1. Background
Without the active engagement of the private sector and multinational enterprises (MNEs), the Sustainable Development Goals (SDGs) will not be achieved. Local affiliates of MNCs are one of the most effective channels through which technology is transferred across countries. Developing countries need both local and foreign direct investment to improve competitiveness and to facilitate structural changes to create jobs and alleviate poverty.
From the vantage point of local entrepreneurs, a careful read of Article 101a of the Responsible Business Initiative (RBI) would expose local businesses to multiple conflicts with Swiss law. Besides, it is an added risk to a challenging business environment and complex political economy. SMEs in developing countries are better served through Non-judicial mechanisms, promoted by the United Nations High Commissioner for Human Rights (OHCHR) and OECD and multi-stakeholder governance arrangements that transfer knowledge and reduce risks for local and foreign direct investment (FDI).
State-based non-judicial mechanisms (NJMs)[1] is a much quicker and cheaper route to resolve business and human rights-related complaints and disputes between individuals and business enterprises than judicial mechanisms. The application of pressure through these mechanisms generate progressive change within the broader social and political institutions.
There is general agreement that a state may not exercise jurisdiction in the territory of another state without the consent of the second state. That is why the Swiss debate is conducted mainly in an echo chamber.
There is general agreement that a state may not exercise jurisdiction in the territory of another country without the second state’s consent. The Responsible Business Initiative (RBI) and Swiss Civil Society Organisations could forfeit a long-standing role of NGO’s to reenforce democratic consolidation and social transformation through cooperation and in favour of deploying broader instruments for social transformation in developing countries.
The small number of states that are exercising extraterritorial jurisdiction has not expelled the controversies surrounding extraterritorial jurisdiction. The fundamental dilemma is reconciling the fact every country has the right to regulate its public order, (principle of state sovereignty) and businesses and individuals are increasingly acting, and producing effects, across state borders. To unilaterally assert laws, extraterritorially would mean developing countries will be faced with the dilemmas to apply two or more national laws to the same conduct.
The search for viable and sustainable global mechanisms that can provide certainty and predictability in cross-border trade is critical and must continue. It, however, requires an inclusive debate. So far, the RBI debate is between western NGO’s or more precisely between Swiss NGO’s. No wonder the wrong or insufficiently effective questions are being asked. Indeed, the relevant sources have not been consulted, and practical realities of local entrepreneurs and their business environment are not considered.
[1] are recognised in virtually all jurisdictions. NJM used to address adverse human rights impacts of business activities include labour inspectorates, sector-specific consumer protection bodies, mechanisms for resolving environmental disputes, government ombudsman services and complaints agencies.
2. A Challenging Business Environment
The business environment and economic actors in developing countries, states transitioning to market economies[i] and emerging markets are dominated by the ‘informal sector’. The informal economy includes “all economic activities by workers and businesses that are—in law or practice—not covered or insufficiently covered by formal arrangements”. (e.g. legal licenses, titles, and regulatory supervision)[ii]. These makeup between 60 and 90 per cent of the economy. Of six and a half billion people in the world, roughly four billion are living outside of the law. They are not covered by basic human rights protections[iii]. In India, 93% of the workers are in the unorganised or informal sector.[iv] These local small firms operate in open or harmful environments; they work in unregulated markets. Their activities range from the illegal to the ordinary and compete by using local resources and modifying labour-intensive technologies.
3. Inadvertently but far-reaching consequences of the RBI
Small businesses are the ‘gateway’ to larger organisations. While news headlines focus on giant corporations, SMEs are the more common victims of risks. There are two conceptual approaches to achieve sustainability objectives in unregulated business environments. One is through the instruments of corporate social responsibility (CSR) [1] and the other through corporate accountability (CA)[2]. Article 101a of the Responsible Business Initiative (RBI) would be out of step with the bilateral and multilaterally agreed mechanism designed to encourage and enforce corporate accountability.
