Cleaning up Gold: What is needed next after Dodd Frank
In September, a global coalition of NGOs amplified their calls for the European Union to implement binding requirements on EU-based companies to publically report on their efforts to ensure conflict minerals from the Great Lakes region of Africa do not enter their supply chains.
Adopting binding requirements would see the EU follow in the footsteps of the United States which adopted similar conflict minerals legislation in 2010. Section 1502 of the US Dodd-Frank Act requires US listed companies to report on their due diligence efforts with respect to gold and what is commonly referred to as the 3Ts (tin, tungsten and tantalum or coltan) that is mined in conflict-affected Democratic Republic of Congo.
Recently, this US legislation has been the subject of several opinion pieces expressing a variety of views regarding its progress and impact. Despite the naysayers, such initiatives are making a difference on the ground, but legislation alone will not solve the drivers behind insecurity and illicit networks that continue to destabilize much of central Africa.
First, a bit of context. Dodd-Frank has provided a much needed push for the implementation of regional policies aimed at improving governance in the mining sector. As far back as 2006, the member states of the International Conference on the Great Lakes Region (ICGLR) signed a legally-binding Protocol on combatting the illegal exploitation on natural resources. The passing of the Dodd-Frank legislation then created the impetus to move from diplomacy and legal frameworks to action. The ICGLR designed, and is now implementing, a series of tools to curb the illegal exploitation and trade of high-value natural resources, including a Regional Certification Mechanism (RCM) for tin, tungsten, tantalum and gold. Furthermore, it was largely due to the pressures of Dodd-Frank that DRC, Rwanda and Burundi adopted the RCM into law, a development which should be followed in a number of other countries.
Considerable efforts have been made to clean up the 3T sector. Since Dodd-Frank came into effect, the grip of armed groups on the production and marketing of high value Congolese minerals has been significantly loosened. While the challenges of instituting a fully compliant and transparent certification system remains, one cannot contest the fact that fewer armed groups are present in tin, tungsten and tantalum mines in Eastern DRC.
The same cannot be said for gold. Unfortunately, armed groups have maintained and even tightened their control over artisanal gold mining. A fact not often reported is that that miners and even armed groups have turned to gold, partly as a result of the focus on 3Ts. The gold sector remains a largely uncontrolled sector and represents the most highly lucrative commodity in the region.
While Dodd-Frank continues to provide a much needed lever for change, more needs to be done to deal with the realities of the gold trade. The possibility of a higher price for “clean” minerals in the 3T sectors create strong incentives to comply with traceability mechanisms, but in the gold sector the incentives are much different, and encourage actors toward smuggling, thereby underscoring the need for complementary approaches.
Unlike in the 3Ts, where the number of smelters is limited to 200 or so, there is no such international ‘choke point’ for refiners of gold. Instead, there is a vast, diversified and largely opaque web of buyers, few of which are concerned about or touched by US laws. Even if such a chokepoint existed, consignments below 18Kg are generally not accepted by large refiners. This has created an important “process hole” when it comes to regulating the gold trade, a gap of which the drafters of Dodd-Frank were well aware.
The downstream importance and the role of gold in commerce and banking is unlike 3Ts and any other commodities – such as palm oil, marijuana, agricultural products and soap – often cited as comparable by some critics of Dodd-Frank. Locally, gold is currency. In DRC’s Orientale province, both near PAC’s gold project site as well as in larger urban centres, goods and services are often purchased with gold. This simply is not done with other goods.
Congolese gold, most of which is artisanally mined, is almost exclusively sent to the United Arab Emirates, after transiting through neighbouring countries such as Uganda, Burundi, Tanzania or Kenya. Dubai has yet to develop a coherent, comprehensive and universally applied strategy to apply due diligence or implement a chain of custody over its gold supply. PAC's research has revealed that hand-carry exemptions continue to be the method favoured by clandestine gold exporters. In Uganda, these exemptions were estimated to be responsible for at least three tonnes of smuggled DRC gold in 2013.
Another study carried out by the International Peace Information Service (IPIS) found that gold is the most persistent ‘conflict mineral’ today, with more than half of the estimated 800 artisanal gold mines in Eastern DRC under illegal rebel or army control. IPIS data also suggests that the number of miners active in gold mining is up to four times higher than that for tin, tantalum and tungsten combined. IPIS concluded that "the current scale of artisanal gold mining has important consequences on the issue of armed group financing, especially because the DRC’s gold production is exported almost entirely unrecorded.” According to the UN Group of Experts, ‘unrecorded gold’ is estimated between 12 to 17 tonnes of annually, which translates into a minimum of $500 million USD in lost tax revenue per year.
Gold’s high value per volume ratio poses a particular challenge. This manifests itself in narrow price margins that make all actors along the chain particularly reticent to regulation and other forms of control. The high costs of legality often serve as disincentives to those attempting to operate as a legal trader or exporter in DRC. For example, official export taxes are roughly 4.5% across Eastern DRC, whereas export taxes are roughly 2% in Uganda. The DRC Central Bank also charges 1% on the repatriation of income from gold. Both contribute to the vast majority of DRC’s gold exiting the country through illicit networks.
When gold is viewed against this backdrop, the challenges to legalization, formalization, tracking and certification of gold are more fully appreciated. Similarly a better understanding of the disincentives to legality provide important insights into why shadow economies and insecurity prevail. Strategies must reflect these dynamics: tax harmonization and fiscal reform in-region are key, but so too are responses that do not vilify artisanal miners and their communities, who are eking out a living.
It is important to note that miners are primarily motivated by improved yields, and money with which to feed their families. PAC’s pilot project in Eastern DRC worked with artisanal miners and succeeded in increasing daily yields by roughly 30%. This was done by introducing basic tools and improved gold recovery techniques. Continued access to equipment and technical support was conditional upon their agreement to have their production tracked and sold to a legal trader. The end result was that over 90% of miners adhered to the project and its conditions. However, challenges remains at the level of the legal trader, whose price margins are low or non-negotiable, and whose costs for operating legally remain too high.
Artisanal gold extraction and trade are not comparable to 3Ts and they are certainly not comparable to other lower-value and locally consumed commodities. This means miners' and traders’ incentive structures are different, requiring an altogether alternative and more refined strategy. Dodd-Frank is important but a complimentary set of tools is urgently needed to create incentives for artisanal producers to sell via legal channels.
The challenges in the gold sector are daunting, but not impossible. In addition to binding legislation, foreign donors and African governments need to consolidate efforts to break the link between conflicts and minerals, and that requires sustained pressure and targeted action that builds on and is complementary to a legislative approach.
For example, efforts should focus on local projects that seek to address incentives and disincentives to legality and smuggling. Regional governments should be supported to create a fully tracked and certifiable conflict-free supply chain for gold from the Great Lakes Region, while also ensuring traceability efforts include linkages to broader peace-building and development efforts. The government of DRC needs to dedicate resources and political will in operating a robust legal trading system that could bring potentially hundreds of millions of dollars to public coffers. Pressure needs to be exerted on Dubai authorities to tighten their customs procedures, particularly with respect to exemptions on imports arriving in carry-on luggage. Finally, a regional approach to improved governance and transparency in the gold sector, beginning with tax harmonization and fiscal reform across central and eastern Africa, would go a long way in tackling the economic and political instability this conflict has wrought for too long.