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From blood diamonds to conflict gold: the U.S. adopts Dodd-Frank Act

08 august 2011

In July 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted by the U.S. Congress and signed into law by President Barack Obama on July 21, 2010, started to be implemented. The jewelry industry is in the first line of those affected by Dodd-Frank most directly.

At the time of this writing, exactly one year passed since this act came into existence officially, but lawmakers, executors, analysts, and consumers do not seem to have figured out how to apply it and what to expect from its entry into adulthood. Dodd-Frank is so young but it is already an “out-weight” containing over 2000 pages - that's not counting the bylaws and explanatory notes.

The law has emerged as a response to the 2008 crisis and subsequent recession. The document is intended to strengthen the financial stability of the United States by improving accountability and transparency in the financial system, and one of its main purposes is to protect the interests of American taxpayers defending consumers from abusive practices in financial services, etc. It is the most dramatic change in U.S. financial regulation since the Great Depression. The law requires major changes in the activities of federal agencies that regulate financial services and is expected to have a strong impact on almost every aspect of the financial industry.

One of the main provisions affecting the jewelry business in the Dodd-Frank Act is Section 1502 (b), entitled “Conflict Minerals Law.” This provision obliges public companies, whose shares are traded on American stock exchanges, to submit reports to the US Securities and Exchange Commission (SEC) on whether they obtain any of four metals (including gold, tantalum, tin and tungsten) from the Democratic Republic of the Congo, as well as to disclose their tax, royalty and other payments on each project they operate, according to Bloomberg and Huffston World. This provision will cover US and European companies as well as many from emerging markets that sell shares on US stock exchanges,says Stephen P. Groff, the deputy director for development cooperation at the Organization for Economic Cooperation and Development in Paris, writing on Huffston World. The "untouchable" metals include gold, tantalum, tin and tungsten.

“The new legislation on “conflict minerals” will have a major impact on the gold and tungsten markets,” Jewelers Vigilance Committee president and CEO Cecilia Gardner said in a seminar on the topic at the JCK Las Vegas show on June 2.

The proposed rule will reach into the operations of tech giants such as Apple Inc. (AAPL), jewelry makers such as Tiffany & Co. (TIF), aerospace firms such as Boeing Co. (BA), retailers such as Wal-Mart Stores Inc. (WMT) and, by extension, into virtually every cell phone, wedding ring, jet engine and even, according to American Apparel Inc. (APP), into the lights that flash in the soles of children’s sneakers.

The U.S. Congress’ stated purpose: to prevent US dollars from funding human rights atrocities in Central Africa, namely the Democratic Republic of Congo (DRC) and the nine adjoining countries. The law mandates that publicly-traded companies
- assess their use of these four metals,
- conduct significant due diligence through their supply chain to identify the original ore country of origin,
- identify where materials originate from the DRC or nine adjoining countries,
- sponsor a third party audit and report of the efforts, and
- make this information publicly available on the company’s website, as well as to SEC.

However, so far there have not been released any bylaws to this act – the regulations developed by relevant federal agencies as to how this law is to be applied, and companies have no real understanding of how to carry out a comprehensive review of their commodity chains. According to Bloomberg, on June 15, the Securities and Exchange Commission (in team with the Commodities Futures Trading Commission which is also expected to release rules for the swop market) decided to postpone Dodd-Frank rules. The rules are scheduled to be finalized sometime between August and December 2011, according to SEC’s website on the Dodd-Frank implementation schedule. However, the agency’s commissioners also could decide to push the deadline into 2012 if they find that more time is needed, Bloomberg says.

At the expert meeting in Washington in late June which brought together representatives from various industries, including participants from Central Africa, trade associations, NGOs and the Organization for Economic Cooperation and Development (OECD), a rift was evident between policy development/governmental organizations and the companies who are expected to implement conflict minerals traceability programs. The main areas of disagreement appeared to be recognition that the gold supply chain is significantly different from that of the other conflict minerals and a unique – and far more complex – solution will be needed for reasonable traceability.

Douglas K. Dean, a partner in the sustainable business solutions practice at PricewaterhouseCoopers, said his clients were anxiously awaiting the SEC’s final conflict minerals rule, hoping it would finally clarify the issue. They also want to know whether the agency will issue exemptions for businesses that use only trace amounts of the minerals or get them from recycled sources, he added. “Companies are basically in a holding pattern,” he said cited by the New York Times blog.

This is especially true for jewelry companies working with gold. “Forty percent of the gold used in jewelry is recycled. But recycled from where?” Cecilia Gardner said touching the burning issue. The President of the Jewelers Vigilance Committee also expressed her hope that the SEC’s final rule will take recycled gold into account, and eliminate the need for a “conflict mineral” report if a company uses recycled minerals, the JCK Show Daily wrote in June. Gardner said it remains difficult to determine the origin of any kind of gold.

According to Gardner, who spoke at a press conference in Las Vegas, law permits businesses to say they “don't know” where their gold comes from. But she added: “I don’t know many companies who are comfortable with saying I don't know. A publicly traded company that answers a question ‘I don’t know,’ exposes themselves to objections from shareholders and NGOs. They will say, 'You are a publicly traded company, you have an obligation to know if your gold comes from the bad guys.'”

Another important aspect of the Dodd-Frank Act, which can affect the markets of gold and silver, is associated with the ban it introduced on OTC trade in these metals.

While federal agencies are hesitant treading water in developing the Dodd-Frank rules, the OECD launched an initiative to "bring this chaos in order" and developed a guidance for public companies to carry out due diligence in respect of their commodity chains. The guidance explains how all involved - from local exporters and mineral processors to the manufacturing and brand-name companies that use these minerals in their products - can identify and better manage risks throughout the supply chain, Stephen P. Groff comments.

The guidance issued by the OECD also seeks to avoid boycotting of mining in the relevant African countries, whose economies are largely based on this particular industry. The Mining Weekly reported that, Dodd-Frank’s wide scope has resulted in global electronics companies like Apple, Intel and Motorola deciding to avoid the use of African gold altogether. This threatens the Congo and other African countries to render thousands of local residents jobless also causing a general deterioration of economic conditions which is an entirely opposite effect compared to what was the hope of the Dodd-Frank law makers.

A similar initiative was launched by the World Gold Council which developed standards for the production of "conflict-free gold." In this way international organizations demonstrate their proactive involvement in establishing a transparent and "bloodless" gold mining.

Olga Patseva, Editor in Chief of the American Bureau, Rough&Polished