The perception in much of the developing world is that human rights instruments are crucial. Still, it has often been exploited for political aims. The KVI enforces the idea it is aimed at uncovering abuses and prosecuting perpetrators. It has the potential of upsetting local economic interest and stirring up an adverse reaction in local communities. It could be seen as undermining national legal institutions instead of supporting Swiss businesses to become embedded in the local community.
4. Collateral damage: Swiss and local SMEs bear the risk.
Switzerland’s 5000 SME could bear the collateral damage of increased costs, and reputational risks of Article 101a of the initiative. Swiss SMEs (i.e. firms with up to 250 employees) dominate the countries enterprise landscape, constituting 99.2% of all firms. Only 0.8% of all Swiss enterprises are large companies. Only two of the large companies dominate Swiss public opinion on corporate responsibility. No company has done so more than Glencore’s operations in the Democratic Republic of the Congo and Colombia. This disproportionate focus overlooks two facts: one, over 4000 Swiss SMEs conduct business abroad. And second, Illicit financial flows (IFF) is robbing Africa of an estimated $89 billion each year[v]. The culprits are 1) illegal Markets 2) tax and commercial practices, 3) theft-type and terrorism financing, and 4) corruption. 77% of illicit trade is attributed to illegal mining and smuggling of African gold.[vi]
On Illicit trade, the US and EU have extraterritorial regulations[3] in areas of anti-corruption and trade regulations. It means that Swiss companies are already operating under US and EU jurisdiction even though the US or EU may not be directly involved in the activities of Swiss export-oriented companies[4]. The fines for violations are significant. US enforcement agencies have targeted companies and individuals all over the world.
The added cost for due diligence to comply with Article 101a of the RBI along the value chain could turn legitimate investors away from developing countries, especially when profit margins are slim. This will disproportionately affect small and medium enterprises that are more likely to invest equity rather than non-equity financing. The vast majority of Chinese non-equity finance in Africa are loans. Loans backed by the value of natural resources is putting developing economies at risk. These “resource-backed loans,” finance critical infrastructure projects. However, the Natural Resource Governance Institute suggests the lack of transparency on the terms of these loans means borrowing countries could end up with untenable debt levels. local communities are ignored or insufficiently consulted and may lead to harming the environment. In other words, mortgaging the future.
The RBI is not designed to address Illicit trade which takes place “underground”, is “unrecorded”, “non-protected”, “grey market” in developing countries. For example, Libya, which produces virtually no gold and Egypt report exporting gold to the United Arab Emirates (UAE) in volumes that exceed estimated national production levels in 2016.
5. Private sector development through inclusive UN SDGs.
Sustainable Development Goals (SDGs) emphasise partnerships between stakeholders including governments, international and regional organisations, businesses, academia and civil society. It is central to the work of the United Nations Economic Commissions. SDG 17 which stresses collaboration to mitigate risk is the preferred strategy for improving cooperation[vii] to reduce pressures on the consumption of natural resources[viii] and to create more dynamic and resilient economies.[ix]
SDG 8 underlines the need to generate jobs that offer higher wages and better working conditions – especially for young people. Small rural farmers that sell products to a company have trouble keeping the children away from work. They cannot afford external workers with formal contracts; on the other hand, a responsible company can counteract this by increasing family income and building schools for the children.
Companies doing business in poor communities where human rights offences, including child labour, is the rule rather than the exception must be able to improve the conditions increasingly. The fact that returns are generally low given the small volumes, companies would think twice before engaging in a poor community.
Eliminating child labour from the supply chain and adhere to human rights practices is often a process. With the KVI, a risk-averse company would either withdraw from the community or source its entire inputs from higher up the value chain or from elsewhere. Companies that decide to stay could choose to operate in secluded export processing zones (EPZs) with little backward linkages with the domestic economy.
Companies could opt for Turnkey projects as their primary mode to do business. A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing/ business/ service facility and turn the project over to the purchaser when it is ready for operation for a remuneration. The N’sele Presidential Farm in the Democratic Republic of Congo (DRC) is one such business model. An island of modern production in a sea of poverty.
