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« The infinite scalability of compliance | Main | Tommy Suharto implicated in Rolls Royce investigation »
Tuesday
Dec112012

Are conflict mineral rules hurting Africans?

On a tarmac at Congo's Goma Airport, customs agents seized a Gulfstream jet with millions of dollars in cash on board. Bricks of tightly-packed hundred-dollar bills were strewn about the cabin. The seizure was the culmination of an episode in which a former NBA star, a diamond trader, and their Texas financier attempted to buy 4.5 tons of gold from Bosco Ntaganda, warlord of the Eastern Congo, who has been sanctioned by OFAC and indicted for war crimes.

This incident is only the most high-profile illustration of the vast black market that has sprung up for Eastern Congo's enormous mineral wealth. Congo possesses huge deposits of gold, tungsten, tantalum and tin, all critical to the production of cellphones and other electronics. The mines are controlled by militias, which use some mineral profits to finance a war that has left six million people dead.

In an effort to curb this conflict, the 2010 Dodd-Frank Act directed the SEC to require disclosure of the use of these minerals. The SEC's rules now require companies using any of the four "conflict minerals" to verify their place of origin. If the minerals come from the Democratic Republic of the Congo or a contiguous country, companies must certify that they're from a conflict-free source, or otherwise report use of conflict minerals in what is essentially a "name-and-shame" mechanism.

An article this month in Foreign Affairs suggests the new SEC rules have had minimal impact reducing violence and may even have exacerbated problems. To avoid the burdensome disclosure and certifications, companies are simply avoiding the Congo altogether. As a result, virtually all of Eastern Congo's mineral resources are being smuggled to neighboring countries like Uganda, now a major gold exporter despite having no gold mines. Congolese militias with smuggling operations continue to profit in spite of the regulations.

Some Congo mines have reduced production or shut down, removing local villagers' sole source of income. Militias that have also lost their income have become more predatory and violent, collecting illegal taxes and ransacking villages for sustenance.

Eric Miller, acting director of Save the Congo's U.S. operations, told the FCPA Blog that problems with the new regulations are to be expected. However, he said, "If the government wants to regulate conflict minerals, they need to do so completely, not halfway. There must be strict legal penalties." Miller said it would be more effective to add targeted sanctions on Rwanda and Uganda, who help smuggle resources and finance their own militias in the Congo. Export of the four minerals should be "embargoed until these countries can verify that they're not smuggling from the Congo."

Despite the difficulties in implementation, Miller believes that regulating conflict minerals is a necessary effort. "There is no reason that buying a cellphone should help foment a brutal war. That's the minimum that we can do."

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Mark R. Friedman is a contributing editor of the FCPA Blog.

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