By Jonny Hogg and Jan Harvey
MONGBWALU, Democratic Republic of Congo (Reuters) - Gold traders in the eastern Congo district of Ituri have heard of the Dodd-Frank act, or "Obama's law" as it's known here, but don't see why it's got anything to do with them.
"I struggle to understand this Obama's law," says George Lobho, one of hundreds of traders operating out of tiny wooden shacks in the muddy streets of Mongbwalu. "What does it mean?"
Ituri is one of many areas of the country to have experienced bitter ethnic conflict between rival tribes in recent years. Massacres have left tens of thousands dead.
It is this fighting that led U.S. authorities to take the unprecedented step of naming Congo in section 1502 of the Dodd-Frank financial regulation act, which says U.S.-listed companies that source gold, tungsten, tantalum and tin from Congo or its neighbors must assure the U.S. stock exchange regulator that their business is not helping fund conflict.
The legislation, signed by President Barack Obama in 2010, puts the onus of proof on end-users. But while it has sent shockwaves through the global gold industry, the fractured and opaque nature of the gold supply chain means it has yet to have an impact where it counts - on the ground.
Gold, which hit record highs near $2,000 an ounce last year and remains above $1,500, is a big earner here. People like Lobho who find it hard to feed their families ask few questions about the origins of the metal on offer.
Lobho buys around 50 grams of metal a week, which he sends on to an exporter in the district capital Bunia about 85 km (55 miles) away. He says he doesn't need to provide any documentation and says trading gold from areas where conflict continues, such as the Kivu provinces, is easy.
"If someone comes from North Kivu, they can sell here, of course," he told Reuters. "No problem."
Members of U.S. Congress are lobbying the Securities and Exchange Commission (SEC) to pass the long-delayed guidelines necessary to fully enforce the section. But U.S. companies are not wasting any time getting ready.
Electronics companies such as Dell and Intel have signed up to codes of conduct excluding conflict minerals from their supply chains, and jewelry retailers are pressuring manufacturers to do the same.
Some European gold refineries say they are no longer sourcing any material from Africa's artisanal miners, who can't provide the tracking paperwork their clients demand.
But in Congo, exporters are still finding routes to get gold from remote regions to market.
Research into the impact of Dodd-Frank by a U.N. Group of Experts last year found that while it had cut the sums earned from tungsten, tin and tantalum mining used to support warlords and buy guns, it had not had the same effect on the gold industry.
"Gold is just less tractable as a mineral in terms of being responsive to this kind of regulation, because it's so easily smuggled," Fred Robarts, coordinator of the Group of Experts' report said by telephone from Kinshasa. "The total volume of gold moving is still quite high."
Aside from output from Canadian miner Banro, Congo's only large-scale producer at present, the country officially exported around 112 kg of gold last year. But one mining official in Kinshasa estimated that figure is probably less than 10 percent of the actual amount.
That means more than 1,000 kg a year may be leaving Congo unofficially, worth more than $50 million in refined form.
While this is a tiny amount in the world gold market, it can buy a lot of arms.
Silva Ucima, who runs an association for artisanal miners in Ituri, said only a fraction of the gold produced here is declared and shipped legally. The rest vanishes into neighboring Uganda.
"Here people are just crossing the border into Uganda, selling the gold, and then coming back with other goods," Ituri mining official Simon Pierre Bolombo said.
Last year's Group of Experts' report identified Ugandan capital Kampala as a major transit point, along with Kenya's capital Nairobi, Bujumbura in Burundi, and Dar es Salaam and Mwanza in Tanzania.
From these centers, the gold can be re-packaged and sent on, much of its bound for the United Arab Emirates, a major refining and distribution hub. The Group of Experts' research suggested some 3 tons of Congolese gold may have been laundered through Kampala into the supply chain in Dubai in 2010.
UAE customs officials declined to comment on the report. The huge gold trading centre has shown it is sensitive to ethical issues, and the Dubai Multi Commodities Centre, working with the OECD, issued guidelines on responsible trading this year.
But controlling unofficial supplies is extremely difficult. One participant at a World Gold Council roundtable in Johannesburg last year said they saw travelers arriving in Dubai with suitcases of semi-processed gold for refining.
Gold can be mixed with metal from other sources and molded into dozens of different forms, which can be melted down and recycled again and again. Even small quantities make big money.
Official figures do not specify where gold is exported to from Dubai, but traders say much of it is bound for India, the world's biggest gold consumer, and elsewhere in the Middle East. Those markets accounted for more than 1,000 metric tons (1102.3 tons) of demand last year - about 40 percent of global consumption.
U.S.-listed companies sourcing gold from these markets, many times removed from its original source, for use in jewelry or electronic goods bound for the United States may decline to buy unregulated metal. But others won't worry.
"It's fair to say that consumer awareness (of conflict funding) is nowhere near as developed in India and China as it is in Europe and North America," says Michael Rae, chief executive of the Responsible Jewellery Council.
Detailed guidelines for section 1502 are still pending. Even when the act is fully enforceable, companies will not be punished directly for buying from Congo and its neighbors.
But if their reporting turns out to be inaccurate, they could fall foul of SEC disclosure regulations, leaving them open to civil and criminal penalties. In theory, directors could be held individually liable.
"Companies are concerned about the burden they are facing," said Tim Engel of law firm King & Spalding in Washington. "They are concerned about what would happen if they make a disclosure in good faith and it turns out to be inaccurate."
Supporters of section 1502 say the legislation, though imperfect, is an important part of a push towards greater accountability in the global gold industry.
Section 1502 was, for example, one of the pieces of legislation the London Bullion Market Association looked at when it drafted its guidance for refiners on its Good Delivery List, a key quality standard, earlier this year.
"It's a huge opportunity," said Annie Dunnebacke, a campaigner at Global Witness, which aims to increase awareness of conflict and corruption around natural resources.
"It is the first time there is a piece of legislation that actually tackles the issue of conflict financing and makes requirements of companies in a supply chain, particularly downstream, end-user companies."
But the very nature of gold is always going to make it hard to track and control supply, especially via legislation aimed at the upper end of the industry. To make a real impact, more direct action within Congo is needed to target the warlords who profit from gold trading.
Convincing traders in Congo that this is practical is likely to be an uphill task.
"How can we differentiate gold?" said Silva Ucima. "It's all yellow. How can you know where it comes from?"
(Reporting by Jan Harvey in London and Jonny Hogg in Mongbwalu; Additional reporting by Maha El Dahan in Dubai and Elias Biryabarema in Kampala; Editing by Richard Woods and Sonya Hepinstall)