Why Is the Scrutiny of Supply Chain Vendors So Varied? Companies That Use Conflict Minerals Face Reporting Requirements to Ensure They Aren't Helping to Fund Violence and Human Rights Abuse, but Retailers of Imported Cheap Clothing Face No Mandate to Determine That Their Products Are Manufactured under Safe Conditions

By Verschoor, Curtis C. | Strategic Finance, June 2013 | Go to article overview
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Why Is the Scrutiny of Supply Chain Vendors So Varied? Companies That Use Conflict Minerals Face Reporting Requirements to Ensure They Aren't Helping to Fund Violence and Human Rights Abuse, but Retailers of Imported Cheap Clothing Face No Mandate to Determine That Their Products Are Manufactured under Safe Conditions


Verschoor, Curtis C., Strategic Finance


The collapse of the factory in TDhaka, Bangladesh, that killed more than 1,100 workers is just the latest tragedy connected to Asian clothing and footwear manufacturers that employ sweatshop working conditions. Five months earlier, a fire in a garment factory in Dhaka killed more than 100 people, and another recent factory fire there led to the death of eight people. In September 2012, a fire in a clothing factory making cheap jeans in Karachi, Pakistan, killed 300 workers. While some companies have responded to the building collapse by vowing to end production in Bangladesh, the consequences of extreme human rights violations have faced no Congressional mandate for corrective actions.

Since the elimination of import quotas from developing countries some eight years ago, importers and retailers have been free to buy from the cheapest supplier in any country. The claims of international clothing brands of success in self-regulation, mainly through semi-independent factory inspections to ensure worker safety in developing countries, appear to be vastly overstated.

California is evidently the only state to enact a Transparency in Supply Chains Act. Under this law, "Every retail seller and manufacturer doing business in this state and having annual worldwide gross receipts that exceed $100 million shall disclose ... its efforts to eradicate slavery and human trafficking from its direct supply chain for tangible goods offered for sale." The threshold for what constitutes "doing business" is rather low, and the disclosure must be posted on the company's website.

In contrast to the garment industry, an area that has received considerable Congressional attention is conflict mineral mining in Africa, which addresses minerals being mined in abusive conditions and to finance conflict. Congress has set forth elaborate and costly reporting and auditing requirements for U.S. publicly traded companies. The objective is humanitarian--to stamp out the financing of violent, armed groups reigning over the eastern Democratic Republic of the Congo (DRC) that particularly focus on sexual- and gender-based violence. The provisions were added to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and seem to have nothing to do with the main objectives of the Act.

Section 1502 of the Dodd-Frank law mandates the Securities & Ex-change Commission (SEC) to en-act rules establishing a Conflict Minerals Statutory Provision (CMSP). This requires public companies to submit a Conflict Minerals Report (CMR) on how they have provided due diligence in regard to the source and chain of custody of conflict minerals. The CMR must include an audit by an independent auditor using Generally Accepted Government Auditing Standards (GAGAS) set forth by the U.S. Government Account-ability Office (GAO). All of these extensive requirements seem far removed from the SEC's mission "to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."

The 356-page SEC final rule, which implements Section 1502, notes that the "exploitation and trade of conflict minerals by armed groups [in the DRC and adjoining countries] is helping to finance the conflict and that the emergency humanitarian crisis in the region warrants the disclosure requirements established" by the new section. Because they were intended as a temporary measure, the President may terminate the CMSP requirements when the armed groups cease to be involved with conflict minerals operations. The final rule also states that Congress chose the disclosure requirements of the securities laws to both motivate greater due diligence on conflict mineral supply chains and achieve greater public awareness of where companies' raw materials are being sourced.

The DRC conflict has been brought up repeatedly in Congress for a number of years. An indication of the foreign policy emphasis of the provision is a requirement that mandates the submission of an assessment of how effective the CMSP was in promoting peace and security in the DRC, starting two years after the Act was implemented and annually thereafter.

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Why Is the Scrutiny of Supply Chain Vendors So Varied? Companies That Use Conflict Minerals Face Reporting Requirements to Ensure They Aren't Helping to Fund Violence and Human Rights Abuse, but Retailers of Imported Cheap Clothing Face No Mandate to Determine That Their Products Are Manufactured under Safe Conditions
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