The Playstation War: Conflict Minerals and Video Game Manufacturing

Tin, tantalum, tungsten, and gold (3TGs) are minerals commonly found in an array of electronics including video game consoles and components. These minerals, which have been termed “conflict minerals,” 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.”

Enter the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, in which a provision in Section 1502, ordered the U.S. Securities and Exchange Commission (SEC) to develop rules that force companies to disclose the origin of their minerals. Diligence efforts are not confined to SEC issuers, with supply chain participants deeply involved in determining and certifying the original source of supplies of 3TGs, and their numerous derivatives, sold to their customers.

Central to the application of the SEC rule is whether a conflict mineral contained or used in a public company’s product and “necessary to the functionality or production of a product manufactured or contracted by that registrant to be manufactured” originated in the DRC. 

The Electronics Industry Takes Action

Some game console manufacturers have made a great deal of progress on the issue, and 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 all production partners have taken steps to comply with Nintendo's guidelines, and that Nintendo "obtained individual confirmation from each production partner that they agree not to use conflict minerals."

Impact on Video Game Manufacturers and Components Suppliers

The SEC regulations impose a three-stage procedure that applies to public companies. Under the new rule, public companies must determine whether they use any metal sources designated as "conflict minerals." If they do, they are obligated to conduct due diligence 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 the company can't determine the origin of the minerals, it cannot use the "DRC Conflict Free" label. Regardless, public companies must publish a Conflict Minerals Report that is reviewed by an external auditor, and they must disclose those findings in their annual report.

Failure to comply may result in loss of S-3 eligibility, SEC enforcement proceedings and/or shareholder litigation, not to mention adverse publicity from shareholder activists or humanitarian groups. 

May 31, 2014 is the current SEC-mandated compliance date for companies to file their initial conflict minerals disclosure on Form SD for the calendar year 2013 and, if necessary, an independently audited Conflict Minerals Report.  Companies are advised to start the process now, since the diligence process required for compliance will be long, expensive and arduous.

Unfortunate Consequences along the Supply Chain

An interesting consequence of the mandated diligence and reporting is emerging: some companies are seeking to impose requirements in their supply contracts to ensure 3TGs are not sourced from the DRC at all or are considering alternatives to these minerals in the manufacture of their products.  Many U.S. and non-U.S. companies along the supply chain, whether public or private, remain at risk of losing business if they are unable to provide the requisite certifications to their customers.   In addition, some companies are using this exercise to streamline their operations by reducing the number of suppliers they engage and by reorganizing internal operations to minimize functional overlap and rethink product specifications.

Video game companies must push forward with their diligence and compliance efforts, using this as an opportunity to rethink certain aspects of their operations and derive efficiencies where possible.  Ironically, in this case, it is likely that any humanitarian benefit will be merely a footnote.