Conflict Minerals, Black Markets, and Transparency: The Legislative Background of Dodd-Frank Section 1502 and Its Historical Lessons

Abstract

After learning that US-regulated manufacturers were relying on a minerals black market in Central Africa to make products, and assessing the threats posed to national security by this black market, Congress enacted Section 1502 on Conflict Minerals in the Dodd-Frank Wall Street Reform Act of 2010. 1502 requires US-regulated manufacturers using minerals from Central Africa to report on whether their sourcing funds armed groups and, if so, to list the products manufactured in the last year containing those minerals. Congress's intent was to use market pressures from investors, business partners, and consumers to shrink companies' use of the Central African minerals black market and lessen its negative impacts. 1502 is the latest in a series of measures using common legal standards to shrink international black markets. This article will describe the legislative history of 1502 in a practitioner's context and address debates surrounding 1502.

Acknowledgement

The author would like to thank Dr. Glenn Mitoma of the Thomas J. Dodd Research Center at the University of Connecticut for his support and thoughtful comments during the writing of this article.

Notes

1. In this article “Central Africa” refers to Section 1502's defined affected countries: the Democratic Republic of Congo and its nine adjoining countries: Central African Republic, South Sudan, Uganda, Rwanda, Burundi, Tanzania, Zambia, Angola, and Congo Brazzaville.

2. See abbreviated list of Floor Statements by members of Congress in Note 18 where they describe their concerns and policy views.

3. In Section 1502, this was addressed through the requirement of the US State Department to issue a new Central Africa peace and security strategy.

4. See the annual National Defense Authorization Act (NDAA), the annual appropriations bills for Armed Services, State and Foreign Operations, and Trade-related agencies and the oversight hearings that are held. All are available on http://thomas.loc.gov, http://www.house.gov, and http://www.senate.gov.

5. On the intent to shrink the minerals black market, see Statements for the Congressional Record listed in Note 18.

6. This figure is a conservative estimate derived by cross-referencing reports from ITSCI, the Associations de Negociants de North et South Kivu, and a presentation by the Governor of North Kivu in Summer 2012. All put the reduction in trade around 70 percent. The increase in smuggling of stockpiled and conflict-affected minerals reduces that number.

7. See the introductory remarks by Congresswoman Waters, Congressman McDermott, and Congressman Clay at the House Committee on Financial Services Hearing, May 21, 2013 and May 10, 2012.

8. The Harkin-Engels protocol is a nonbinding international agreement, not US law, but is included here as a policy tool backed by Congress.

9. Executive Order 13126 (EO 13126) (Clinton 1999) is a ban on the sale to the federal government of products manufactured with child labor containing a list of specific products from specific countries. Coltan from the DRC has been on the EO 13126 list since 2010 and, without efforts to limit Coltan revenues from benefiting armed groups in Central Africa in place, it has likely been violated. As an outright ban, it is a stricter standard than Section 1502. In congressional staff conversations with the General Services Administration's (GSA) General Counsel's Office, the GSA said it has not had an instance of enforcement.

10. “Due diligence” is a common concept used by domestic and international governments and private-sector accounting, finance, and trade entities. In the context of Section 1502, the Securities and Exchange Commission, which uses “due diligence,” “compliance,” and “audits” as standards for the reports it receives, asked the Government Accountability Office (GAO) for additional guidance on new refined definitions for these terms and the request was rejected as unnecessary, as the GAO directed the SEC to the existing standards already documented in the GAO's The “Yellow Book”: Generally Accepted Auditing Standards (2012).

11. For brief evidence and understanding of the cross-regulatory regime commonality of the concepts “Due diligence,” “informed compliance,” and “audits” see:

-	Accounting standards for due diligence in the EU: http://www.accountingpartners.eu/
-	Trade compliance in South Africa: http://www.itac.org.za/import_regulations_page.asp and recent updates http://www.internationaltradecomplianceupdate.com/blog.aspx?entry=1234
-	A primer on Audit Standards coordination between Association of Southeast Asian Nations (ASEAN) and other regulators: http://www.news.gov.sg/public/sgpc/en/media_releases/agencies/acra/press_release/P-20140517-1.html

12. See Customs and Border Protection's set of general guidance and product-specific guidance Informed Compliance Publications on these standards here http://www.cbp.gov/trade/rulings/informed-compliance-publications including an informed compliance factor test in What Every Member of the Trade Community Should Know About: Reasonable Care (A Checklist for Compliance) (US CBP 2004) that includes this question: “8. Do you know how your goods are made from raw materials to finished goods, by whom and where?” (11).

