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New Conflict Mineral Certification Causing Industry Concern

Sep. 23, 2013 - 09:11AM   |  
By ZACHARY FRYER-BIGGS   |   Comments
A UPC (Union of Congolese Patriots) figh
Ill-gotten Minerals: A Union of Congolese Patriots fighter controls workers at a gold mine in the Democratic Republic of Congo. Firms are concerned over a US law requiring them to disclose minerals from conflict zones that are used in their products. (AFP/Getty Images)
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WASHINGTON — A small provision in the Dodd-Frank Act meant to create transparency surrounding the use of conflict minerals by publicly traded companies is causing concern in the defense industry, as the magnitude of checking the totality of the supply chain comes into focus ahead of a May 2014 deadline.

The provision does not prevent companies from using minerals mined in countries undergoing conflict, but instead requires that they disclose the use of such minerals to the Securities and Exchange Commission (SEC). For the defense industry, where individual components can have a dozen independent contractors, verifying the source of minerals for all of those contractors is an intimidating undertaking.

Initially, several business groups fought the requirement, including the Chamber of Commerce and the National Association of Manufacturers. But an injunction wasn’t granted, and a successful appeal doesn’t look likely, said Christian Marrone, vice president of the Aerospace Industry Association’s (AIA) national security and acquisition policy group.

“If this were the stages of grief, we’re at acceptance,” he said.

Marrone said the association isn’t focused on fighting the provision, which was the basis for an SEC rule, but rather helping members understand how the rule will work and sorting out its mechanics. To that end, AIA plans to send questions to the SEC to try to clarify how the system will work.

The rule, specifically designed to address concerns about minerals mined in the Democratic Republic of the Congo that have fueled years of conflict, applies only to publicly traded companies, which means many contractors in the defense industry won’t be required to file a report on the origin of the minerals they use. That creates something of a problem for prime contractors in particular, because they must get information from privately held subcontractors in order to verify the origin of all the minerals in the systems they acquire.

“When they ask those questions, a lot of the supply chain is private, so how do you compel those individuals to supply that information when they’re not required to?” asked Micah Edmond, assistant vice president for industrial base policy at AIA.

Edmond said that while the May deadline is fast approaching, companies do have a means to give themselves more time. If they file and say that they essentially don’t know the origin of all of the minerals in the supply chain, they can get an extension that will last another year or two, he said.

Exact numbers on how much compliance will cost and how many companies will be affected are difficult to calculate given uncertainty surrounding implementation of the rule. Some estimates put the cost in the billions for the defense industry alone, and the number of companies affected in the hundreds of thousands.

Despite those costs, the rule serves an important purpose, according to Rep. Jim McDermott, D-Wash., one of the men behind the clause in the House version of the Dodd-Frank Act.

“None of the authors wanted to create undue burden on business, but any discussion of costs would be remiss without including the high human cost of inaction,” he said in a statement provided by his office. “More than 5 million people have been killed in the Democratic Republic of Congo’s civil war. The mining and trade of these minerals has driven the war for over a decade. Manufacturers understand the supply chain and asking them to obtain a certificate is not an undue burden, especially if it will help cut off the funding for rebel groups and put an end to the millions of deaths, untold number of rapes, and slavery of mine workers.”

McDermott pointed to the need to give purchasers visibility on mineral sourcing.

“The law we passed creates the transparency that consumers and investors deserve and will hopefully move the minerals industry to cleaner sources and curb some of the devastation the conflict has left in its wake,” he said.

How a product is built and sourced does seem to have an impact on the consumer market, as seen in the backlash surrounding certain issues with Apple’s supply chain in the last couple of years. Whether those sourcing issues would cause market problems for companies that build products specifically designed to cause death is another question.

Marrone said industry agrees with the intent of the law, but that it forces companies to swallow what may be a large cost in the middle of a budget-cutting environment already causing fiscal pressures.

“I don’t think you’ll find anyone who disagrees with the idea, but it has unintended consequences,” he said. “If you’d done a cost-benefit analysis you probably wouldn’t have done this.”

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