The Dodd-Frank Act at 5: Examining progress and pushback

Birthdays are often cause for celebration, yet cheers for Tuesday’s fifth anniversary of the historic Dodd-Frank Act have been somewhat tempered and reserved.

Since officially being inked into U.S. law on July 21, 2010, as the most sweeping set of financial reforms since the Great Depression, the landmark bill’s efforts to promote good governance in developing countries have indeed contributed to considerable progress.

Its calls for greater transparency into the procurement of mining supplies have spawned robust partnerships between government and civil society to monitor industry value chains. And its intent to require extractive industry companies to publicly report their payments to foreign governments has set off a wave of transparency efforts around the world. Today more than 30 countries have similar laws on their books, including one that recently entered into force in Canada.

But Dodd-Frank has also encountered hefty pushback. To many proponents of financial transparency, Dodd-Frank’s five-year mark is a salient reminder of ongoing legal battles and a long road still ahead to achieve full openness and government accountability. Legislators now fear that the U.S. risks falling drastically behind the countries it helped inspire in global transparency efforts.

Of the thousands of pages of financial regulations that Dodd-Frank made law, two amendments stand out for their impact on governance issues in developing countries.

Amendment 1502 requires publicly listed U.S. companies to provide detailed reports on whether any so-called conflict minerals used for their core business originated from the Democratic Republic of the Congo or its neighboring countries. Conflict minerals refer to the “3Ts” of tin, tungsten and tantalum, and gold that are commonly — though not exclusively — exploited in Kinshasa and surrounding areas, whose illicit sales have historically financed conflict in the region.

A separate amendment, 1504, requires all publicly traded oil and mining companies to provide detailed disclosures of the payments they make to foreign governments relating to their operations.

The U.S. Securities and Exchange Commission was tasked with drafting the final rules for both amendments. The idea, of course, was to shine light on the often opaque ways that developing countries source and manage the natural resources that function as the lifeblood of their economies.

“Secrecy breeds corruption. Corruption will cause instability, violence and investors to lose,” Sen. Ben Cardin of Maryland, a co-sponsor of the 1504 amendment, told a congressional briefing last week. “You deal with corruption through transparency.”

In a way, the 1502 and 1504 amendments were slightly ahead of their time, foreshadowing the trend of socially responsible investing that is now taking place. According to the Forum for Sustainable and Responsible Investing, an association of investment firms whose members manage more than $2 trillion in assets, the volume of U.S.-based assets that are being managed under socially responsible investment strategies has increased 76 percent in the past two years. Investors want to know the complete, holistic picture of their investments, which supports transparency and in turn promotes responsible governance, Alya Kayal, the director of policy and programs for the Forum of Sustainable and Responsible Investing, told Devex.

Both amendments have a vast reach being rooted in U.S. law that far outpaces the voluntary disclosures that even the largest oil, mining, telecommunications and electronics companies would undertake otherwise.

The rule governing conflict minerals in particular has generated considerable traction.

At the time of Dodd-Frank’s passage a fledgling tracking process known as the iTSCi system developed by the international tin industry body ITRI to monitor the value chain of conflict minerals was just getting off the ground.

In large part due to the demand for end-user accountability that Dodd-Frank created, iTSCi has now morphed into the premier global standard for conflict mineral due diligence in Africa’s Great Lakes region.

The system employs a meticulous field process in which governments and nongovernmental organizations monitor supply routes, tag deliveries and constantly weigh packages to ensure supply chain integrity as minerals make their way from mines to global processing centers, which is supplemented by other types of due diligence and auditing.

Today, the iTSCi system is the principal internationally recognized process that accredits this upstream segment of the 3T minerals coming from the Great Lakes region as conflict-free.

