How to comply with nearly the impossible, and who to hire to help do it?
A new U.S. law requires public companies that make personal electronic devices to audit the materials used in their products and make these findings public. This supply-chain challenge presents a daunting task and hopefully a human rights mechanism to encourage the private sector to do the right thing.
Most of the readers of this website know that many of the metals and minerals found in today’s personal electronics (e.g. smart phones, mp3 players) have the strong possibility of being extracted from Democratic Republic of the Congo (DRC) and/or its adjoining countries. For years, bloody conflicts and intra-state wars have been waged in this region, in fact the United Nations’ largest peacekeeping operation (18,000 personnel) is in the DRC, likely fueled by mining profits. Advocacy groups and both governmental and NGO human rights organizations have been trying for years to develop a foreign policy to end these conflicts and defund the warlords. However, with India, China, EU and other countries involved in exporting raw materials from the region, the right mechanism was hard to find.
However, on July 21st, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, otherwise referred to on TV as the financial reform bill. Deep inside on page 851, in section 1,502, the document reads, It is the …”Sense of Congress that the exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence, and contributing to an humanitarian situation therein…”. The document then goes on to require the companies to…”exercise due diligence on the source and chain of custody of such minerals, which measures shall include an independent private sector audit of such report submitted through the [sic. Securities and Exchange] Commission that is conducted in accordance with standards established by the Comptroller General of the United States, in accordance with rules promulgated by the Commission, in consultation with the Secretary of State.”
Very wordy, but these few paragraphs will force many “manufacturers to overhaul checks on their supply chain in an attempt to identify any “conflict minerals” that can be traced back to the Democratic Republic of the Congo or adjoining countries”, as Jean Eaglesham and Jeremy Lemer of the Financial Times reported earlier this week.
The law will affect thousands of companies. The Congo region is a widely used source of important industrial metals and minerals such as tantalum, copper, germanium, gold, manganese and cobalt. Tantalum, for example, is used in very small amounts in crucial electronic components such as capacitors, which find their way into everything from cars, to personal computers and mobile phones.
Regardless of the good intentions and valid policy goals of the law, the challenge still remains to verifiably trace the origins of these ingredients across oceans, refineries, shipping companies and through jungles to dangerous mining regions
Who can do this work? Supply-chain audit experts probably have not tackled a problem as complicated and dangerous as this one before. There also is a chance though, that the makers will simply disclose that their products contain materials from the Congo region, address any public relations concerns that arise and move on. The next implementation steps are likely to be costly and require very specialized firms to do the work. When the law goes into effect in 2012 it will be interesting to see the findings and learn who and how they produced the reports.
When currency is both at once worthless and treasured
On the 105 year-old bridge that separates Zimbabwe from Zambia, over the mist of Victoria Falls, a curious currency exchange is turning heads and delivering 1,000%+ returns.
During Zimbabwe's period of hyper-inflation, people had to carry bundles of currency with them to purchase goods.
To set the scene – in early 2009, after nearly a decade of runaway hyperinflation, Zimbabwe’s bank note denominations climbed sky high to include a 100 trillion dollar note. Since these bills were only worth about .33¢ in US Dollars, people regularly pulled wagons, suitcases and large bags of bills with them when they went to markets, restaurants and banks. Perhaps finally admitting the futile battle to save their national currency, the country’s Finance Minister announced that Zimbabweans were permitted to use other, more stable currencies (e.g. Sterling, Euro, South African Rand and the United States Dollar) to do business. As of April 12 2009, the Zimbabwe currency was effectively worthless.
President Robert Mugabe, despite ruling a country with vast potential in many business sectors, had run Zimbabwe into the ground. As the result of his devastating economic and social policies, Mugabe led Zimbabwe into the record books as Steve H. Hanke, Professor of Applied Economics at Johns Hopkins University and Senior Fellow at The Cato Institute writes, laying claim to second place in the world hyperinflation record books. (see chart)
Despite being monetarily worthless for over a year, Zimbabwe’s bank notes have found new value on the border being traded for their novelty value and sold to tourists. Asking price for the rarest bill, the $100 trillion dollar note, is $20 USD. Subsequent haggling and a bit of patience can bring the price lower to $5 USD. Still this is 15 times its last exchange value and Zimbabwean men crowd the border-crossing zone around Victoria Falls hoping to convert their worthless paper into foreign currency. The US Dollar is the preferred trade medium, but South African rand and Euro are also gladly accepted.
Click to view larger photo
Above all the other trinkets being hawked in the craft stalls and by the shifty street vendors who make you constantly check your pockets; the obsolete bank notes elicit the most interest and stir huddled conversations in Shona (the local language) when a buy offer is made. The selling price is collectively discussed by the Zimbabwe sellers, taking market factors like the nationality of the buyer, time of day, high-tourism season and amount of rare bills still left in their pockets. (10, 20 and 50 billion dollar bills are more common) The buyer has the upper hand, but the rarity of the top bills and the limited face time between the sellers and the tourists, who understandably sequester themselves inside Victoria Falls’ 4 star resorts, increases the pressure to cut a deal.
Zimbabwe border on bridge over Victoria Falls
While this exchange market won’t budge Zimbabwe’s GDP, it does provide a necessary source of foreign currency for otherwise unemployed locals. With the average annual income per person below $400 USD a year (IMF, World Economic Report, 4/2010) entrepreneurial currency traders can manage to earn above average incomes around $50 a week.
I could not resist the opportunity myself and bought 100,350,000,000,000 Zimbabwe dollars from two men for $10.00 USD. Its good to be a trillionaire.
New Regulation for a $300 Trillion Market
New York – The Council on Foreign Relations hosted Gary Gensler, Chairman of the Commodities Futures Trading Commission this morning for a frank conversation on regulating the OTC derivatives markets. These transactions are currently unregulated and according to Gensler account for almost $300 Trillion in notional principle. See video report below.
