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Legislative Environment
Global industry acts to shield gold’s reputation from effects of conflict
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16th November 2012
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It is estimated that as many as five-million people lost their lives in the civil war that convulsed the Democratic Republic of Congo (DRC) from 1994 to 2003. Although most of the country then achieved peace, conflict continued in the eastern part of the country, where what has been described by the British Broadcasting Corporation as a “proxy war between Rwanda and the Kinshasa (DRC)government” raged until the end of 2008.

However, war between national government forces and rebels continues to this day, and the settlement between Rwanda and the DRC has collapsed, leading to accusations – supported by a report by a United Nations (UN) panel – that Rwanda and Uganda are supporting a new rebel group in the eastern DRC. According to the UN, the various rebel groups fund themselves through extortion rackets centred on cattle and charcoal, and through the illegal export of valuable minerals. Human Rights Watch has reported that they perpetrate widespread abuses and crimes, including murder, rape and forced labour. This situation has created widespread international concern.

In August, the US Securities and Exchange Commission (SEC) adopted a 356-page-long ‘final rule’ which makes it compulsory for companies to report on their use of minerals from the DRC and adjacent countries. The SEC was required to do this in accordance with Section 1502 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

“The statute explains that the exploitation and trade of conflict minerals by armed groups is helping to finance conflict in the region and that the emergency humanitarian crisis there warrants these disclosure requirements,” said SEC Chairman Mary Schapiro, opening the meeting that adopted the final rule. “As reflected in Section 1502 of the Act, [the US] Congress intended to further the human- itarian goal of ending the extremely violent conflict in the DRC, which has been partially financed by conflict minerals originating in the DRC. Congress chose to use the securities laws disclosure requirements to accomplish its goal.” The main minerals and metals covered by the Act and the final rule are gold, tantalum, tin and tungsten.

The interlude between the passing of the Act and the release of the final rule was due to the SEC’s canvassing of comments and suggestions from all those interested in the issue, including companies, industry asso- ciations, nongovernmental organisations (NGOs), legal associations, auditors, professional associations, and US and foreign government officials. These opinions were delivered in writing and tabled at meetings. “We have received significant public input on this rule-making,” said Schapiro. “In response, we incorporated many changes from the proposal that we designed to address concerns about the costs . . . The rules . . . use the same process as proposed, but many of the mechanisms within the process have been modified in response to comments. As proposed, issuers that are required to file reports with us will need to determine if they manufacture or contract to manufacture products that contain conflict minerals that are necessary to the production or functionality of the product.” (Issuers are those that issue securities – stocks, bonds and/or derivatives; the final rule applies to all those issuers who have to file reports with the SEC.)

It should be noted that, in late October, the US Chamber of Commerce and the National Association of Manufacturers launched a lawsuit against the SEC in the US Court of Appeals in Washington DC, calling for the modification or partial or total setting aside of Section 1502. The plaintiffs, while recognising the good intentions of the section, are arguing that the “final conflict mineral rule imposes an unworkable, overly broad and burdensome system that will undermine jobs and growth and may not achieve Congress’s overall objectives”.

Meanwhile, in 2011, the Organisation for Economic Cooperation and Development (OECD), which embraces 34 mostly developed countries, issued its Due Diligence Guide for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.
Unlike the US measures, the OECD did not limit its concerns to one region of the world, although the initial guidance focused on tantalum, tin and tungsten.

In July, the OECD issued a supplement which covered gold. “This supplement provides specific guidance on supply chain due diligence of gold from conflict-affected and high-risk areas according to the different positions of companies in the gold supply chain,” it says in its introduction. “This supplement focuses on the steps companies should take to avoid contributing to conflict and to serious abuses of human rights in the supply chain of gold potentially sourced from conflict-affected and high-risk areas.”

The Gold Standard

One of those that submitted comments and suggestions to the SEC on this issue was the World Gold Council (WGC). This body has 23 members that, together, account for more than 60% of the world’s newly mined corporate gold production. In a statement issued in March 2011, the WGC said that it was “fully supportive of the humanitarian intentions underpinning the Act of preventing gold or other minerals from the Democratic Republic of Congo (DRC) being misused to fund or otherwise benefit armed groups and of rooting out ‘conflict minerals’ from the supply chain” but “expressed concerns about aspects of the draft regulations” and sub- mitted documents urging improvements in the proposed final rule.

A particular concern was “the potential to stigmatise responsibly produced African gold, and the economic impact on Tanzania and Ghana”. As WGC CEO Aram Shishmanian later pointed out, “[r]esponsibly undertaken, mining and its related enterprises play a crucial role in contributing to sustainable development and alleviating poverty in many of the world’s developing countries. The direct economic contribution of professional gold mining creates new possibilities for these nations, their communities and individuals.”

Given the increased scrutiny that the gold mining industry has been subjected to, it is fortunate that the WGC had already been working on its own approach to these issues. Although the Council estimates that less than 1% of newly mined gold is used to finance unlawful conflicts (DRC gold production for 2010 is believed to have been 16 t, or 0.6% of newly mined gold for that year, of which almost all was artisanal and almost nothing entered the formal gold supply chain), it recog- nised that action had to be taken to make it harder to use the precious metal for such ends.

