Conflict Minerals, AML and Supply Chain Risk

 

Conflict Minerals Reporting Requirement Struck Down

Received a timely Good Friday Alert from Nixon Peabody about a recent district court ruling on regulations concerning Conflict Minerals. Conflict minerals are mined in areas where conditions of armed conflict exist. The minerals, extracted with forced labor under conditions employing human rights abuse, is common in the Democratic Republic of the Congo. Rebel groups use the proceeds from the sale of conflict minerals to finance armies to enrich leaders and gain political power.

A provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act required companies to publish notice that minerals acquired for use in production must be certified as being sourced from a conflict free zone. The National Association of Manufacturers brought suit against the Securities and Exchange Commission that the Conflict Mineral Disclosure provisions in the Dodd-Frank law violates the First Amendment right of free speech of corporations. The DC District Court agreed and overturned the reporting provision. 

Nixon Peabody’s note makes clear that other provisions of the law still stand. Though the ruling provides relief from the reporting requirement, firms remain obligated to audit their supply chain to determine the source of conflict minerals and what economic and political interests are engaged in the sale. 

The Treasury Department’s Office of Foreign Assets Control (OFAC) publishes a list of people and corporations, Specially Designated Nationals (SDN) that have been identified as affiliates of terrorist organizations, known to engage in money laundering activities. Proceeds derived from the sale of Conflict Minerals like Blood Diamonds are sources of terrorist financing and financial crime. Proceeds from the sale of Conflict Minerals underwrite black market activities relating to counterfeiting, drugs, restricted chemicals, uranium, guns and slave trading. Global Financial Intelligence Units (FIU) like Financial Action Task Force (FATF) and FInCEN oversee and enforce regulations concerning money laundering to prohibit proceeds of illicit transactions from entering the regulated economy. 

Manufacturers and commodity merchants engaging in transactions involving Conflict Minerals from the Central African Republic and its surrounding countries must consult the OFAC’s SDN List, conduct PEP Checks (Politically Exposed People) and certify that source of materials, countries and banking institutions comply with the provisions concerning money laundering and reporting compliance with the Dodd-Frank law. 

Though the law only lists four minerals its applications span a wide range of industry groups. The following is a list of Conflict Minerals and its applications. Source is Wikipedia. 

Columbite-tantalite (or coltan, the colloquial African term) is the metal ore from which the element tantalum is extracted. Tantalum is used primarily for the production of capacitors, particularly for applications requiring high performance, a small compact format and high reliability, ranging widely from hearing aids and pacemakers, to airbags, GPS, ignition systems and anti-lock braking systems in automobiles, through to laptop computers, mobile phones, video game consoles, video cameras and digital cameras. In its carbide form, tantalum possesses significant hardness and wear resistance properties. As a result, it is used in jet engine/turbine blades, drill bits, end mills and other tools. 

Cassiterite is the chief ore needed to produce tin, essential for the production of tin cans and solder on the circuit boards of electronic equipment. Tin is also commonly a component of biocides, fungicides and as tetrabutyl tin/tetraoctyl tin, an intermediate in polyvinyl chloride (PVC) and high performance paint manufacturing. 

Wolframite is an important source of the element tungsten. Tungsten is a very dense metal and is frequently used for this property, such as in fishing weights, dart tips and golf club heads. Like tantalum carbide, tungsten carbide possesses hardness and wear resistance properties and is frequently used in applications like metalworking tools, drill bits and milling. Smaller amounts are used to substitute lead in "green ammunition". Minimal amounts are used in electronic devices, including the vibration mechanism of cell phones. 

Gold is used in jewelry, electronics, and dental products. It is also present in some chemical compounds used in certain semiconductor manufacturing processes. 

SME's with supply chain exposures need to audit its supply chain to assure compliance with the in force provisions of Dodd Frank and Treasury Department anti-money laundering provisions. 

Sum2’s Credit|Redi offers managers tools to gain better insights into supply chain risk. 

