Report

U.S. Companies Still Puzzling Over North Korean Gold Question

After disclosing that they used the forbidden metal, some companies are still trying to figure out whether they did.

Dozens of American companies disclosed in Securities and Exchange Commission filings this week that they use North Korean gold in their products, raising questions about whether they violated comprehensive sanctions against the despotic regime. Now, some of those firms say that was a mistake while others continue investigating. The confusion illustrates how little companies know about their own supply chains even after collectively spending billions of dollars examining them.

As first reported by FP Tuesday, a new rule meant to force companies to reveal whether their products use minerals from conflict-torn central Africa has instead turned up a connection to pariah state North Korea. Ralph Lauren, Hewlett Packard, IBM, and about 65 other companies reported that the "Central Bank of the DPR of Korea," the North Korean central bank, was one of their sources for gold. Tractor-maker Deere & Co., hunting outfitter Cabela's, kitchen store Williams-Sonoma, and GPS-maker Garmin also listed North Korea as a supplier of gold.

Just a small amount of gold from North Korea in a U.S. product -- even if it was only a minor part of the product purchased from a third-party supplier in China or another country -- would violate sanctions. "This broad prohibition applies to goods, services, and technology from North Korea that are used as components of finished products of, or substantially transformed in, a third country," a Treasury Department spokeswoman said.

Spokesmen for Ralph Lauren and Hewlett Packard say, on further inspection, they've found their products don't contain North Korean gold, despite their SEC disclosures indicating otherwise. Other companies' officials say they're still investigating the situation; many companies didn't respond to requests for comment.

The surprise revelation, or mistake, demonstrates how hard it is for consumers to know whether products they buy are inadvertently connected to dictatorships. And the new law that made companies report where they got their minerals provides few conclusive answers. As part of the 2010 Dodd-Frank law that overhauled financial regulations, Congress passed a provision requiring companies to annually report to the SEC their use of the so-called "conflict minerals," after concerns that the sale of tin, tantalum, tungsten, and gold from the Democratic Republic of the Congo support armed groups that terrorize civilians and use slave labor. Almost four years later, nearly 1,300 companies filed thousands of pages to the SEC by Monday's deadline. But the information provides few conclusions and appears to contain significant mistakes.

"You're asking them to create an auditing system that didn't exist before," said KC Chang, an economist who tracks the gold market for consultancy IHS Global Insight. "Before this law, many companies didn't really ask these questions."

The SEC now requires them to ask the questions, but not necessarily provide answers. After a last-minute court ruling in late April, the law was relaxed slightly. Three trade groups -- the National Association of Manufacturers, the Chamber of Commerce, and the Business Roundtable -- challenged the rule and notched a partial victory. Companies had to show that they'd investigated the origins of their minerals, but didn't have to declare whether they contained conflict minerals. Companies are also thwarted by the complexity of their own supply chains and suppliers that aren't necessarily forthcoming. The end result is that the filings vary widely from company to company. Intel filed one of the most comprehensive reports and declared its products conflict-free, but many companies said they couldn't determine if their minerals were from DRC.

Ralph Lauren spokeswoman Winnie Lerner said the SEC filing that listed North Korea as a source for gold was a mistake and that the company is correcting it.

"The original filing contained some smelters that we don't actually use, including the central bank of North Korea," Lerner said. "We will be re-filing with the SEC an amended list of smelters that we use."

Hewlett-Packard said it learned in January that some of its suppliers could be using North Korean gold and began investigating.

"To date, the information we have received indicates no minerals obtained from Central Bank of DPRK were included in HP products," spokeswoman Kelli Schlegel said in an email.

Kitchen store Williams-Sonoma said the company is still investigating too.

"As our Conflict Minerals Report notes, we are several levels removed from the mining of minerals and do not make purchases of raw or unrefined minerals," Leigh Oshirak, vice president for public relations, said in an email. "We believe one of our vendors received this information from a supplier and forwarded it on."

Many companies may have listed North Korea without even knowing it because they just passed along information from companies further down the supply chain without review.

Lawrence Heim, a consultant who helped some companies prepare their disclosures, said in his review of the filings, he's surprised how many companies only asked their sellers to reveal their minerals' origins and nothing more.

"About a third said that they didn't do due diligence; they just relied on what the suppliers were telling them," said Heim, a director at The Elm Consulting Group International.

The trade-group trio fought the rule because they said it was too expensive and hard to implement.  The SEC had estimated compliance would cost companies about $4 billion in the first year and industry estimates were many times that. But it's hard to know how much companies actually spent.

Intel launched what is widely considered one of the most thorough programs to root out conflict minerals. Five employees traveled to 21 countries and visited 86 smelters over five years, according to a company spokeswoman. But the company wouldn't say how much its effort cost.

Although critics of the law say companies were handed an impossible task, proponents say the North Korea revelation proves they still have a lot more work to do.

"The conflict-minerals disclosures are historic, and companies really need to do a better job at really conducting the due diligence they are supposed to be doing under Dodd-Frank," said Sasha Lezhnev, who as a senior policy analyst with Enough Project advocated for the provision.

And now they may have to investigate not only whether their minerals come from DRC and neighboring countries, but also North Korea. Bruce Calder, vice president of regulatory compliance firm Claigan Environmental, said even if this disclosure turns out to be a mistake, minerals from North Korea could still wind up in U.S. products.

"There does look to be gold coming out of North Korea and moving through Chinese smelters but it would not appear as Central Bank of DPR Korea in a disclosure," Calder said.

