Europe can improve upon US's 'conflict minerals' legislation: ICG

Europe is up in the air about how to deal with what is coming out of the ground in conflict zones.

A year ago, the European Parliament asked the Commission to develop a European version of the Dodd-Frank legislation, which establishes disclosure regulations relating to the use of conflict minerals by companies, and was passed by the US Congress in July of 2010. However, in Brussels, skepticism persists as to whether any such measure will be enacted, and many wonder what added value Europe could bring in any case.

On one hand, the market reacted more quickly than expected to Dodd-Frank: importers officially distanced themselves from the minerals originating in the Kivus region of the Democratic Republic of the Congo; on the other hand, the Kivus economy is suffering, and the international mechanism of regulation which stands as the historical model, the Kimberley Process, is itself in dire straits. On balance, it would seem European policymakers have enough reasons at least to hesitate.

That would be the wrong conclusion, however. The real goal should not be to simply follow Dodd-Frank or “Europeanise” it. The EU’s version should go further by addressing the weaknesses of the American act – complementing regulation by the market with a political and developmental approach that is currently lacking.

The Dodd-Frank Act imposes two obligations of transparency on companies with securities registered in the US: financial transparency in the extractive industries and transparency of supply in case of mineral imports from the African Great Lakes region. This law translates the due diligence principle for the identification of the origin of imported ores and the principle “Publish What you Pay” of the Extractive Industries Transparency Initiative (EITI) into national law. Although it is already applied to other economic sectors like banking and the food industry, the introduction of due diligence into U.S. legislation caused great controversy. Indeed, it aims at making transparent a business that prefers darkness to light and discretion to advertising.

The Dodd-Frank Act has undoubtedly been “raising the bar”, however it raises more questions than answers. First, it is very challenging to create conflict-free supply chains from the Kivu provinces, an area where the Congo government’s authority is only theoretical. The two highest authorities of the Congolese government have called for the demilitarisation of mining sites in 2009 and 2010 with little effect.

Second, it is very challenging to set up a truly reliable verification system of supply chains. Export certification will be performed by the administration of exporting countries. But in 2010, Burundi, the Congo, Uganda, Tanzania and Rwanda were respectively 170th, 146th, 127th, 116th and 66th out of 170 countries ranked on corruption by Transparency International. The certification of “conflict free” minerals by administrations that are far from being “corruption free” inevitably calls into question the credibility of the entire enterprise.

Third, the US law has a cost. The identification of minerals’ origin is an additional cost for importers which is going to be reflected in the price of Congolese minerals, making them less competitive. Importers will simply shop elsewhere. In this case, the cost of the Dodd-Frank legislation is economic and social: the current withdrawal of buyers is resulting in the unemployment of artisanal miners.

This situation reveals what makes for the competitiveness of the Kivus minerals: a ruthless exploitation of workers. In the Kivus, the extraction of minerals is based on working conditions that look like ‘voluntary’ slavery. Thousands of miners armed with shovels and picks risk their lives for a pay that nobody would call a salary.

The “dirty little secret” of trading in minerals from the Kivus is not only the fact that this trade benefits armed groups and Congolese army officers. The “dirty little secret” of trading in minerals from the Kivus lies also in the fact that hundreds of thousands of people are stuck in a hopeless poverty trap.

Unfortunately, against this economy of oppressive subsistence, the Dodd-Frank legislation has no plan.

In creating its legislation, the EU can and should improve on the US model. Europe must not only demand transparency for companies that operate in conflict areas, but it must also work towards the socio-economic well-being of the mining communities and complement regulation by the market with political dialogue in producer countries and Asia.

On the development side, even the US is already moving to address the unintended consequences of Dodd-Frank, with the Administration having designed a strategy on conflict minerals in eastern Congo that makes the socio-economic development of mining communities a priority. Some companies are also trying to follow this path as part of their corporate social responsibility outreach. As the main donor of the Great Lakes’ countries, the European Union has all the tools to follow suit and on an important scale.

The political side is equally fertile ground for policy improvement. Fully consistent with its desire to develop “raw materials diplomacy”, Europe must make conflict minerals one of the main subjects of the political dialogue with multilateral organisations and countries of the region. This will enable it to encourage countries in the region to also operate transparently by publishing contracts – as DRC has just done – and to legislate on due diligence and certification. This will also be an opportunity to test the will of the Great Lakes countries to regulate this trade

This political dialogue can take place within the framework of the Cotonou Agreement and within the European Union/African Union institutionalised dialogue. This dialogue will be an opportunity to address previously taboo subjects: the demilitarisation of mining sites, the fight against corruption, smuggling, and the failure of mining reform in the Congo. On these issues, the proposals stemming from the civil society in the Great Lakes countries and the Six Tools of the Regional Initiative to fight against the illegal exploitation of natural resources (PDF) should be examined for possible support from the EU. After all, the EU is the only body that works simultaneously on the reform of governance and the security sector, and on development in the Great Lakes region.

Finally, the EU should use its status in the international arena to bring the debate to the demand side, in particular Asia. China and some countries of South East Asia are important in the refining industry and even have buyers in the Kivu provinces. Through the EU-China dialogue and the G20 summit to come, Europe must encourage these countries to adhere to the principles of due diligence and certification. In the global market of the electronics industry, Asian countries have an interest in “team playing” and not being perceived as undermining international efforts to fight against conflict minerals.