Results on the ground are tangible. According to ITRI, an organization that represents the tin industry, approximately 1,300 mine sites have been incorporated into the iTSCi system in the Kinshasa, Burundi and Rwanda in the past five years, of which 800 are currently active. Last year approximately 1,600 metric tons of 3T minerals were produced on a monthly basis under the auspices of iTSCi. ITRI estimates that as of March 2015, 80,000 miners have participated in the program.

“Dodd-Frank has certainly been a driver,” Kay Nimmo of ITRI told Devex. “Without it, iTSCi would not have scaled up to the degree that it has.”

Yet for all of iTSCi’s progress, Dodd-Frank’s intended ambitions for conflict minerals transparency still remain a considerable ways off.

For one, there is no international standard to monitor and audit the origins of the fourth conflict mineral cited by the 1502 amendment — gold. The iTSCi system tracks tin, tantalum and tungsten, but gold remains completely unchecked.

Gold’s absence from monitoring and oversight is mainly due to its fungible nature. Whereas the 3Ts require processing and a chain of infrastructure to derive their value, gold is worth its weight, easily smuggled and extremely difficult to trace.

“Dodd-Frank has had negligible impact on gold mining and trade and conflict in the Great Lakes region,” international NGO Pact, an implementing partner for the iTSCi system, wrote in a recent report.

The iTSCi system also operates in just three of the 10 countries that Dodd-Frank requires companies to report on. The remaining seven — Angola, Central African Republic, the Republic of Congo, South Sudan, Tanzania, Uganda and Zambia — still remain untouched by similar monitoring and assessment.

“It is a bit of a mixed bag, there’s a huge task left to do,” Karen Hayes, director of Pact’s Mines to Markets program, told Devex.

It’s not just about ensuring greater transparency, which is critical for improved governance and accountability, but responsible business practices create an environment where local capacity can be improved and poverty can be reduced.

Scaling up and extending the iTSCi system to the rest of the countries would require significant additional funding, which is mainly provided by levies paid by exporting companies. But here lies a slippery slope, according to Pact. Costs should be enough to fund and scale the program, but not too high to render mineral exporters uncompetitive.

The cost of doing business is already hefty and was a source of initial friction between central African countries and the U.S. Currently the volumes of tin being exported from Africa’s Great Lakes region are just half of what they were in 2009 prior to Dodd-Frank, owing to the drop in demand from noncompliant countries. African governments said that rule caught them off guard and that the lack of prior consultation and few, if any, resources to cope with the demand shock, equated to a de facto embargo.

Yet, for all of its setbacks, Dodd-Frank 1502 has been officially in force since the SEC issued its final rules in August 2012.

The same cannot be said for the 1504 amendment, which is stuck at the center of lengthy litigation between industry and civil society. Now five years on, the SEC has yet to issue the final rules for how publicly traded oil and mining companies should disclose their payments to foreign governments. The SEC’s first attempt came in 2012, but the rules were tossed out shortly after a lawsuit by the American Petroleum Institute said they were too punitive and harmed industry competitiveness.

Among the main sticking points is the issue of whether companies should itemize payments to individual governments — taxes, royalties, signing bonuses and license fees — at the detailed project level rather than lump them into their general financial reporting.

Oil-rich Norway already requires as much. Its state-controlled producer, Statoil, for example, revealed last year that its payments to all levels of governments in Angola totaled nearly $3 billion.

Canadian and EU companies will begin reporting similar payment arrangements as early as next year. But without the all-important cover of final U.S. regulations, transparency advocates argue that a true global framework to promote responsible natural resource governance will continue to lack teeth.

The SEC has tentatively indicated that it will issue its next set of rules in spring 2016, but the commission is currently facing a lawsuit by advocacy group Oxfam America to expedite its timetable.

There is clearly the potential and need for more action, but for tens of thousands of miners, Dodd-Frank has ensured safer working conditions and hundreds of local businesses are meeting international standards and have become credible suppliers. And as these initial issues continue to be tackled, actors up and down that supply chain can use the infrastructure in place to address other important socio-economic challenges as well.

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