sharing in governance of extractive industries
The Dodd-Frank Act is the first major piece of legislation in the US to address the issue of conflict minerals. Specifically, Section 1502 of Act requires voluntary disclosure to the American Securities and Exchange Commission by publicly traded companies that purchase minerals from the DRC. This is aimed at naming and shaming companies dealing in conflict minerals and in the process also curtailing conflict diamonds from company supply chains.
The provision is in line with a number of international treaties and principals. It neatly dovetails with the UN guiding principles on business and human rights in general and its reporting framework which calls for due diligence in particular. By focusing on the minerals supply chain from mine to product, the Act also operationalizes principals of the Africa Mining Vision (AMV) such as linkages development, general good governance of the sector through transparency and a focus on protecting mining communities and the environment.
Controversially known as Loi Obama in the DRC, the law was built on a weak foundation and met with lots of skeptism and implementation and legal challenges and counter challenges. The law therefore unsurprisingly faces several charges against it. Reflecting the seriousness of these charges, the incoming US administration has made clear its intention to do away with the law.
The law faces three main charges. First, businesses have complained that the law will significantly increase compliance costs with the SEC estimating the cost at around $3 billion in the first year alone. Secondly, it is alleged that despite the increased cost, the law has not stopped conflict in the DRC and importantly that the law is not enforceable and has only led to a blanket ban on trading of DRC minerals.
The charges however are not backed by the evidence on the ground. Whilst allegations are plenty, there has only been one comprehensive study that has been done to assess the Act’s impact in the DRC. The study however found that contrary to the SEC estimate of $3 billion, the increase in compliance costs amounted to about $150 million in 2014 (or about 5% of the estimate).
As regards the law’s alleged failure to stop conflict in the DRC, the study noted that that whist minerals are not the direct cause of conflicts in the DRC, they hav... or facilitated the formation of conflict groups thus fueling conflict. Accordingly, the study concluded that the law, by reducing the profitability of trading in conflict minerals by as much as 60%, had significantly decreased the involvement of armed groups in the mines whilst simultaneously triggering the implementation of industry specific conflict minerals audit programs from the electronics industry. These initiatives have in turn strengthened ongoing reforms begun by African governments in the region but not yet fully implemented.
The allegation that the law led to a blanket ban on trading in DRC minerals is also unfounded. This is because the trade in conflict minerals in DRC was so significant that the law was bound to initially have temporary and unintended consequences as regulatory bodies develop compliance requirements and companies make compliance adjustments– something known as the recoil effect. This can be seen by the fact that after an initial standstill in trade, electronics companies for example developed new industry guidelines for mineral smelters and trading has steadily recovered.
Overall, there the Dodd Frank is an important piece of legislation in the fight against conflict minerals. Any intent to dismantle it has to be backed by a rigorous cost benefit analysis that clearly shows how the law has failed in its objectives otherwise it the law is simply facing trumped up charges.
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