Sum2's also offers an AML compliance tool to screen OFAC and SDN lists. 

Risk, Dodd-Frank, Conflict Minerals, Nixon Peabody, Central African Republic, OFAC, SDN, FATF, supply chain, AML, money laundering, AML BSA Reporting, Credit|Redi,

Graphic: Source Intelligence

The Black Knight

Sir Larceny-A-Lot

Sir Allen Stanford turns out to be no knight in shining armor. He's just another greedy creep who thought he was entitled to other peoples money. Sir Allen might just be another garden variety Ponzi Schemer; but compared to Madoff this guy is a piker. The theft of $8bn is petty larceny compared to Madoff's massive $50bn swindle.

It is becoming startling clear that we can no longer view these types of events as isolated incidents. Sir Allen may be this weeks poster child for capitalists gone wild; but the shock and awe of audacious financial crime is becoming a consistent lead story on the nightly news. Public trust in the financial markets is at stake. If people cannot trust their financial fiduciary the whole system goes down.

The SEC's reluctance to act on information concerning Madoff irregularities and the announcement that over 500 public firms are being reviewed for possible fraudulent business practices are raising a public outcry for more vigorous oversight and protection. The swirling rumors of bank insolvencies, nationalizations and news of their egregious failure to adhere to basic risk management precepts are turning the skeptical taxpayers into vocal opponents of the TARP program and any future bank bailouts.

The allegations that UBS marketed a tax evasion scheme to attract over 50,000 US clients to their private banking business with the promise that it would shield them from onerous tax liabilities may be the straw that breaks the camels back. US taxpayers are struggling from the burdensome pain of high taxes they dutifully pay. They are confused and frightened by the orgy of government spending and how the financial industry bailouts will effect them. The credit crisis and the stunning losses people incurred in their retirement and investment portfolios is casting widening doubt about the trustworthiness of the banking system. Citizens are urging their elected representatives that all financial service providers must come under a microscope of scrutiny and oversight. Consumers want assurances that all fiduciaries are sound. Taxpayers are demanding that regulators insist that financial institutions provide a level of transparency to assure consumers that they are in compliance with all regulatory mandates, have a program of risk management controls and offer proof of an ethical corporate governance program.

The US tax payer has made it clear that they can no longer shoulder an egregious tax burden that continues to finance insolvent financial institutions that failed miserably to manage risk or comply with the barest minimum standards of proper corporate governance.

The allegations that surfaced suggesting that Stanford Financial may be linked to money laundering for Latin American drug cartels through The Bank of Antigua and related banking enterprises in Venezuela and Ecuador is sure to usher in a new era of aggressive enforcement initiatives by regulators. The practice of selling worthless CDs to retail investors that promised high rates of interest is the tip of the spear in a sophisticated money laundering scheme. This will create some added urgency for regulators to conduct an in depth reviews of financial institutions AML compliance programs. Examiners will aggressively pursue fund managers to determine that Know Your Customer (KYC), Customer Identification Procedures (CIP), Bank Secrecy Act (BSA) and Politically Exposed People (PEP) programs are meeting acceptable standards to detect and deter money laundering. Of particular concern will be hedge fund complexes with incorporated off shore structures. To be sure, examiners will liberally interpret and claim jurisdictional nexus on all offshore structures linked to US domiciled funds. The US Treasury coffers are bare and it will look to collect taxes on any revenue sources it deems as taxable.

Financial institutions need to demonstrate to counter parties, regulators, SROs and most importantly investors; that they have a sound risk management program in place that protects the funds investors against all classes of operational risk. Sum2 offers an AML audit program fund managers use to maintain compliance standards that demonstrate program excellence to regulators and investors.

You can believe the examiners are sharpening their spears. Looking to bag a kill and make an example of wayward managers with lax compliance controls. Be ready, be vigilant and be prepared.

You Tube Video: Moody Blues: Nights in White Satin

Risk: money laundering, regulatory, operations, reputation