Dodd-Frank’s Collateral Damage in Africa

Reminiscent of the racially discriminatory practice of “redlining” neighborhoods, a little-known measure in the 2010 Dodd-Frank law, designed to stop the trafficking of “conflict minerals” from the Democratic Republic of Congo, is not achieving that goal. The measure also discriminates against the DRC’s regional neighbors and is hurting U.S. companies and consumers.

The minerals tantalite, tin, tungsten and gold reportedly are trafficked by armed groups. The Dodd-Frank measure calls on publicly traded U.S. companies who purchase these minerals from the DRC to voluntarily disclose to the Securities and Exchange Commission the specific sourcing of the four minerals. But the provision also targets Angola, Burundi, the Central African Republic, the Republic of Congo, Rwanda, Tanzania, South Sudan, Uganda and Zambia as potential sources of the minerals for no other reason than their shared border with the DRC.

In addition to being discriminatory, the Dodd-Frank measure has a highly debatable effect on the flow of conflict minerals, given that private U.S. companies and foreign firms and their subsidiaries are not covered by the provision. Indeed, the law hands those companies a distinct competitive advantage over public companies in the U.S.

The chain reaction of unintended results does not stop there.

U.S. companies subject to Dodd-Frank already are saddled with heavy compliance requirements governing complex anti-corruption and export-controls risks. Many of the companies are voting with their feet, leading to a de facto boycott of mining in 10 African countries by some of the world’s largest consumer-goods companies. African governments, eager to attract investment in their mineral sectors and integrate their primary products into global supply chains, now turn instead to Asian partners.

The perverse result is that as America’s biggest competitors increasingly source these minerals in Africa, global traders and producers, especially in China and Russia, are buying the raw minerals, turning them into usable components and reselling them at a premium to the affected American companies. This not only effectively nullifies the intended effect of the Dodd-Frank provision, it amounts to a big income loss for African producers as well as to U.S. companies operating in the hypercompetitive market of durable consumer goods. Apple and Sony Ericsson fall under the provision; foreign-owned Samsung and Nintendo do not. Motorola and RIM BlackBerry fall under the provision; foreign-owned Huawei and ZTE do not. Estée Lauder and Unilever fall under the provision; L’Oréal and Shiseido do not.

Meanwhile, the violence in the DRC continues.

Complicating the matter further is the failure, thus far, of the Commerce Department to publish a list, as mandated under Dodd-Frank, of all known conflict-mineral-processing facilities globally that are financing armed militias. Despite the release earlier this month of a list of more than 400 sites, the department admitted that it “does not have the ability to distinguish” which facilities are tainted and which are not. This puts the onus on U.S. companies to prove that their products do not contain conflict minerals, without giving them the tools to do so. Absent such a credible list, all of the producing mines in the DRC and its neighboring countries are presumed guilty, with no way to prove their innocence.

Congress needs to remove the Dodd-Frank “guilt by geography” provision and level the playing field for U.S. companies engaged in sourcing legitimately procured minerals from the DRC’s neighbors.

First, for the Dodd-Frank provision to be effective, the commerce secretary must provide a global list that clearly identifies proven conflict-mineral-processing facilities. Second, the import into or export from the U.S. of products containing conflict minerals originating from listed processors should be expressly prohibited—with enforcement authority resting with U.S. border officials and the Commerce Department’s Bureau of Industry and Security. Ironically, Dodd-Frank does not prohibit the importation or use of conflict minerals; it simply requires the disclosure of their use. Therefore, products made in known conflict-mineral processing facilities should be designated as prohibited entities by the Treasury’s Office of Foreign Assets Control. New SEC guidelines could, then, be simple and straightforward: U.S companies cannot do business with any entity on the prohibited list.

Such measures would bring clarity and fairness while also providing a far more effective deterrent to the bad actors in the DRC. They would also allow the DRC’s neighbors to confidently develop their conflict-free mining sectors, without fear of being tarred with the same brush as their troubled neighbor.

Ms. Whitaker, president and CEO of the Whitaker Group, served as the first-ever assistant U.S. trade representative for Africa, in the administrations of Presidents Bill Clinton and George W. Bush.