Many companies in agricultural supply chains have implemented the OECD-FAO Guidance for Responsible agriculture supply chains to address sustainability issues. However, proper due diligence is often external pressures make translating policy commitments into implementation actions very challenging. To better address, systemic challenges require much closer collaboration with key stakeholders. Engaging local communities would contribute to ‘inclusive’ growth. The RBI initiative is counterproductive precisely because the associated risk levels will encourage ‘exclusive’ development and because local communities would lose out on the benefits.
6. Swiss National Action Plan: an appropriate tool for achieving extraterritorial jurisdiction
On the tensions between international and local standards, two critical questions arise when one state desires to apply and enforce their national laws extraterritorially:[x]
- When can and should a state be able to regulate conduct occurring outside its territory; and.
- How should overlaps of jurisdiction between two or more states be resolved?.
While there has been some positive shift towards ‘convergence’ or ‘harmonisation’ countries must first overcome the difficulties of both honouring and incorporating the social, political, legal, and economic realities within and between sovereign nations.
The Swiss National Action Plan (NAP) for the implementation of the UN Guiding Principles on Business and Human Rights (UNGPs)[5] is a much more useful tool.
The NAP commits the Federal Administration to regularly review progress and challenges in the implementation of the UNGPs, and to revise the NAP if necessary. It is more effective to tackle human rights abuses through national legislation. Even when it can be frustratingly slow if the local institutional context for monitoring and enforcement lack the requisite capacities and the political will is absent.
A collaborative multi-stakeholder approach is a much superior approach because it builds social capital (trust, reputation and legitimacy) and promotes culture to appreciate, adapt and observe minimum CSR standards. Collaboration serves both Swiss SMEs that invest in less regulated businesses and is a conduit to deliver targeted technical cooperation and mentoring support to local entrepreneurs.
Often, the local legal regime can be perfectly adequate. Still, when laws are administered in a corrupt and incoherent manner, it forces local operators into informality. Support for governance and use of new technologies such as blockchain can improve transparency and help the process to formalise local businesses.
7. Examples of successful multi-stakeholder governance arrangements
Collaborative multi-stakeholder schemes are a practical approach to improve standards and embrace sustainability practices and promote inclusive growth. Collaboration and partnerships are encouraged to realise the 2030 United Nations Sustainable Development Goals.
In the United States, a successful multi-stakeholder initiative includes the Los Angeles City Sweatfree Procurement Ordinance. With regards to requirement involving standards of subcontractors in developing countries, the local company must comply with local minimum standards assessed based on local conditions.[xi]
The other is the US Fair Labour Association (FLA). A multi-stakeholder governance arrangement where companies work with the local civil society, universities and international NGOs to improve labour and human rights concerns. They also promote compliance with core international labour standards within their global supply chains. Such collaboration has developed a range of regulatory mechanisms – including standard-setting functions, monitoring and audit systems, and ‘soft’ forms of enforcement – to provide leverage over corporate behaviour.[xii]
The Asia Wage Floor Alliance helped introduce new regulatory techniques on behalf of national governments to reflect greater corporate accountability. Success depends on the role of the state in mediating labour standards and production prices and consistent multinational standards to reflect the global nature of the industry.
In Switzerland introduced the Responsible Cocoa Platform (RCP) with a tool to manage deforestation and child labour across smallholder supply chains. The RCP builds on ten years of Monitoring and Evaluation for deforestation and child labour across smallholder supply chains.
8. The way forward
The informal economy is exceptionally problematic to the enforcement of the human rights regime. Even when States ratifies such instruments, it provides little comfort to the intended beneficiaries who are existing outside of the legal authorities charged with implementing these rights. Making human rights regime a reality for those who need it most, is to allow them into the formal economic system.[xiii]
The question is how to do that.
Social alliances that have successfully promoted corporate accountability are those that pressured governments to regulate corporate behaviour in ways that reflect internationally agreed goals and standards.
- The reporting functions contained within many of the human rights instruments can already be used to generate international pressure on governments to enforce their human rights obligations. It includes the 1970 Convention on the taking of evidence abroad in civil or commercial matters. Except for South Africa, the African continent remains a blank spot. Lawsuits involving foreign parties will present swiss litigants and courts with unique problems, from questions of jurisdiction over the actions of foreign subsidiaries to the choice of law. The other common challenge is to determine the procedure by which evidence located in foreign countries may be obtained.
