By Barbara A. Jones, Esq., Greenberg Traurig LLP
What are video games made of?
The games themselves are software; electronic pulses and magnetic charges. But the consoles they’re played on, like a lot of other electronic equipment, are composed of plastic, metal, and often, minerals like tin, tantalum, tungsten, and gold, or 3TGs.
Those are known as “conflict minerals.” They are being mined in the Democratic Republic of the Congo (DRC), and used to fuel what has become the deadliest conflict since World War II. In fact, gaming consoles and conflict minerals are so closely linked that some refer to the decades-long conflict in Congo as the “Playstation War.” In May, a GlobalPost report stated, “Forty percent of the two million people working in the DRC’s artisanal mines are children, according to World Bank. Minerals extracted by children in Katanga include coltan, cobalt, copper and others.” Coltan is the raw material used to create tantalum.
Enter the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which included a provision ordering the US Securities and Exchange Commission (SEC) to develop rules forcing companies to disclose the origin of their minerals. That includes supply chain participants, who are deeply involved in determining and certifying the original source of the 3TGs and their numerous derivatives that are sold to customers.
Central to the application of the SEC rule is whether the conflict minerals in a public company’s product originated in the DRC.
Some game console manufacturers have made a great deal of progress on the issue. Electronics giants such as Microsoft, Intel, Motorola, and HP engaged early on, by developing compliance policies and procedures. Nintendo, which has been viewed by many as slow to get on board, recently stated that it "obtained individual confirmation from each production partner that they agree not to use conflict minerals."
The SEC regulations impose a three-stage procedure that applies to public companies, which must determine whether they use any metal sources designated as "conflict minerals." If they do, they are obligated to discover the origin of those minerals. If those minerals are not found to be from the DRC, or are from a government controlled mine in the DRC, they can label their products "DRC Conflict Free."
If the minerals come from rebel-controlled mines, or a public company can't determine the origin of the minerals, it cannot use the "DRC Conflict Free" label. Either way, it must publish a Conflict Minerals Report that is reviewed by an external auditor.
Failure to comply may result in SEC enforcement proceedings and/or shareholder litigation, not to mention adverse publicity from shareholder activists or humanitarian groups.
Companies must file their initial conflict minerals disclosure and, if necessary, an independently audited Conflict Minerals Report, by the end of May, 2014. That means they should start the process now, because the required due diligence will be long, expensive and arduous.
Meanwhile, some companies want to include in their supply contracts provisions to ensure 3TGs are not sourced from the DRC at all. Some are considering replacing conflict minerals in their products with alternatives. Many companies along the supply chain, both public and private, could lose business if they are unable to provide the requisite certifications to their customers. And some companies are using this exercise to streamline operations, reducing the number of suppliers they engage and reorganizing internally to streamline operations and rethink product specifications.
Video game companies must use this as an opportunity to rethink certain aspects of their operations, and become more efficient. Ironically, in this case, it is likely that any humanitarian benefit will be merely a footnote. Even so, we’ll take it.
Barbara A. Jones is a shareholder in Greenberg Traurig’s Corporate and Securities practice group, a member of the Global practice group and the Emerging Technologies Team, and co-coordinator of the firm’s cross-disciplinary Conflict Minerals Compliance Initiative.
The State of Play blog, organized by MassDiGI, features posts by digital and video game industry insiders writing about creativity, innovation, research, and development in the Massachusetts digital entertainment and apps sectors. MassDiGI, based at Becker College, is a statewide center for academic cooperation, entrepreneurship, and economic development across the local games ecosystem. Follow along @Mass_DiGI
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