In 2009, the body set out to develop a standard to ensure the supply of nonconflict gold. In June 2011, a draft standard was issued, and comments and suggestions sought from a wide range of stakeholders and interested parties, and thereafter these recom-mendations were incorporated into the standard. Finally, last month, this effort bore fruit with the release of the definitive WGC Conflict-Free Gold Standard, “an industry-led approach to combat the potential misuse of mined gold to fund armed conflict”, in the words of the accompanying press release. This standard is designed to be complementary to the OECD Due Diligence Guide. “It’s global in approach,” highlighted WGC director: responsible gold Terry Heymann. “Con-formance with the standard is subject to rigorous independent scrutiny and it really is an example of industry leadership in tackling concerns around the misuse of gold and that gold being used to fuel unlawful armed conflict.”

“Over the last few years there has been increasing interest in the origin of raw minerals – from gold to groceries [sic],” he added. “And this is the opportunity for the gold mining industry to very clearly demonstrate that its gold has been produced in a way that isn’t fuelling armed conflict. We think it is very important for customers, for investors, for communities around the mine site and globally, to have confidence in the gold [sic] and to know that the companies that are producing that gold are committed to not fuelling unlawful armed conflict.”

That it took some time to develop and produce the final document is a reflection of the extremely complex nature of the gold supply chain. This was, as Shishmanian highlighted, caused by many things, including “gold’s role as a parallel currency, high levels of recycling amounting to over 35% of annual supply, the significant production of newly mined gold from artisanal sources which is [sic] often informal and sometimes illegal”. The WGC says that 10% to 15% of global gold production originates in artisanal and small-scale oper- ations. Further, gold is rarely sold directly by producers to consumers, but usually passes through a series of transactions, involving refiners, bullion banks, manufacturers and retailers. On top of all this, the fact that gold is easy to melt and that refiners usually mix gold from various sources to create their products means that, once it has gone through a refining process, the metal cannot be traced to its points of origin.

The recently released definitive standard is composed of five sections, designated Parts A to E. Parts A to D are assessments, Part A being the conflict assessment, Part B the company assessment, Part C the commodity assessment and Part D the external sources of gold assessment, while Part E is a statement of conformance documentation.

Part A requires the gold company to use external criteria to determine whether the country or area it is operating in should be viewed as conflict-affected or high risk. These criteria include determinations by the UN Security Council and its subordinate agencies, the African Union, the European Union and the Organisation of American States, as well as internationally respected national bodies and NGOs.

Should the country or area be conflict-affected or high risk, then Part B assesses whether or not the company has the correct management systems to meet its corporate obligations to avoid fuelling and funding the conflict and any associated human rights violations. Part C considers, in countries and areas that are conflict-affected or high risk, who handles the gold and how it is handled, and if this could contribute to the conflict. Part D covers the case when a company or operation obtains gold, and checks the procedures that are required to guarantee proper due diligence is carried out on this gold to screen out any metal connected with conflict. Part E demonstrates the company’s conformance with Parts A to D and, when necessary, provides such assurance to the next participant in the supply chain.

“Each section sets out the key decisions that will determine whether the gold produced by the company is in conformance with the Standard,” states the WGC in its introductory brochure to the standard. “Criteria are set out together with publicly available reference points against which any decision may be tested and a process by which the decision can be made to assess conformance.” Members of the WGC, and other businesses applying the standard, will have to make public statements regarding their compliance, or noncom- pliance, with it. These statements could be made in company reports or on company websites, and their compliance with the standard will be externally checked.

Golden Future?

Even before the release of its final version, the standard had been widely welcomed, and not just by companies in the gold sector. Back in May, US ambassador Barrie Walkley, Washington’s special adviser for the African Great Lakes region, commented: “[The] government of the US supports the Conflict-Free Gold Standard. I think that it can serve as a model for industries outside the gold production industry . . . [for] other mining industries. It can show what can be done when the will is there.”

The WGC standard has also been welcomed by the OECD. “These two standards – the OECD Gold Supplement and the World Gold Council’s standards – should go hand in hand,” said Dr Lahra Liberti of the OECD’s Investment Division.

“This is the beginning of a global shift,” averred nongovernmental group Global Witness DRC conflict specialist Sophia Pickles. “You can see that the due diligence framework that the World Gold Council [standard] is based upon has got global consensus. Standards like these have potential to be a real turning point, as long as all the players in industry do their due diligence and check along their supply chain for the risks, then this could be the beginning of conflict-free trading across the world.”

“I think we’re on the cusp of something really, really good happening and I think we’re moving in the right direction,” asserted Fairtrade Foundation new products manager Gemma Cartwright. “The World Gold Council’s conflict-free gold standards are incredibly important,” argued Fund for Peace executive director Krista Hendry. “That industry has come together and created something that is voluntary but is also verifiable and will be audited is incredibly important.”

PricewaterhouseCoopers has, in a report on the WGC document, described it as “a significant development for the gold mining industry” and concluded: “[It] fulfils an important function. And it does so at the right time . . . conformance to the Conflict-Free Gold Standard is designed to take gold producers a long way towards operationalising the expectations of the OECD’s Gold Supplement and, by extension, provide supply chain information to users of gold who are required to comply with the SEC’s rule.”

Edited by: Martin Zhuwakinyu


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