- The informal economy effectively interferes with the attainment of almost every significant human right. The preference of Swiss Development Cooperation and NGO’s should be to support reforms that create greater regulatory transparency and allow for citizen input. These capacities are best placed to uncover and address human rights and other business violations.
- The human rights regime can be a significant part of a solution that brings people within the law and alleviate poverty when it is used to create coherent legal systems. Domestic and regional human rights courts and commissions are influential bodies and better placed to enforce human rights regimes. This is especially critical when it involves illicit mining and cross border trade.
9. In conclusion
The involvement of a broader range of stakeholders has enabled more robust systems of monitoring and compliance to be established. In some cases, enhanced transparency and participation improve the perceived legitimacy of such schemes. Without the political will or capacities to inspect and enforce, the RBI might not benefit from OHCHR efforts to promote accountability and remedy through the UN Guiding Principles on Business and Human Rights (UNGPs) and the supporting actors or lead players in developing. Successful programs are those that help companies to become embedded in the local community. Success happens when the local community is collaboratively exerting influence over the behaviour of both local and foreign business and where donors build the capacity of stakeholders to engage effectively at different levels of the economic structure.
Notes
[1] Corporate social responsibility is when corporations strive beyond generating profit for their shareholders and refrain from causing harm to the environment, individuals or communities and protecting human rights of workers and communities from negative externalities. In contrast, corporate accountability is a more aggressive strategy to influence corporate behaviour. It implies that to influence corporate behaviour, legal mechanisms to enforce social and environmental standards are necessary.
[2] Meaning ‘holding corporations accountable and responsible for the social and environmental impacts of their decisions and practices. It incorporates the effects, both direct and indirect, on human rights, labour rights, the broader community and the environment (Australian Government: 2006).
[3] Swiss companies have to comply with local and EU/US market regulations, and they can face potential relevancy of US and EU law.
[4] The US Department of Justice (DOJ) fined Alstom Network Schweiz AG and other Alstom companies for corruption in several countries. The extraterritorial enforcement is based on the fact that (a) US resources have been used (US Dollars, US financial system, mail/email) or (b) US persons or companies have been involved in the companies transactions.
[5] The UNGPs were endorsed by the UN’s Human Rights Council in 2011 following a multi-year and multi-stakeholder process to address widespread concerns about the adverse human rights impacts of economic activity.
References
[i] Hernando De Soto, The Mystery Of Capital: Why Capitalism Triumphs In The West And Fails Everywhere Else? 15 (Basic Books, 2000)
[ii] ILO Informal economy in Asia and the Pacific. http://www.ilo.org/asia/areas/informal-economy/lang–en/index.htm
[iii] Institute for Liberty and Democracy, Home Page, at http://www.ild.org.pe/home.htm(last visited Apr. 6, 2006).
[iv] (Hussmanns, 2004; see also, Blades et al., 2011; Bhuyan, 2013; Bhattacharyya, 2009)
[v] 2020 Economic Development in Africa Report.
[vi] Trade and Smuggling of African Gold to UAE: The Cases of Libya and Sudan are published in ATDF Journal Volume 9, Issue 3. 2019 http://atdforum.org/2588-2/
[vii] SDGs, 7, 8, 9, 11, 13
[viii] SDGs 3, 6, 7, 12, 13, 15
[ix] SDGs 7, 8, 9, 11, 13
[x] Report of the Task Force on Extraterritorial Jurisdiction: International Bar Association, Legal Practice Division, 2008
[xi] (Owen-Smith, Coast et al. 2010, p.340-1).
[xii] (Macdonald 2011).
[xiii] Brett J. Miller, Living Outside the Law: How the Informal Economy Frustrates Enforcement of the Human Rights Regime for Billions of the World’s Most Marginalised Citizens, 5 Nw. J. Int’l Hum. Rts. 127, (2007). http://scholarlycommons.law.northwestern.edu/njihr/vol5/iss1/5