Sources of Misery

A controversial new rule requires companies to peer deep into their supply chains to see if they are unwittingly supporting violence in Africa.

Experts who have helped companies begin the process say it is difficult. Rachelle Jackson, director of sustainability practices at STR Responsible Sourcing, which audits supply chains, gives a quick example: “A mineral may be exported and purchased by a trading company in Dubai that sells it to a smelter based in Germany, which extracts the metal from the ore and sells that material to a Malaysian company that uses it in components for laptops.”

Even when companies can track their components, there will be some holes. And that’s where the new requirement gets more complicated. Namely, questions arise over how the minerals got to a smelter for processing. Could they have been intercepted by a Congolese rebel group and be subjected to illegal taxation? Were conflict-free minerals mixed with those taken from mines owned by armed groups, and does that mean the seemingly clean minerals are now tainted? “There are many steps along the way where ambiguity can be introduced into the supply chain,” says Martin Fisher-Haydis, an associate at law firm Fasken Martineau.

Such ambiguity won’t help CFOs who sign off on the annual reports that address this matter. Dodd-Frank requires companies that source from the DRC region to provide a separate, audited report to the SEC and, if applicable, certify that their products are “DRC conflict-free.”

Being confident about that declaration will not be easy. “We have to determine at this point that anything coming out of the region is likely to be compromised,” says Rick Goss, vice president for environment and sustainability at trade association Information Technology Industry Council.

A De Facto Ban

In effect, although the law does not prohibit companies from sourcing from the Congo, it has led to a de facto ban as companies fear the reputational risk outweighs the potential savings.

Ironically, walking away from this source could further harm the Congolese economy — and the very people the Dodd-Frank provision aimed to protect, according to human-rights advocates. However, some companies “are very committed to not only assuring their products don’t fund the armed groups’ control of mines, but contribute to the economic development of the Congo as well,” says Patricia Jurewicz, director of the Responsible Sourcing Network.

Meanwhile, TriQuint’s Sharp continues to examine his supply chain as he waits for the SEC’s final rule. He spends a lot of his time educating suppliers about the pending regulation. One supplier hemmed and hawed through many versions of a nondisclosure agreement before giving up the basic data that TriQuint needs for compliance.

Although Sharp believes it is highly unlikely that his company uses conflict minerals from the DRC region, he says many more months of work are needed before he can be sure.

Sarah Johnson is senior editor for risk & compliance at CFO.

Discuss

Your email address will not be published. Required fields are marked *