While it will not become illegal for the affected companies to use minerals which perpetuate conflict in DRC, the reputational damage of making such a disclosure in annual reports due from May 31, 2014, should act as a significant deterrent. As a result, the transparency requirements will cascade down supply chains from US-listed companies to suppliers across the world.
In a best case scenario, the new regulatory requirements will boost business and consumer awareness, and thus spur an increased commitment from US-listed companies and their supply-chain partners to source minerals from conflict-affected countries in a responsible manner. A number of market leaders in supply-chain traceability - such as Apple, HP and Intel - have put in place policies to reduce their exposure to conflict minerals. These measures include mapping vast supply chains, leading, in some cases, to the identification of hundreds of smelters used to process minerals.
The smelter tier is a logical level of depth for traceability in the supply chains of multinational companies. Tracing unrefined minerals further upstream may not be feasible. Nevertheless, even where companies have identified all the smelters in their supply chain, auditing refineries using minerals from DRC and verifying that they are conflict-free remains a challenging proposition. Indeed, the practicalities of sending auditors to conflict-ridden North and South Kivu is only one of a variety of obstacles to reliable certification.
Under Section 1502, US-listed companies are obliged to carry out a 'reasonable' inquiry into which country minerals in their supply chain are sourced from. However, the requirements for this test have not been clearly defined by the SEC, creating uncertainty for business. Indeed, greater clarity may only be established once a legal precedent has been set.
For critics, the cost of compliance will seriously undermine the competitiveness of affected companies during a period of weak economic growth in the US. Indeed, the SEC estimates that the initial cost of compliance will be between $3bn and $4bn, while the annual cost of compliance thereafter will be between $207m and $609m.
Moreover, some industry bodies have put the estimated cost of initial compliance much higher at $16bn. Given these costs and a perception in some quarters that the rules are unworkable, legal challenges from industry bodies are on the horizon, creating additional uncertainty for business.
The new regulations could also lead to higher prices for minerals such as tantalum, given that DRC is the source of around a fifth of global supplies of the element. Furthermore, artisanal miners in eastern DRC and the nine states which neighbour the country are likely to feel the effects of falling Western demand as medium-sized companies which are incapable of - or unwilling to - put in place supply-chain traceability policies and risk-averse investors withdraw from supply chains potentially linking them to conflict and human rights abuses.
While there is a clear risk that Section 1502 will result in a de facto embargo on sourcing certain minerals from DRC and its neighbours, there is still reason to be optimistic that the legislation will contribute to the noble Congressional objective of promoting peace and security in eastern DRC. However, the positive effects of the Act will only be felt in the long-term.
Robert Borthwick and James Warwick are analysts at Maplecroft, the global risk advisory firm