by Paul Schultz, Professor, Mendoza College of Business, University of Notre Dame.


There has been armed conflict in the eastern portion of the Democratic Republic of the Congo (DRC) since the mid-1990's. It has been a brutal conflict that has included the murders and rapes of many local civilians. This area of the DRC has rich mineral deposits and rebels and rogue army units have fought over and exploited the region’s mines.
Section 1502 of the Dodd-Frank bill is intended to limit the violence in the DRC by requiring U.S. companies who file with the SEC to report their usage of “conflict minerals” from the DRC or adjoining countries. The SEC is currently writing the rules, and envisions a three step process. First, a company determines if tantalum, tin, gold, or tungsten are used in the products it makes. Second, the company determines whether any of these minerals are from the DRC or surrounding countries. If the minerals the company uses are from different parts of the world, it would disclose this, along with a “country of origin inquiry” in its annual report. If the DRC is a source of minerals, the company must file a Conflict Minerals Report. If the company determines the minerals come from legitimate mines and not from armed rebels or rogue army units, they can describe their products as “DRC conflict free.” The firm can use minerals that are not conflict free, but must publicly report them as such. The firm’s due diligence on the supply chain of their minerals must include a certified independent audit.
This of course, has nothing to do with the safety or integrity of U.S. capital markets. It is a novel use of the SEC as an instrument for foreign relations and social policy. This is a task for which the SEC is ill-suited. They have no institutional knowledge of mining, international trade, or supply chain management.
This rule affects many firms. These minerals are used in the electronics industry, in aerospace, telecommunications, jewelry, steel, appliances, and carbide tools. Any company that produces a product that is plugged into an electric socket is subject to Section 1502. All companies that file reports under the Exchange Act are covered, regardless of how much, or how little of the minerals they use. For example, Kraft Foods uses tin to package biscuits. They are understandably concerned about the reporting requirements because they use over 100,000 suppliers.
To be able to describe their products as “DRC conflict free,” a company that uses minerals from the DRC, or components manufactured from minerals from the DRC, must be able to trace the metals all the way back through the supply chain to the mine. In many cases, a manufacturer will work backwards through multiple component manufacturers, refiners, smelters, shippers, and traders to reach the mine. It will not be unusual for a dozen or more intermediaries to handle the mineral between the mine and the final manufacturer.
Like all new regulations, it is difficult to estimate the costs imposed by Section 1502. The SEC estimates the annual cost to all firms who file reports under the Exchange Act to be just over $71 million. The SEC ignores the costs to firms that do not file reports, and these companies will have to trace the origin of the minerals they use to supply reporting companies that wishes to be “DRC conflict free.” In addition, the SEC has an odd way of estimating how many reporting firms fall under this regulation. They note that 20% of the world’s tantalum comes from the DRC and adjoining countries, and assume that 20% of U.S. firms will be affected by Section 1502. The idea seems to be that all companies use these minerals, but, since only 20% of the minerals come from the DRC, only 20% of companies use minerals from there. It is more likely that almost all companies use minerals from the DRC, but they constitute about 20% of the supply for each company.
It is not surprising then, that others have come up with very different estimates of the cost of Section 1502. The National Association of Manufacturers (NAM) puts the cost at $9 - $16 billion, or approximately 140 times the SEC estimate. A study by the Payson Center for International Development at Tulane University suggests the NAM study overestimates the number of affected suppliers and puts the cost at $7.9 billion, still more than 100 times the SEC estimate.
It is difficult to forecast the costs of Section 1502, but it is obvious that firms will try to minimize these costs. One way to do this is to entirely avoid minerals from the DRC. Firms will still have to make a “reasonable country of origin inquiry” but they will not have to trace minerals all the way back to a mine. This is already happening, with devastating impact, in anticipation of the law. Most of the mining in this region is done by individual artisanal miners. Hundreds of thousands of people support themselves and their families in this way. Because of the drop in demand for DRC minerals, they now have no livelihood.
A second way to avoid these costs is to avoid filing statements with the SEC. Foreign companies can delist from U.S. exchanges. Private firms can stay private. In many cases, the cost of Section 1502 seems too small by itself to prevent firms from going public, but it is one of a number of recent additions to the cost of going public.
The rapes, murders, and human suffering in the DRC have horrified and appalled people in the U.S. and elsewhere. Section 1502 of Dodd-Frank will help to ease the human suffering if the rebel groups depend on revenues from the mines to arm themselves. The sad experience of neighboring Rwanda demonstrates though, that genocide can be carried out cheaply using only machetes. Section 1502 could also end the conflicts if the warlords and rebels have nothing else to fight over when the mineral trade dries up. If so, the conflict should be winding down now.


Africa and ‘Obama’s Embargo,’ Wall Street Journal, July 18, 2011.
Bayer, Chris, and Elke de Buhr, 2011, A Critical Analysis of the SEC and NAM Economic Impact Models and the Proposal of a 3rd Model in View of the Implementation of Section 1502 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Working paper. Payson Center, Tulane University Law School.
Hamilton, Jesse, Kraft, GE Officials Say Conflict-Mineral Rule Will Burden Firms, Bloomberg, October 11, 2011.