Thursday, 1 October 2015

D-RC-U.S: Challenge to "Conflict Minerals" Court ruling

On August 18, the U.S. District Court of Appeals for the D.C. Circuit issued the latest in a series of decisions on the case National Association of Manufacturers, et al. v. SEC, upholding a previous decision that one part of the rule violates companies' First Amendment rights, but keeping the majority of companies' disclosure requirements intact. The deadline for parties to file for a review of the case by the court en banc is this Friday, October 2.

In 2012, the SEC promulgated the Conflict Minerals Rule based on the Dodd-Frank Wall Street Reform and Consumer Protection Act's Section 1502. A group of industry associations challenged the rule in the D.C. Circuit Court of Appeals based on the Administrative Procedure Act and the First Amendment of the U.S. Constitution.

The recent ruling that the descriptor requirement violates companies' free speech rights and agrees with the dissenting opinion that "DRC Conflict Free" is a factual and uncontroversial statement. Whether certain minerals in a supply chain are linked to the funding of an armed group is a matter of investigation, not a matter of opinion. It is not always an easy fact to determine, but it is a fact nonetheless.

Some misleading media reporting has said that the most recent ruling "threw out the rule" or "gutted" the rule. In fact, the only portion of the rule that industry associations are challenging in court is the requirement for companies to use "descriptors" in their reporting, that is, to report whether or not their products are "DRC Conflict Free" or "Not Been Found to be 'DRC Conflict Free.'" The remainder of the reporting requirements are still in place. Thus, companies are legally bound to continue reporting on their minerals' origins and their due diligence practices.

While it is only a limited win for the industry associations, the decision to strike the descriptor requirement is detrimental for the transparency and humanitarian goals of the Conflict Minerals Rule. In the absence of the descriptor requirement, three major problems arise:

First, the audit requirement for companies will likely disappear. The audit requirement represents an important accountability mechanism to make sure companies' reports are truthful and accurate. Without audits, companies could make statements about their supply chains, and the public would have no way of knowing whether they were being truthful, as no independent third party would have verified them.

Second, companies' Conflict Minerals Reports will become less accessible to the public and investors. Companies' due diligence reporting can be complex and dense, whereas the descriptor provides a clear summary statement of the outcome of a company's due diligence. This is critical for giving consumers and investors the information they need to both choose which companies to support and pressure companies to improve their practices.

Finally, the descriptor requirement exerts internal pressure for companies to understand and summarize their own supply chains and due diligence practices by requiring they reach a clear conclusion. As we have seen in the first two years of companies reporting to the SEC on conflict minerals, many companies are falling far short of robust due diligence reporting.

Many companies are starting to simply claim that they looked a bit into their supply chains and did not find anything troublesome but give almost no information about what due diligence they actually conducted. The descriptor can act as a lever to push companies to do more thorough investigations and reporting in service of reaching a clear, truthful summary conclusion.

The decision, as it stands, is one result of a larger strategy by certain corporate actors using the First Amendment to avoid regulation and public accountability. In this case, that effort is particularly harmful: it aims to protect companies' right to remain blind to their potential financial support of deadly armed groups. The growing number of investors and consumers who care about corporate responsibility, along with the people in central Africa affected by U.S. companies' sourcing practices, deserve better.

This next phase of appeal is essential, both for the sake of corporate transparency and for efforts to build sustainable peace in Congo. The court's latest decision, calling the constitutionality of the rule's descriptor component into question, is on very shaky ground. Moreover, if the requirement for companies to conclusively describe their products is struck down permanently, the significant positive momentum that Dodd-Frank 1502 has helped trigger in Congo could be disrupted.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist
African Affairs Expert