Unilateral and Extraterritorial Sanctions Symposium: Unilateral and Extraterritorial Sanctions – Economic Operators and the Rise of the Business and Human Rights International Legal Framework

[Marco Fasciglione is a researcher of International Law at CNR.]

Introduction

According to a common belief existing among State officials and international law scholars, unilateral and extraterritorial economic sanctions would be a valuable alternative to armed conflicts. This is either because sanctions would, according to Reisman and Stevick (at 94), “reinforce public commitment to the norm that has been violated and generate a sense of civic virtue, without incurring unacceptable domestic political costs”, or because they enable the sender countries to avoid the political backlash of sending armies to the receiver country. Whatever the reason, the expansion of the utilization and application of unilateral and extraterritorial sanctions by powerful States has led to an increase of academic articles and books published with the aim to debate various aspects of sanctions law and in particular some sensitive issues such as the impacts of multilateral or unilateral sanctions on the rights of civilian populations or their humanitarian impacts on the receiving State. Conversely, an important concern that the literature has rarely scrutinized, despite the prominent economic aspect of coercive measures, is the ‘impact’ of sanctions on a specific category of non-state actors: the national economic operators.

The Impact of Sanctions on Economic Operators

Economic sanctions, indeed, are not only directed at States, but also at foreign business entities and investors operating, or having business relationships within sanctioned countries. From this side, the sanctions mechanisms give rise to a sort of ‘burden shifting’ on private operators who are requested to comply with coercive measures so as not to incur in secondary sanctions (proceeding or penalties). In discharging duties stemming from such measures, economic operators increasingly deal with risks associated to falling within the scope of economic sanctions as risks for their business activities. Accordingly, they use to address these risks by integrating “unilateral sanctions into their compliance programmes” (Charlotte Beaucillon, Introduction: 13). The combination of these factors is apt to lead, inter alia, to the so-called phenomenon of ‘overcompliance’ to unilateral and extraterritorial sanctions.

Part III of the Research Handbook on Unilateral and Extraterritorial Sanctions edited by Charlotte Beaucillon serves as an excellent starting point for deconstructing and exploring major challenges that economic sanctions represent for a large typology of private operators such as banks, financial institutions, traders, and other business operators. Under the heading “Impact on Economic Operators” Part III is composed of six chapters, which cumulatively are aimed to investigate a series of issues concerning the subject matter, two of which deserve to be highlighted.

The first one deals with the ease with which business operators tend to fall into overcompliance. As mentioned above, complying with unilateral and extraterritorial sanctions is increasingly perceived involving reputational and legal risk for their business and therefore a matter concerning their compliance programmes (Emmanuel Breen, chapter 15). Where economic operators fail to abide by sanctions, States imposing unilateral measures have developed powerful tools to enforce compliance and punish private actors for their non-compliance. Fines imposed by sender States, indeed, are often very high and their application against business operators who are particularly vulnerable to financial sanctions, such as banks, may even lead to the ceasing of their existence. A paramount illustration of such an impact is the case of ABLV Bank, one of the major Latvian banks, accused of illegitimate financial activity in violation of US and UN sanctions against North Korea, and put into liquidation by its shareholders due to a sudden increase of withdrawals of deposits and lack of access to US dollar funding following the notice of sanctions by the US authorities (see Ilze Znotiņa and Paulis Iļjenkovs, chapter 17). In these situations, the need to avoid risks to be sanctioned for non-compliance is likely to lead to overcompliance, with private operators deciding, in order to respect unilateral sanctions, to adopt policies that may go even beyond what is required by the sanctions and to set up very intrusive due diligence checks; in some cases this may lead to the termination of the business relationships with business actors in the target Countries (so-called ‘de-risking’). This occurs even where the legitimacy and lawfulness of the concerned measures may be questioned, because, for instance, they negatively impact on human rights (see Emmanuel Breen, chapter 15 and Grégoire Mallard and Anna Hanson, chapter 16).