13. For an overview of the practical aspects of trade compliance with a historical context, see Governance, Risk, and Compliance Handbook: Technology, Finance, Environmental, and International Guidance and Best Practices (Tarantino 2008).

14. As told to Congressional members and staff by career Customs and Border Protection staff lawyers, 2010.

15. The annual reports, like most reporting to US federal government agencies are subject to standard penalties determined by the relevant agency. The relevant agency may or may not look at every report based on volume and circumstance. Often, members of the public will review reports and point out concerns. Reporting entities are subject to penalties if they do not report, report improperly or report inaccurately. In any of these three cases, the size of penalty is determined by whether the transgression was due to negligence, gross negligence, or fraud (or a similar formulation). In Section 1502, an additional quality mechanism was included—“unreliable determinations.” Every year the Commerce Department must analyze a representative set of reports to determine what actors and mechanisms used in the process of reporting worked and what did not. Those actors and mechanisms that were found to not work (that is, to be “unreliable”) cannot be used in future year's reporting. This extra cause of action (for making “unreliable determinations”) was meant to address the issue of diminishing adherence to quality over time.

16. It is the Section 1502 requirement that companies annually list their products (which contain conflict minerals used to fund armed groups) that continues to be before the courts as of the summer of 2015. This congressional requirement was intended to enable easy economic choices by the public. However, the NAM and other business associations argue the requirements result in unconstitutionally compelled speech. See NAM v. SEC (2013) lawsuit decision in the References.

17. See the “filed vs. furnished” section of the SEC Final Rule (2012), starting on p. 109 and the Final Rule on p. 115.

18. See Congressional Record statements by Brownback, Durbin, and Feingold as well as comments submitted to the SEC by Durbin (2011) and McDermott (2011):

-	Statements of Senator Brownback in the Congressional Record February 14, 2008, October 27, 2009 and April 23, 2009.
-	Statements of Senator Feingold in the Congressional Record December 11, 2009, and April 23, 2009, April 27, 2009 and May 19, 2010
-	Statement of Senator Durbin in the Congressional Record May 17, 2010.

19. Bans on specific products from specific countries or regions are against World Trade Organization (WTO) rules, though a conscience clause exists. The only ban widely employed is on “conflict diamonds” that over 80 countries have participated in. Since the reporting and supply chain transparency necessary to be effective is not in place, the ban is on the books but not effective. Few advocate extensive use of the WTO conscience exception due to the concern it would trigger frivolous and casual use.

20. Senator Feingold chaired the Senate Foreign Relation Committee's Subcommitee on Africa and became Ambassador to Great Lakes Region in 2012. Congressman Payne was the House Foreign Affairs’ Africa Subcommittee Chairman. Congressman McDermott lived in Sub-Saharan Africa in the early 1960s, worked in Kinshasa, DRC for the State Department in the 1980s and wrote the original Africa Growth and Opportunity Act. Senators and Representatives travelled extensively to Sub-Saharan Africa, including Eastern Congo, as part of fact-finding Congressional Delegations.

21. USAID, State Department, and Department of Defense officials as told to Congressional staff.

22. As told to the author by Senate Staff at the event, and who subsequently worked on the first Senate bill.

23. The story of the evolution of the Brownback bills was told to the author by Senate staff who worked on the bills.

24. The base text of the Dodd-Frank Wall Street Reform and Consumer Protection Act was adopted May 18, 2010. See http://thomas.loc.gov/cgi-bin/bdquery/z?d111:SP3997 for more information. For text of debate see http://thomas.loc.gov/cgi-bin/query/R?r111:FLD001:S53866.

25. The Commerce Department report on the effectiveness of processes is an off-code provision in Section 1502(d)(3); the Unreliable Determinations requirement and cause of action is in section 15 U.S.C. 78m(p)(1)(C), and the listing of products requirements is in Section 15 U.S.C. 78m(p)(1)(A)(ii).

