My friend Estelle Levin recently contributed to an excellent article entitled “Revisiting the Conflict Minerals Rule”. In it, the authors discuss the impacts of Dodd-Frank, which require public companies to report their sourcing of conflict minerals — tin, tantalum, tungsten and gold (3TG) — from the DRC and all adjoining countries.
Frankly I’m still trying to wrap my head around the entire article, but am finding it enlightening as to how good intentions can have unintentionally harmful and devastating impacts while pursuing a top-down “conflict-free” sourcing policy, whereas risk-adverse companies have decided to avoid Congo or even Africa altogether, reducing the demand and therefore price of goods to the most vulnerable producers in the region.
The critical challenge of the Conflict Minerals Rules is the inherent tension between forcing risk-averse companies to make disclosures that could invite public scrutiny and loss of shareholder value without having those companies eliminate the DRC and adjoining countries from their conflict mineral supply chains. In fact, the humanitarian goals of the Conflict Minerals Rule can only be accomplished if legitimate buyers remain engaged in the region. This means that the artisanal and small-scale mining and trading industries1—which are economically critical to the region—must in particular be supported to improve their commercial viability, legitimacy and professionalism, and to ensure they have the capacity to identify and manage the risks that determine their ability to deliver “conflict-free” minerals to the market. If the adoption of these rules produces the opposite outcome—further marginalization and criminalization of these miners—then it is failing to meet its humanitarian goal.
Although artisanal mining is a critical industry in the African Great Lakes region, that region is not necessarily a critical supply for the covered conflict minerals. 5 At least 2 million artisanal miners extract conflict minerals in the affected region, making it a vital contributor to rural economies in the DRC and adjoining countries. However, the relative availability of the covered minerals in other regions around the world combined with the challenges and expense of conducting due diligence and establishing traceability in the DRC region make it attractive for mineral supply chains to pivot away from the DRC and adjoining countries. Even where the DRC and its adjoining countries may be a more attractive source from a pricing perspective, due diligence costs could make the region a more expensive source as compared to lower risk areas.
Marange, Under-Invoicing & Transfer Pricing a/k/a Resource Theft
Marange, Zimbabwe has been back in the news again lately, but this time because they are in the messy process of merging the 7? companies mining in the Marange diamonds fields in to one company, coincidentally and sadly, at the same time that the alluvial diamonds appear to have finally run out. Mbada Diamonds has recently started mining conglomerate diamonds, but these efforts appear to be in vain, as the diamonds are “not commercially viable”, meaning that the costs of bringing them out of the ground (kimberlite mining is exceptionally capital intensive, it seems) is higher than the costs the diamonds would fetch on the market.
“Capital Flight, Natural Resources and Institutions in Zimbabwe” [investigates] the link between capital flight, natural resources and institutions in Zimbabwe”, and “[explores the] mechanism of capital flight by estimating trade misinvoicing.”
This in addition to Kimberley’s Illicit Process, and All That Glitters discuss the problem of under-invoicing and transfer pricing of natural resources from their countries of origin … or as we could also call it: theft … which is generally a shitty thing to do to revenue-starved countries with nothing but natural resources.
Let’s assume that I have a parcel of diamonds that I estimate are worth $10MM. Nobody likes paying taxes, but paying taxes on $10MM really hurts the balance sheets. So how about we say that the diamonds are instead worth $6.5MM… I pay taxes on that reduced amount, give a kickback to the corrupt officials that make this deal happen, and then forward the diamonds on to Dubai where they magically increase in value by over 50%.Read More