“Conflict Minerals—Peace and Security in Democratic Republic of the Congo Have Not Improved with SEC Disclosure Rule.” That is the title of the final required report of the U.S. Government Accountability Office, the last of 17 reports provided in response to the statutory mandate of the 2010 Dodd-Frank Act. As you probably know, the SEC’s conflict minerals rules were originally mandated by Congress in Section 1502 of Dodd-Frank in an attempt to limit the use of revenue from the trade in conflict minerals to fund the operations of armed groups that have wreaked violence in the DRC and adjoining countries. Under Dodd-Frank, the GAO is required to assess periodically the effectiveness of the SEC’s conflict minerals rules in promoting peace and security in the DRC region. While the blunt conclusions of this year’s report are, to say the least, very discouraging—even devastating—on so many levels, they should not come as a complete surprise: in 2022, the GAO also reported that the violence in the DRC had not abated: “overall peace and security in the region has not improved since 2014 because of persistent, interdependent factors that fuel violence by non-state armed groups.” (See this PubCo post.) But that assessment was not showcased in the title as it is this year. This time, as Liz Dunshee so aptly phrased it on thecorporatecounsel.net, the report “did not bury the lede.” This year, the GAO found that, not only had the rule not curtailed the level of violence in the DRC, in some areas, the rule was actually associated with a spread of violence. That is, if the report’s findings are accurate, not only are we not helping the problem; in some contexts, such as gold mining, we’re actually exacerbating it. It’s worth noting that, as the GAO reports, the “SEC disagreed with some of GAO’s findings and raised concerns about some of its methodology and analyses. In response, GAO made certain adjustments that did not materially affect its findings.” Will the disturbing conclusions of the report propel Congress to reexamine Section 1502?
Here’s the stunning summary: the GAO found that the SEC’s “2012 conflict minerals disclosure rule has not reduced violence in the [DRC] and has likely had no effect in adjoining countries. The rule requires certain companies to file reports on their use of tantalum, tin, tungsten, and gold, which are mined in the DRC. GAO found no empirical evidence that the rule has decreased the occurrence or level of violence in the eastern DRC, where many mines and armed groups are located. GAO also found the rule was associated with a spread of violence, particularly around informal, small-scale gold mining sites. This may be partly because armed groups have increasingly fought for control of gold mines since gold is more portable and less traceable than the other three minerals. Further, GAO found that the number of violent events in the adjoining countries did not change in response to the SEC rule.”
In 2010, Congress had observed that trade in conflict minerals could be helping to finance violent conflict in the DRC, and included Section 1502 in Dodd-Frank requiring the SEC to promulgate regulations containing disclosure and reporting requirements. The resulting conflict minerals rule required reporting, beginning in 2014, by public companies if they manufacture or contract to manufacture products that use conflict minerals that are necessary to the functionality or production of those products. Those companies are required to conduct a “reasonable country-of-origin inquiry” to determine if the conflict minerals used were from the DRC or an adjoining country. If, based on that inquiry, the company knows or has reason to believe that the conflict minerals originated in the covered countries (or if the company learns or has reason to believe that its minerals may not be recycled or scrap), the company is required to conduct substantial due diligence on its supply chain to determine if the conflict minerals financed or benefited armed groups in the covered countries and to file a “Conflict Minerals Report” with the SEC. (See this Cooley Alert.)
Dodd-Frank also required the GAO “to assess, among other things, the SEC rule’s effectiveness in promoting peace and security in the DRC and adjoining countries.” This final mandated GAO report “examines, among other things, (1) what can be determined about the SEC disclosure rule’s effectiveness in promoting peace and security in the DRC and adjoining countries and (2) how companies responded to the rule when filing with SEC in 2023. GAO conducted statistical analyses of the SEC rule’s effect on violence in the DRC and adjoining countries. GAO also analyzed a generalizable sample of 100 company filings from 2023. GAO interviewed DRC and U.S. government officials; UN officials; experts from nongovernmental and academic institutions; and industry stakeholders and representatives of companies that filed disclosures.”
The report indicates that, although the incidence of violence against civilians in eastern DRC “remained relatively constant from 2004—after the Second Congo War—through 2016,” it increased significantly beginning in 2017, with most battles occurring “between armed groups and Congolese security forces. As battles increased, so did incidents of violence against civilians, including attacks, sexual violence, abductions, and forced disappearances. Armed groups committed the majority of this violence against civilians, although Congolese security forces, including the military and police, were also responsible for some violence.”
