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Legislation Passed To Prevent The Use Of Conflict Minerals Originating From The Democratic Republic Of Congo

November 24, 2010

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On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Act, which included Section 1502 that requires, among other things, that the Securities and Exchange Commission (SEC) enact rules and regulations that require publicly traded companies to disclose if they use Conflict Minerals in their manufactured products. In some instances, auditing will also be required.

Definition Of Conflict Minerals

Under Section 1502, Conflict Minerals are defined as gold, wolframite, cassiterite, columbite-tantalite (coltan) or their derivatives, or another mineral or product determined by the Secretary of State to be financing conflict in the Democratic Republic of Congo (DRC) or adjoining countries. Columbite-tantalite is the ore from which tantalum is derived. Tantalum has many uses. About half of the tantalum consumed each year is used in the electronics industry, mainly as powder and wire for capacitors.

Impetus For Passage Of Conflict Minerals Legislation

There has been much publicity about the use of Conflict Minerals from the DRC and their role in financing the violence in eastern DRC, particularly sexual and gender-based brutality. The violence surrounding these Conflict Minerals has resulted in the deaths of approximately 5,000,000 people over the last ten years and contributed to an emergency humanitarian situation.

In essence, the Conflict Minerals are mined, and their sale is used directly or indirectly to finance or benefit armed groups, enabling them to continue their armed occupation. Similar legislation was previously passed for conflict diamonds.

Who Must Comply With The Conflict Minerals Legislation

Section 1502 applies to SEC reporting companies for which Conflict Minerals are necessary to the functionality or production of their products. Thus, companies that are not publicly traded are not covered by Section 1502. For covered parties, they must annually disclose whether their Conflict Minerals originated in the DRC or an adjoining country. If the Conflict Minerals originated in the DRC or an adjoining country, then the issuer must submit a report to the SEC and post on its company website a description of the measures it has undertaken to exercise due diligence on both the source and chain of custody of such minerals. The issuer must also include an independent private audit of the report, a description of the manufacturer of products that are not DRC-conflict free, the country of origin of the Conflict Minerals, and the specific efforts used to determine the mine and/or location of origin.

Many of the new requirements in Section 1502 are undefined and need clarification.

Actions Required Of The SEC By Section 1502

Under the Act, the SEC has 270 days to publish regulations requiring publicly traded companies to annually report that they are using minerals from the DRC and what they have done to conduct due diligence on the source of minerals and the chain of custody.

Actions Required By The U.S. Secretary Of State

Within 180 days under Section 1502, the U.S. Secretary of State, in consultation with the US Agency for International Development (AID), must submit a strategy to Congress on how to deal with linkages among armed groups, human rights abuses, the mining of Conflict Minerals and commercial products.

The strategy must support efforts by the Congolese government and the UN Group of Experts to monitor and prevent the financing of armed groups through the minerals trade. The Secretary must also propose punitive measures for those entities found to be trading in Conflict Materials, and provide guidance to commercial entities on exercising due diligence and determining a proper country of origin for Conflict Minerals. Punitive measures are to be drafted that would be taken against individuals or entities whose commercial activities are supporting armed groups and human rights violations in the DRC.

Can Section 1502 Be Effectively Enforced

It is unclear at this time if the provisions of Section 1502 can be enforced because Congolese government troops are themselves heavily involved in the trade of Conflict Minerals. Previous attempts at banning Conflict Minerals have only increased smuggling. However, the Organization for Economic Co-Operation and Development (“OECD”), of which the U.S. is a founding member, will be adopting new Conflict Mineral guidelines. These will compel all OECD countries to develop legislation to enforce the guidelines that apply to all enterprises, not just publicly traded ones.

If you have any questions about these issue, please contact Stephen Spraitzar at (415) 288-0427 or via email at steve.spraitzar@tuttlelaw.com.

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Stephen Spraitzar is an attorney with the Law Offices of George R. Tuttle in San Francisco.

The information in this article is general in nature, and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.

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