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A Utopian ‘Conflict Minerals’ Mandate Offers No Practical Solution

Just thinking about the ramifications of a proposed rule from the Securities and Exchange Commission (SEC) on “conflict minerals” causes Irma Villareal, a representative of Kraft Foods, to hyperventilate, The Washington Post reported.

The reason is probably that Congress didn’t do enough thinking when it asked the SEC to write the rule.

The directive was hidden deep in last year’s mammoth Dodd-Frank Wall Street Reform and Consumer Protection Act. Once the SEC promulgates a final rule implementing the provision, Sec. 1502 of the law, all companies listed on U.S. stock exchanges that use certain metals, including tantalum, tin, gold or tungsten, will be required to determine and disclose whether those metals came from the war-torn region that includes the Democratic Republic of the Congo (DRC) and its neighboring countries. According to the law, this is to avoid “helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence.”

The problem is that many companies have no practical way to ascertain whether their products contain these materials and, if they do, where the minerals were mined. Supply chains frequently span numerous companies and countries, to the point that the first links are all but inaccessible to those at the other end. The National Association of Manufacturers, a leading trade group fighting the proposal, has said that the cost of actually complying with the regulation could be between $9 billion and $16 billion.

The regulation may also result in a shortage of raw materials as companies clamor for a small supply of minerals with thorough documentation, warned Tom Quaadman, the vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.

In the best-case scenario, the SEC will provide a clearly defined procedure companies can follow to demonstrate that, although the process was doomed from the start, they have made a good-faith effort to discover the origins of the metals they use. Millions of dollars (at least) will go down the drain, and no one will really be better off, but the law will have been served.

In the worst-case scenario, the SEC will impose an impossible burden of proof, and some companies will opt to avoid the regulation altogether by not listing their shares on American exchanges. As I have written before, Wall Street is not the only street in the world where stock brokers can do their business. If listing stocks in the U.S. becomes too much of a burden, companies will simply stop doing it, either by avoiding going public in the first place, or by taking their business offshore.

The law was obviously written with the best of intentions. The problems in central Africa are indeed worthy of international concern. When called on to address the SEC, Sen. Richard J. Durbin, D-Ill., a strong backer of the conflict minerals provision, told of his own travels in Africa and of the horrific scenes he witnessed there. He concluded that he would like to be able to enjoy products containing minerals from the region, like cell phones and other high-tech gadgets, “with a clear conscience.”

But, while a politician’s desire for a “clear conscience” is more admirable than, say, a desire for a big pay raise, it’s still not enough to produce good legislation. In the adult world, achieving a clear conscience requires making difficult decisions about costs and feasibility. Addressing serious humanitarian crises, like the conflict in the DRC, in a substantive way requires commitment of national resources and, often, of human lives.

Lawmakers like Durbin seem to believe that all that is required to assuage a troubled conscience is a piece of vaguely worded, feel-good legislation that hands off all responsibilities to regulators and all costs to businesses.

The SEC has been understandably flummoxed as to how to execute this bit of Congressional utopian thinking. The agency issued a draft rule last December, but it failed to meet an April deadline for writing the final regulation, and now, almost a year after putting out that initial proposal, it continues to mull over the options. It is legally bound to follow Congress’ intention. But it also faces the possibility of a court challenge, which any rule in line with Congress’ expressed desires would have difficulty surviving, since the courts will insist that businesses at least have a clear idea of what the rule requires and some reasonable way to comply.

The partnership between Congress and regulatory agencies is an important part of our legislative system. It allows laws to reflect both the will of the people, as expressed by their non-expert representatives, and the technical knowledge that can come only from people with expertise in a particular field. Congress, however, still bears a basic responsibility to understand the costs of what it asks for.

On the surface, the “conflict metals” provision seems like a departure from the rest of the content of the Dodd-Frank Act. On further examination, however, it is just another part of the Pelosi-Reid Congress’ attempt to foist all of the costs of a political and social agenda that they convinced themselves voters wanted onto businesses. (As last year’s election demonstrated, voters wanted no such thing.)

The next time our elected officials stop to wonder why American businesses have not yet invested in new workers and factories, someone might want to remind them that those businesses are busy investing in pointless, unproductive regulatory compliance instead.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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One Response to "A Utopian ‘Conflict Minerals’ Mandate Offers No Practical Solution"

  • Chuck Blakeman
    November 10, 2011 - 12:07 am

    Dodd-Frank 1502 highlights a disturbingly colonialistic mindset amongst the proponents of this solution – we know what’s better for Africa, and we know what’s better without having asked those most affected by the decision. Arrogance is not a strong enough description for the high-backed-chair pontificating that is going on in the comfort of Washington regarding 1502.

    Our Congo-based company works with Congolese tribes to help them export without a dime going to conflict groups. Dodd-Frank has been disastrous for them. And if it’s anything like the Kimberley process for diamonds, it will continue to be a disaster for two years and 10 months, the time it took to implement Kimberley. For whom are we advocating?

    I challenge the supporters to take a poll of those they are supposedly trying to protect. The response would tell them that, while Dodd-Frank was well-meaning, it is an unmitigated disaster in practice. COCABI, COMIMPA and COMIDER represent 20,000 miners in the conflict area. They all say they’ve never even been contacted.

    While all the NGOs and politicians are quoting each other’s support of this, we are quoting chiefs and tribes who are actually being affected by it, all of whom say Obama’s Law (that’s what they call it) has been disastrous for them and their livelihood. Doesn’t this say something very powerful to us?

    Also, there are six regions from which Dodd-Frank minerals are mined, and only one of them has ever had anything to do with conflict. Dodd-Frank has put them all out of business before it is even enacted. The World Bank says 10 million Congolese who get their living from mining could be affected.

    If all Congo minerals came from criminals, then Dodd-Frank would make sense. But the fact is that very small percentage of Congolese minerals come from criminals, the rest are from honest, hard-working chiefs and their tribes, all of whom have lost their only source of income in the second poorest country on earth.

    I was in Tanzania a few weeks ago to help a chief export his coltan using a visible, well-documented process that ensures not a dime goes to conflict. His people will go hungry because the smelters, citing Dodd-Frank, have vanished. The chief is devastated, as are the millions who find their meager livelihoods destroyed by this over-reaching act. One of the main supposed “advocacy” groups stunningly suggested we sell our coltan to the Chinese who ignore Dodd-Frank 1502.

    The issue with Dodd-Frank is that it is a nuclear option that demonizes minerals instead of criminals. It’s no different than burning down every house in town to stop a burglar from stealing. Dodd-Frank has burned down the entire mining industry in the Congo in hopes that their scorched earth policy will catch a militia group or two in its path. They are willing to take down every innocent man, woman, and child who live off mining. Such massive collateral damage is not acceptable under any circumstance.

    Remove mining from the equation and the militia will exact its pound of flesh from the locals by other means. This should be handled by targeting militias, not mining. Dodd-Frank takes the route of universal collateral damage, which, before the bill is enacted, has already destroyed the livelihoods of the innocents who depend on it.

    As Eric Kajemba, the leader of a Congolese civil-society group has said, “If the advocacy groups aren’t speaking for the people of eastern Congo, whom are they speaking for?”