What’s in your smartphone?

131023_gold_mining_congo_ap_605.jpg

Arming militias in a war-torn region of Africa? There’s an app for that.

By now, just about everyone has heard of blood diamonds, but you may not know their close cousins: “conflict minerals.” They include metals such as gold, tantalum, tungsten and tin, used to fuel your smartphone’s vibration mode or help maintain your camera’s battery life. In fact, they exist in just about every computer or electronic gadget you own.

They are heavily sourced from the Democratic Republic of the Congo, where warlords control mines and smuggling routes, profiting to the tune of more than $185 million annually by terrorizing locals into extracting the metals for little or no pay. Human rights groups report that more than 5 million Congolese have been killed by the militias, which, in addition to mining, force children to serve as soldiers and sexual slaves. Once the ill-gotten metals are mixed in smelters, it is impossible to trace to their source.

“The direct connection between our consumer appetites and violence in eastern Congo is a result of this: your cell phone,” said John Prendergast, holding up his own smart device. Prendergast is co-founder of the Enough Project, a humanitarian organization that has studied the sources and use of conflict minerals.

However, as the United States, the European Union and other governments take aim at conflict minerals with new regulations, manufacturers are battling humanitarian groups over just how much responsibility the companies will bear for keeping the metals out of their products. The business groups are pushing for wiggle room from coming regulations that might work to force changes in the supply chain.

Starting May 31, publicly traded companies will be required under a new Securities and Exchange Commission rule to disclose whether the metals in their products are “conflict free.” The new requirements stem from the 2010 Dodd-Frank Wall Street reform law and their enforcement powers from the 1934 law that created the SEC. Failure to comply could expose companies to lawsuits from shareholders if negative publicity over the use of the minerals causes consumers to boycott products and stock values to plummet.

The U.S. Chamber of Commerce, the National Association of Manufacturers and the Business Roundtable have joined forces to appeal a ruling by the U.S. District Court in Washington against their bid to block the law’s implementation. A decision by the U.S. Circuit Court of Appeals in the District of Columbia, could come in early 2014.

In their appeal, the business groups argue that the law violates their First Amendment rights because it compels speech, forcing them to post information on the Web. Further, it’s all but impossible to track the sources of minerals before they reach choke points like smelters, they say. They argue that companies whose products contain only tiny amounts of the minerals, such as diapers and surgical gloves, shouldn’t be held to the same strict standards as manufacturers that use more of the materials.

“You’re talking about a supplier of a supplier of a supplier,” said Tom Quaadman, vice president of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness. “If you’re a big manufacturer, you’re being held responsible for everything down the line. There’s no way that a company could actually come up with that information.”

“An airplane can have 300,000 different parts,” Quaadman adds. “Think of how many different suppliers supply 300,000 parts.”

Businesses don’t brush off the importance of ensuring that their purchases don’t fund Congolese militias, Quaadman says. But they argue that they’re being put in a Whac-A-Mole situation: Cut off one source of funding and the militants will just find another. That’s a problem they say the State Department, rather than the SEC, is best suited to address.

Simultaneously, lobbyists for sectors as diverse as technology, aerospace and jewelry are begging Congress to ease the rules, and as the European Union considers an even more stringent law, they are urging U.S. negotiators to push for more-relaxed standards in trans-Atlantic trade talks.

The Chamber is “talking to people on the Hill about potential changes” that would make the SEC’s rule easier for companies to stomach, Quaadman says. Its proposals include carving out a “de minimis” exemption for companies that use minuscule amounts of the minerals and providing clearer guidance on a company’s due diligence obligations.

The consideration of Dodd-Frank-style laws by the United States’ neighbors to the north and across the Atlantic also has drawn the business groups’ attention. Canada is in the early stages of drafting a proposal, while the EU is expected to make a decision within weeks or months on its own regulation. Whether the EU rule will be weaker, similar or even stricter than the U.S. rule — for example, by expanding compliance to include major European retailers — remains an open question.

European Trade Commissioner Karel De Gucht said last month that he wants to be sure any EU policy builds on the U.S. mandate and encourages broader action. However, in recent days, EU trade officials have also begun considering a less stringent proposal that would apply only to European-owned metal processors, a lobbyist close to the discussions said. That proposal would exempt most of Germany’s manufacturing companies, which largely import their minerals from non-European processors.

U.S. businesses worry EU officials will lean toward imposing the stricter policy, which has 29 industry associations urging U.S. officials to push the EU for a less stringent approach during talks over a massive free-trade deal dubbed the Transatlantic Trade and Investment Partnership. Earlier this month, the groups sent a letter to Secretary of State John Kerry, Commerce Secretary Penny Pritzker and U.S. Trade Representative Michael Froman, asking them to make sure the EU government does not issue an even broader disclosure regulation than the SEC’s under Dodd-Frank.

Meanwhile, with the SEC’s regulatory deadline for company disclosures on the sources of their mineral components coming in the spring, many companies are struggling to trace their supply chains. The regulation does grant a two-year grace period during which companies can cite their sources as “undetermined” rather than conflict-free, which many firms will take advantage of, predicts Michael Littenberg, a partner at Schulte Roth & Zabel, a New York consulting firm with a long list of clients affected by the new regulation.

But the consumer electronics industry seems to be adapting. The Enough Project gives Intel, Hewlett-Packard, Motorola and Apple particularly high marks for vetting the sources of their mineral components. HTC, Canon and Nikon have made less progress, the watchdog group says.

As a result of the steps being taken, militias have seen their prices for the minerals drop by more than 55 percent, reports Sasha Lezhnev, Enough’s senior policy analyst.

Still, other industries are dragging their feet, especially aerospace, which has leaders on the business groups spearheading the U.S. litigation, and jewelers, according to the Enough Project. The worst offender, the group says, is Japanese video game maker Nintendo, which has taken no clear steps to keep conflict minerals out of its components. Because Nintendo is traded in Tokyo and Frankfurt, Germany, it isn’t subject to the SEC regulations and doesn’t have the same legal concerns as companies in the United States — at least until any EU regulation goes into effect.

“It’s not so much about what Nintendo is doing, it’s about what Nintendo isn’t doing,” Lezhnev said. He cites a long list of tech industry-driven partnerships to make sure conflict minerals aren’t being used, noting that Nintendo isn’t participating in any of them.

Nintendo of America counters that it takes “very seriously” its role in blocking the use of conflict minerals, saying its procurement guidelines bar its production partners from using them, as do its lead partners.

“We ask our suppliers to disclose both their policy on conflict minerals and procedures used to trace materials in their supply chain,” the company said in a written statement. “We continually monitor the progress made by our suppliers and visit the facilities of our production partners for on-site inspections to enforce our policies and provide feedback to ensure that the Nintendo CSR Procurement Guidelines are being followed.”

For now, the greatest consequence for foreign companies that don’t take measures to rid their products of conflict minerals could come in the form of public relations blows. To bring attention to Nintendo, for example, human rights advocates have donned Mario and Luigi costumes and protested outside the company’s flagship Rockefeller Center store.

“You’re probably not going to sell fewer consoles tomorrow if you’re at the bottom of the food chain on conflict minerals, but I think companies want to protect their brand,” Lezhnev said. “If your brand is associated with rape and murder in Congo, that’s not something I’d think that you’d want to have continued.”