ED JONES/ AFP/ GETTY IMAGES

Report

China's Kinda-Sorta-Oughta Plan to Fight Climate Change

Is Beijing suddenly getting on board in the fight against global warming?

Just one day after Barack Obama's administration unveiled its tough new climate change rules, China seemingly followed suit, hinting Tuesday that it would put an absolute cap on greenhouse gas emissions in its next five-year plan, which begins in 2016.

But it's not quite so cut and dried: The advisor whose words at a Beijing conference sparked the story, He Jiankun, said he and other experts merely urged the Chinese government to cap emissions, the Financial Times noted.

"This is our experts' advice and suggestion," he told the Financial Times. "The government has not decided on this policy yet. We hope to implement this in the 13th five-year plan, but the plan has not been fixed yet."

Not to be overlooked, however, is the real effort China is making to tackle pollution, both the kind that is only too visible -- such as the smog that regularly blankets Chinese cities -- and the kind that isn't, such as greenhouse gases.

Pollution has become an existential challenge for Chinese leaders. Protests against the country's terrible environmental record, whether dirty air, dirty water, dirty factories, or dead pigs, leave Beijing with uncomfortable flashbacks to the Tiananmen Square protests, which were 25 years ago this Wednesday, June 4.

That explains, in part, China's world-leading investments in renewable energy such as wind and solar power. The Chinese also have an ambitious schedule for nuclear energy deployment, and some individual provinces have banned coal plants. Although China uses as much coal as the rest of the world combined, Chinese energy experts increasingly say the end is nigh -- or rather, that China's coal consumption will peak sooner than previously predicted. At the height of China's economic boom, it was building roughly one coal-fired power plant every week.

Simultaneously, China is trying to move away from energy-intensive heavy manufacturing and embrace a more service-oriented economy, which will require less energy -- and produce fewer emissions -- for each dollar of output. All that promises to have big implications for next year's global climate change summit and for domestic U.S. politics.

"China cannot continue its current trends, either in terms of pollution or in terms of energy supply," said Wang Tao, an energy and climate expert at the Carnegie-Tsinghua Center for Global Policy. "The government is just trying to make this transition as smooth and soft as possible."

Climate watchers still digesting the Obama administration's biggest step toward tackling greenhouse gas emissions -- a plan to cut emissions from the power sector 30 percent by 2030 -- got pie-eyed when news broke that China apparently would cap emissions too. Part of their enthusiasm came from the fact that the Chinese move, if fully carried out, could re-energize lagging efforts to create a global carbon-trading system.

China is already the world's second-largest carbon-trading market, with seven local pilot programs. It wants to turn those regional, sometimes troubled, efforts into a national emissions-trading scheme similar to Europe's and the one nixed by the U.S. Congress in 2010. However, Chinese officials have been racking their brains on how to do so.

One problem facing Chinese climate programs: They're meant to make dirty energy more expensive and cleaner alternatives more attractive. But China's stranglehold on domestic energy prices means the programs don't work as well as they could.

If China does move toward a cap on carbon emissions, that could make it easier for international climate negotiators to reach some sort of agreement at next year's U.N. climate summit in Paris. Energy analysts say that the Obama administration's newly announced measures, which target the biggest single source of greenhouse gas emissions, would likely open the door to more action from other big emitters, including China.

And even if formal steps by the Chinese government to cap emissions are years away from fruition, it will also make it harder for opponents of the president's climate push to fight his environmental initiatives. Many Republicans have criticized the administration's climate plans, especially the new rules to clean up the power sector, because in the absence of any similar action from big emitters such as China, they worry the new rules will poleax the American economy and provide few global environmental benefits.

Sen. David Vitter (R-La.), a prominent voice on the Senate environment committee, criticized the new power plant rules Monday precisely because they aren't binding on countries such as India and China. Likewise, Sen. Marco Rubio (R-Fla.), a prospective 2016 presidential candidate, has derided U.S. efforts to fight climate change on the grounds that China will continue its environmentally damaging growth path regardless of unilateral U.S. actions.

The apparent trial balloon floated Tuesday could change that conversation, said Ailun Yang, a China climate researcher at the World Resources Institute, an environmental think tank.

"If this happens, it would show that there is shared concern among the world's biggest emitters that climate change should be taken more seriously. In general, the whole rhetoric around climate action has changed and is evolving."

That's a big if, however. As Tuesday wore on, the difference between official Chinese government policy and what Chinese government advisors would like to see happen became clearer.

Still, the mere internal suggestion that China should embrace firm climate targets reflects a fundamental shift, Yang said.

"Right now, it's both technically possible and politically acceptable for China to be talking about an absolute cap [on emissions]; and that's a very important step forward," she said. He Jiankun-- chairman of China's Advisory Committee on Climate Change -- got an earful about the new Environmental Protection Agency rules during a visit to Washington in May.

What was especially intriguing about his comments at the conference in Beijing, aside from the timing, is that an absolute cap on pollution would be something of a departure for China.

Beijing's formal environmental goals are designed to make the economy relatively cleaner but allow overall greenhouse gas emissions to keep rising as the economy keeps growing. The latest official targets, for instance, are meant to cut carbon emissions per unit of GDP by 2015, rather than cutting carbon emissions outright. China is struggling to meet even those lower targets. Meeting these potentially more ambitious ones will be even harder.

Photo by Stringer - AFP - Getty