helping end their reign of terror. So when the SEC recently announced it was suspending enforcement of the rule, the response by activist organizations was predictably apoplectic; on the surface, this seems like a heartless move by an administration that's less pro-business than only-business.

But the end of the conflict minerals rule offers an opportunity to see how good intentions can fall short when they're attempted only half-heartedly.

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It's important to outline specifically what Section 1502 did. It forced a handful of corporations (around 5,000) that were sourcing materials from the region to "submit a report to the Commission that includes a description of the measures it took to exercise due diligence on the 'conflict minerals' source and chain of custody." This meant corporations had to spend their own money (a 2011 analysis by Tulane University found due diligence would cost companies $7.93 billion) to make sure the minerals were "conflict-free."

And, well, that was sort of the end of the rule. Much of the 356 pages detail scheduling of when the rule would take effect, how the due diligence must be undertaken, and other types of bureaucratic concerns. But there was no mention of an outside, third-party agency that would oversee this and no penalties listed for non-compliance.

With no real consequences, corporations didn't have any incentive to follow the rule. In 2015, Amnesty USA analyzed 100 different reports (including from Apple, Boeing, and Tiffany & Co.) and found that nearly 80 percent failed to meet the rule's requirements. In fact, only 16 percent performed "due diligence" past the initial level of direct suppliers, essentially ignoring the rule's intent, which was to track the mineral back to its source. (Warlords often export using multiple intermediaries in order to avoid detection.)

The rule's "enforcement" was left to consumers. As the Brookings Institution put it in its analysis of the bill, it was a "name and shame" instrument, relying on the free market dynamics of a morally minded consuming public to cut profits from corporations that used conflict minerals. This never happened.

But the problem was bigger than enforcement: There was a very real possibility that the rule was actually hurting those living in the DRC. Following the rule's implementation, the DRC banned many of the mines, as a 2015 report from Foreign Policy detailed. Even though the ban was quickly lifted:

Many artisanal mines have remained closed, and countless livelihoods have been destroyed, according to academics and activists. [It was] estimated in 2012 that between five and 12 million Congolese had been "inadvertently and directly negatively affected" by the loss of employment created by the ban and its aftershocks.

As a 2014 Washington Post investigation pointed out, before the rule, "miners were selling a kilogram of tin ... for $7. The world market price averaged $18 a kilo." But after? "Now, the miners get only $4 for a kilo of tin — even though the global market price this year has averaged $22 per kilo." This matches the effects SEC chairman Michael Piwowar observed when he visited the country last year:

I heard first-hand from the people affected by this misguided rule. The disclosure requirements have caused a de facto boycott of minerals from portions of Africa, with effects far beyond the Congo-adjacent region. Legitimate mining operators are facing such onerous costs to comply with the rule that they are being put out of business.

If the goal of the rule was to defund warlords, it failed, due to lack of substantive enforcement. If the goal was to help the Congolese people, it also failed, due to mine closures and the regulations' effect on the price of minerals.

While it's understandable that the rule's death has been met with indignation, if the government is serious about halting American corporations' purchase of conflict minerals, what's needed is a more intelligent approach. At the very least, the policy must do more than politely ask corporations to refrain from buying conflict minerals simply out of the goodness of their hearts.

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