The GAO performed a statistical analysis of data on violent events, data on artisanal and small-scale mining (ASM) locations and mineral prices, and other data collected by ACLED, an international nonprofit organization. The analysis “found no evidence that the SEC disclosure rule has decreased violence in eastern DRC. Specifically, [the GAO’s] analysis of data from July 2004 through December 2022 showed that the disclosure rule was not linked to a decrease in either the occurrence or number of violent events in eastern DRC.” The GAO analysis also found that “the SEC disclosure rule was associated with a spread of violence in eastern DRC, particularly in territories with ASM sites for gold that were likely to be most affected by the SEC rule.” (I encourage you to look at some of the map graphics in the report displaying the increase in violence at gold mines.) The GAO “did not find a similar effect [i.e., the spread of violence] in territories containing ASM sites for tantalum, tin, or tungsten”; however, the analysis “generally did not find reduced violence in territories with tantalum, tin, and tungsten mines.” The GAO’s analysis also showed that, with regard to the countries adjoining the DRC, the changes in levels of violence in these countries “were similar to changes in other low-income and lower-middle-income countries where the SEC disclosure rule does not apply.”
The results of the GAO’s analysis were consistent with some prior external studies cited in the report. According to the report, one study, in 2023, found that “the probability of conflict in the DRC—specifically, violence against civilians, battles, riots and protests, and deadly conflict—roughly doubled through 2016 because of the Dodd-Frank Act. The study also found evidence suggesting that the act…caused a reduction [of 42 to 51 percent in the number of] workers employed at tantalum, tin, and tungsten mines. The study’s author posits that the ability of armed groups to perpetrate violence may have increased because the labor market shock caused by changes taken in reaction to the act reduced miners’ options for earning income from mining and thus increased their incentive to join armed groups.” A 2017 study examining the effects of the rule on a short-term basis (prior to 2013) “found that, rather than reducing violence, it increased the likelihood that armed groups would loot, and commit violence against, civilians. The study’s authors suggest that the act led to displacement of armed groups, which encouraged them to replace lost revenue by looting.” These studies also suggested that “armed groups may have shifted away from tantalum, tin, and tungsten mines to other types of mineral mines, including gold,” as a result of the rules in part because “gold is more difficult to trace back to mines controlled by armed groups.” A 2018 study “found that the Dodd-Frank Act increased battles, looting, and violence against civilians in territories with an average number of gold mines. The study posits that when armed groups moved toward gold mining areas, they may have also looted and committed violence against civilians in those areas.” The report also indicates that “[s]ecurity improved around tantalum, tin, and tungsten mines in part because some ASM sites were industrialized following the SEC disclosure rule”; industrial mining companies “tend to maintain strong security apparatuses” to “protect their investments from armed groups,” which improved public security.
Not that the SEC disclosure rule had no positive consequences. According to the report, the disclosure rule has “encouraged companies to improve reporting of conflict minerals’ sources by tracking the minerals’ chain of custody” and “raised international awareness about the risks that minerals will benefit armed groups and thus support violence.” In addition, the SEC disclosure rule has “encouraged responsible sourcing efforts overall, according to industry stakeholders. Stakeholders said that the rule has raised awareness about minerals’ origins by requiring end-user companies to better understand their supply chains and conduct due diligence, especially when sourcing from conflict-affected and high-risk areas.” The report suggests that industry efforts may have improved transparency regarding the sourcing of conflict minerals, and that the rule “provides an incentive for companies to require compliance from their suppliers, including smelters and refiners, and to consider removing noncompliant suppliers from their supply chains.” However, “removing a supplier from a company’s supply chain can be challenging and slow, particularly if the company is several tiers removed from the problematic supplier. As [the GAO] reported in 2020, companies have indicated that identifying viable alternatives to problematic suppliers and can be difficult and establishing new relationships can be costly and time consuming.” However, obstacles, such as smuggling, inhibit efforts to trace the origin of conflict minerals, especially gold, and “validating mine sites as free of conflict or of interference from armed groups is time consuming and expensive.” There may be traceability schemes for tin, tantalum and tungsten, but “tracing chains of custody for gold—which is more portable, valuable, and fungible—is more difficult.” Lack of traceability, together with high DRC taxes on gold, make smuggling more attractive. But even for tin, tantalum and tungsten, the UN Group of Experts and Global Witness reported that smugglers were able to circumvent traceability schemes “to launder illicit material into the official supply.”
