IBTBlog

The International Business Transactions Blog

Human Rights and Environmental Due Diligence for Large Business Operating in the European Union

By Sharon Foster
Law Student Editor

The European Union’s Commission, revealed its draft directive on Human Rights and Environmental Due Diligence on February 23, 2022. While human rights, environmental law, and business have operated in seemingly separate legal spheres, the Commission recognized that promises to respect human rights and the environment have proved inadequate. This directive, the result of two years of drafting and negotiations, is a step toward achieving the EU’s sustainable corporate governance objectives. Before the draft directive, a business firm had no legal human rights and environmental obligations on the European level. A business firm could voluntarily agree to follow the UN Guiding Principles on Business and Human Rights (UN Guiding Principles) or the OECD’s Guidelines for Multinational Enterprises and Due Diligence Guidance for Responsible Business Conduct. However, these guidelines lack the force of law, have no enforcement mechanism, and have not been shown to establish proper accountability for human rights and environmental impacts. As a result, the EU has drafted the new directive to create binding, enforceable requirements on companies to respect human rights and the environment.

The EU’s draft directive will affect large business firms and business firms operating in high-risk sectors, in which serious human rights and environmental hazards are rampant. The directive also applies to non-EU companies with significant operations in the EU. As currently drafted, the directive applies to about 13,000 EU companies and 4000 non-EU companies. The rules apply based on the size of the company.  In general, the directive applies to EU companies that have at least 500 employees and a global turnover of more than €150 million. However, companies operating in sectors with high risk of human rights abuse must comply if they have at least 250 employees and €40 million in global turnover. The rules define these high-risk sectors to include agriculture, apparel, and natural resource extraction. For non-EU companies, the directive applies to companies with significant operations within the EU.  Specifically, they must have a global turnover of at least €150 million from EU operations or, if they operate in a high-risk sector, at least €40 million in turnover from EU operations.

The directive would require companies to identify existing and potential negative impacts from both their operations and “from ‘established business relationships,’” meaning their supplies, customers, and business partners.  Business firms are also required to prevent, end, and reduce human rights and environmental impacts.  The draft directive clarifies that companies must remedy harms and provide compensation to victims. The directive also directly imposes duties on company directors to oversee these due diligence procedures. Further, member states must adopt laws establishing administrative penalties and civil liability for violation of the directive’ mandate.

The directive takes significant steps toward corporate accountability for human rights and the environment for companies with major EU operations. If the directive proves successful in curbing corporate abuse of human rights and the natural environment, civil society may press for similar laws in other countries.

Quashed TPP Leads to Important Asian Regional Free Trade Agreement

By Yuki Taylor
Law Student Editor

On January 1, 2022, East Asia’s Regional Comprehensive Economic Partnership (RCEP) Agreement entered into force for Australia, Brunei Darussalam, Cambodia, China, Japan, Laos, New Zealand, Singapore, Thailand, and Vietnam.  With delayed ratification, the Republic of Korea (South Korea) and Malaysia became participants to the comprehensive economic alliance as of February 1 and March 18, respectively.  12 countries out of 15 original signatories thus far have joined the world’s largest free trade agreement (FTA). 

The RCEP, as a modern and comprehensive FTA, consists of 20 chapters, covering all aspects of cross-border economic activities including trade in goods and services, trade remedies, investment, and intellectual property.  The Agreement was concluded in November 2020, following nine years of preparations and negotiations initiated by the ASEAN (Association of Southeast Asian Nations) leadership upon a mutual proposal submitted by China and Japan in November 2011.  The FTA alliance was blueprinted on the so-called ASEAN plus 6, consisting of 10 ASEAN member states, three Far East nations, i.e., China, Japan, and South Korea, and three additional neighboring states, i.e., Australia, New Zealand, and India.

The RCEP negotiations assumed urgency after the failure of the Trans-Pacific Partnership (TPP) among Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States, together comprising 40 % of the global economy.  The TPP was signed in February 2016 during the Obama administration.  But, soon after in January 2017, President Trump announced U.S. withdrawal from the pact, essentially paving a way for China to join the negotiations.

India exited the RCEP negotiations at the final stage in November 2019, complaining that the Agreement ultimately deviated from its original principles, particularly regarding safeguard measures.  Additionally, three ASEAN countries—Indonesia, the Philippines, and Myanmar—have not yet ratified the Agreement, although they signed as ASEAN states.  Indonesia initially announced on the eve of the RCEP’s entry into force that it would ratify the Agreement during the first quarter of 2022, but it has so far failed to complete ratification.  In the Philippines, the RCEP bill was deferred by its senate in February 2022, after groups including farmers and fishers opposed the ratification. 