26. The Senate bill had reports going to the SEC, and the Senate Banking Committee reviewed the Brownback bill in its jurisdiction. The House bill required the same kinds of reports using the same standards but to US Customs and Border Protection (which has comparable enforcement capacity) and also required work by the US State Department. This meant the House Ways and Means and House Foreign Affairs Committees had jurisdiction over the House bill. Until the Senate bill became part of the base text of Dodd-Frank a month before the conference and two months before final passage, the House Financial Services Committee did not have jurisdiction over the policy, so they did not hold a hearing on the House bill. That said, several members of House Financial Services also sat on the Foreign Affairs Committee and attended the House Foreign Affairs Committee hearing. Some members of the House Financial Services Committee have said Section 1502 was not debated. In fact, they missed a three-year debate on House bills, did not review Senate bills in their jurisdiction or attend or watch their own Committee's conference on Dodd-Frank and did not read the base text of Dodd-Frank, for the two months between adoption of the Brownback amendment and final passage.

27. Unanimous consent is a process by which all 100 legislative directors in the Senate, one working for each Senator, are informed daily of bills coming up for unanimous consent. Each request is reviewed by Senators and their staffs. It requires only one Senator to rise and object, or their staff through e-mail to say in advance that the Senator will object, for the request to fail on the Senate floor.

28. June 23, 2010, House Foreign Affairs Committee Room, attended by congressional staff and industry lobbyists.

29. One example of the roughly dozen final changes was the additional cause of action, “Unreliable Determinations” 15 U.S.C. § 78m(p)(1)(C). See Note 10.

30. While it is not possible to list every grassroots Congolese organization that advocated for action on the minerals sector, organizations such as Women for Women International, Hero Women of Congo, and the DR Congo Bishop's Conference actively supported the legislation among dozens of others.

31. See http://hts.usitc.gov.

32. It is not possible for Members of Congress and congressional staff to violate the confidences of individuals and organizations that come to Congress to express their views, but it can be said what kinds of contacts were had and what elected public officials were met with. To list a subset, bipartisan House and Senate meetings were had with nonpartisan research organizations, partisan research organizations, advocacy organizations for and against a legislative effort, many dozens of Congolese, Rwandan, and Ugandan citizens from different ethnic backgrounds and contexts, civic leaders of many different types in Congo, Rwanda, Uganda, Angola, and other affected countries, diaspora from all 10 affected countries, national and local government representatives from 6 of the 10 affected countries, domestic and international companies and associations from many factions across more than two dozen industry sectors, the four mineral trade groups and their multiple in-country and international associations, the international exchange market organizations (London), mining organizations (artisanal and industrialized, across mineral type and country), mineral trading organizations, women's groups, religious groups, health groups, and other vertical interest groups, officials from other countries beyond those covered in the law (e.g., South Africa), the International Conference on the Great Lakes Region, UN, and EU, Organization for Economic Co-operation and Development and other similar institutions, academics who published peer-reviewed data, academics who did not have empirical research but who had experience on the ground, independent researchers, economists, staff from congressional research organizations (Congressional Research Service, GAO) and a large number of career staff from federal agencies including the US State Department, US Commerce Department, USAID, US Defense Department, SEC, United States Trade Representative, Homeland Security, US Customs and Border Patrol and many others, and staff and members with experience from previous Congressional legislative efforts on international development, regulatory policy, natural resources, national security, and sub-Saharan Africa. These meetings took place in the United States, Europe, Asia, and on the ground in Central Africa.

33. See PACT's website, http://www.pactworld.org, for their work and organizational description.

34. As discussed many times with Congressional staff by policy analysts from around the world, including by USAID career officials in meetings with Congressional Staff in 2009–1010.

35. These figures were cited by US State Department career officials in meetings with Congressional Staff.

36. In Congressional briefings, Human Rights Watch (2009–2012) estimated the percentage of slave labor in the mines at more than 50 percent.

37. The Exchange Act of 1934 (US Congress 1934) says the SEC shall ensure regulatory measures are not only “appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation” (15 U.S. Code § 78o (n)(2)) and “promote investor protection, efficiency, competition, and capital formation” (15 U.S. Code § 78o (n)(2)).

38. In briefings with Congressional staff, State Department officials said spending between 2010 and 2012 rose from $3 million to $18 million on Central Africa governance, security sector reform, and sexual and gender-based violence issues. For further information on spending programs, see the FY 2009–2014 USAID, US State Department, and US Department of Defense Congressional Budget Justifications for their increased year-on-year spending amounts.