With regard to company reporting, although the number of companies filing conflict minerals disclosures in 2023 “increased for the first time since 2014”—12 more than in 2022—”many companies continued to report being unable to determine their minerals’ origins.” The report indicates that “the number of annual filings dropped steadily during the first 9 years, from 1,321 in 2014 to 1,005 in 2022.” (For discussions of prior GAO reports on conflict minerals, see, e.g., this PubCo post, the PubCo post, this PubCo post, this PubCo post, this PubCo post, and this PubCo post.)
Based on a sample of 100 disclosures filed in 2023, the GAO reported that, based on their RCOIs, “an estimated 63 percent of companies made preliminary determinations, based on their inquiries, about their conflict minerals’ origins,” primarily reflecting an increase in the percentage of companies that preliminarily believed that the conflict minerals used may have originated from the covered countries. Only an estimated 15 percent “reported having determined that the conflict minerals in their products did not come from covered countries.”
The GAO estimated that 94 percent of the filing companies conducted due diligence after conducting an RCOI. Of those that performed due diligence, “an estimated 62 percent reported being unable to determine the minerals’ source.” About 33 percent “that conducted due diligence determined that their minerals may have originated in covered countries, and an estimated 5 percent did not clearly report a determination. None of the companies that conducted due diligence reported that their minerals were not from covered countries, and none reported that their minerals came from scrap or recycled sources.” According to the report, 15 percent of companies that performed due diligence “reported that they were able to determine whether conflict minerals in their products benefitted or financed armed groups,” and all reported that they did not benefit armed groups.
According to the report, about 94 percent of companies conducted due diligence under the OECD framework. To perform due diligence, companies used tools, including supplier surveys, smelter and refiner audit programs and upstream traceability schemes. About 95 percent of companies reported surveying suppliers, with 93 percent indicating use of the Conflict Minerals Reporting Template. The report observes that using supplier surveys through many tiers of suppliers can be challenging, with some suppliers not responding or proving incomplete or erroneous information and some suppliers providing “information about all of their products, regardless of whether they supplied these products to the company requesting the survey, according to industry stakeholders. Consequently, the company may receive sourcing information that is not relevant to its products.” About 79 percent of companies reporting relying on organized audit programs, such as RMAP; however, “[i]ndustry stakeholders said that the withdrawal of some smelters and refiners from audit programs creates uncertainty about supply chain risks.” The report also discussed problems with upstream traceability schemes used by smelter and refiners.
The report also includes discussions of the persistence of sexual violence in the DRC and adjoining countries, and the steps that some governments have taken to address it, beginning on page 53.
In its conclusion, the GAO report observes that proponents of the SEC rule
“believed the disclosure process would contribute to greater transparency about conflict minerals’ origins and would pressure companies to ensure that the mining and trade of minerals in their supply chains were not benefiting armed groups in the DRC. However, 10 years after companies first submitted disclosures under the SEC rule, conflict persists and evidence indicates that the rule has not contributed to a measurable improvement in peace and security in the DRC. This result is likely driven by the fact that although conflict minerals play an important role in the conflict’s dynamics, they are but one of a number of interdependent factors. Experts on the DRC have noted that even if the SEC rule had successfully cut off armed groups’ access to revenues from the minerals trade, conflict would persist until other entrenched issues—such as a lack of economic opportunities, lack of capacity in the DRC government, corruption, ethnic tensions, and geopolitical competition between the DRC and its neighbors—were more comprehensively addressed. Further, even if armed groups’ revenues from the conflict minerals trade were reduced, evidence indicates that such groups would find other means of financing themselves, such as extorting residents of the areas they control.
“The U.S. government has noted its commitment to partner with the DRC government in efforts to address the range of factors contributing to the conflict. Promoting transparency in conflict minerals supply chains and encouraging the private sector to adopt reliable due diligence systems will likely continue to be important aspects of these efforts. However, the accumulation of evidence since SEC implemented its rule indicates that the rule alone has not been sufficient to meaningfully improve peace and security for the Congolese people.”