As for Myanmar, ASEAN has excluded its current military cabinet since February 2021 following a coup d’état which deposed the democratically elected members of the nation’s ruling party, including Aung San Suu Kyi, then state counsellor.  Myanmar has been technically blocked from joining RCEP.  However, RCEP signatories have not been acting in concert.  Even though it has not yet ratified, the Philippines announced the country would not accept the junta-led Myanmar as a RCEP partnerNew Zealand openly denounced the Myanmar government and stated that it would not deal with the ASEAN nation under RCEP.

Meanwhile, China and Thailand have been supportive of Myanmar’s military-controlled government.  On March 21, Thai customs announced that it would treat Myanmar as an FTA partner pursuant to RCEP retroactively as of January 1, 2022, when the estranged nation acquired its RCEP qualification.  Prior to Thailand’s preferential tariffs treatment, on March 15, Myanmar agreed to use the Thai baht as its official currency in border trade dealings, aiming to reduce its reliance on the U.S. dollar.  

It is uncertain whether RCEP will build the economic alliance envisioned in the original negotiations, due to prolonged political crises and human rights abuses in Myanmar, and domestic resistance to RCEP in Indonesia and the Philippines.  Nonetheless, RCEP has already created the world’s largest free trade area, surpassing the EU in scale.  With only its current ratifications, RCEP comprises the world’s largest FTA in terms of both population and gross domestic product.

BIS Enforcement of Russian Trade Sanctions

By Sharon Foster
Law Student Editor

On February 24, 2022, the United States imposed stringent export controls on Commerce Control List (CCL) and EAR99 items destined for Russia. Despite these restrictions, the United States identified dozens of private and commercial aircraft subject to the EAR that flew into Russia from outside the United States. On March 18, 2022, BIS publicly identified those flights, indicating the flights  appeared to violate the Russian/Belarusian Foreign Direct Product Rules (the “Russia/Belarus FDP Rules”) adopted under the EAR (15 C.F.R. pts. 730-774).

The EAR implements the Russia/Belarus FDP Rule and the Russia/Belarus-Military End User FDP Rule. The Russia/Belarus rules prohibit U.S. persons, and some foreign persons, from exporting or reexporting controlled content to Russia or Belarus, as well as in-country transfers. The Russia/Belarus FDP Rules establish control over foreign-produced items directly produced with major components or by certain plants using “U.S.-origin software or technology subject to the EAR.” The Russia/Belarus Military End User FDP Rule restricts exports of all software or technology “subject to the EAR that is on the CCL,” plus items designated EAR99. EAR99 items are subject to the EAR, but are not specifically controlled on the CCL. BIS emphasized that aircraft and other controlled items manufactured in the United States or a foreign country that include more than 25% U.S.-origin controlled content require a license if destined for Russia or Belarus.

BIS reiterated that anyone, including persons within Russia, risk violating the EAR by exporting these controlled items without a license to Russia or Belarus. However, these licenses will be difficult, if not impossible, to obtain. Further, under the EAR’s reexport and in-country transfer rules, it does not matter that the owners exported these controlled aircraft from a third country. BIS further clarified that any actions taken “including, but not limited to, refueling, maintenance, repair, or the provision of spare parts or services” to any of the identified aircraft reexported to Russia would violate General Prohibition 10 of the EAR. Persons violating the EAR are subject to BIS enforcement actions, including substantial jail time, fines, loss of export privileges, or other restrictions. As a result, these aircraft must remain grounded, or the owners and operators will risk incurring additional penalties. However, the penalty risks may not deter persons who are not subject to the personal jurisdiction of the United States.

BIS also reminded owners, operators, and potential servicers of the controlled items that the list is not exhaustive. BIS will update the list as necessary, but this public statement should alert exporters of U.S.-Origin and Foreign Direct Products of the gravity with which BIS intends to enforce the Russia/Belarus FDP Rules. On March 30, 2022, BIS updated the list adding 73 aircraft and removing 12 aircraft cleared for removal to owners in U.S.-allied countries. On April 1, 2022, BIS issued a final rule adding 95 additional military end users to the Entity List for Russia and Belarus.