The second issue concerns whether legal remedies are available to entities affected by these measures, and in particular the avenues at the disposal of business operators to adjudicating their conduct in light of the duties stemming from unilateral and extraterritorial sanctions. Here the analysis performed in Part III points to national as well as to arbitral jurisdictions with an interesting overview comparing some European countries’ approach, i.e. France and United Kingdom (Marjorie Eeckoudt, chapter 18), with the approach of China and its two special administrative regions, Hong Kong and Macau (Jin Sun, chapter 19). The final chapter analyzes the rules governing the admissibility of arbitrations and the substantive law applicable to cases concerning the implementation of unilateral sanctions and the effects of unilateral sanctions on the contractual practice with the rise of the phenomenon of ‘sanction clauses’ applicable also in the contemporary international arbitration (Eric de Brabandere and David Holloway, chapter 20).   

Unilateral Sanctions in the Light of the Developing Business and Human Rights Framework

The essays in Part III provide food for thought for the understanding of unilateral and extraterritorial sanctions legal framework. They encourage readers to leave their ‘comfort zones’ and move outside respective disciplinary silos, opening up the potential for future analysis of the subject matter. There is one potential area for future research, implicitly raised by the chapters under review, which is particularly noteworthy. It concerns the relationships between unilateral sanctions’ legal framework and the developing business and human rights (BHRs) legal regime. Such a regime, currently enshrined in a handful of international non-binding instruments such as the OECD Guidelines for multinational enterprises, adopted in 1976 and revised in 2011, the ILO Tripartite declaration on principles concerning multinational enterprises and social policy, adopted in 1977 and lastly revised in the 2017, and the UN Guiding Principles on Business and Human Rights (UNGPs) adopted in 2011, relies on the duty of States to protect human rights, on the responsibility of businesses to respect human rights, and on the access to remedies for victims of human rights violations. While the objective of BHRs framework is to “prevent and address human rights violations by the business sector” (at 296), the question raises if and how this framework should be used in order to prevent and mitigate the unintended consequences of sanctions on people and environment in target States. This issue may be dealt with according to two complementary approaches.

The first approach valorizes the State duty to protect under the first Pillar of the UNGPs. State duty to protect enshrines one of the basic tenets of the international human rights law regime and emphasizes the role of States in safeguarding individuals’ human rights against violations committed by non-state actors, including business enterprises. According to this duty, in effect, States bear a positive obligation to adopt all reasonable and appropriate steps and to set up an efficient smart mix of measures including policies, regulations, legislation and adjudication in order to protect individuals from corporate violations of human rights (see UNGPs Principles 1 and 2). Such a state duty to protect does exist in respect to situations concerning the imposition of unilateral and extraterritorial sanctions by home States. Actually, given the disastrous impacts of sanctions and the ineffectiveness of exemptions provided under the sanctions regime for necessities such as food, medicine and medical technology, categorizing the sanctioned country among the conflict-affected and high-risk areas (as enshrined in Guiding Principle 7 and Commentary to Guiding Principle 23) makes sense. It allows, indeed, to address the devastating negative impacts of sanctions through the ‘heightened attention’ requirement demanded of States and companies in such complex contexts (a review of impact of sanctions in “high-risk territories” may be found in Grégoire Mallard and Anna Hanson, chapter 16). Even though unilateral and extraterritorial sanctions are not mentioned neither in Principle 7 nor in its commentary, and even leaving aside the fact that economic sanctions are frequently adopted against States who are conflict-affected, it is worth noting that the very same imposition of such kind of sanctions may cause significant ‘governance gaps’ in target States rendering them “unable to protect human rights adequately due to a lack of effective control” (see the Commentary to UNGPs Principle 7. A number of  indicators for identifying such areas, including the existence of “widespread and serious human rights violations” and “political/social instability or repression” have been developed by The Geneva Academy of International Humanitarian Law and Human Rights). In other words, sender (home) States of sanctions, in addition to taking into account human rights impact of their coercive measures also bear the duty to ensure that their national companies do not infringe human rights in receiving (host) States in which they operate in implementing unilateral sanctions. While home States have at their disposal several viable options in order to attain such a goal, arguably domestic legislations with transnational application – such as laws establishing mandatory human rights due diligence for companies– are effective measures to ensure that duty to protect be carried out effectively.   

The second approach turns to the role of the economic operators as enshrined in the second Pillar of the UNGPs. Corporate responsibility to respect is a global standard of expected conduct for all business enterprises, including companies operating in States who have been the target of economic sanctions. The commitment to respect implies that companies should avoid infringing on the human rights of others and should address adverse human rights impacts with which they are involved. In order to do so, companies have to carry out human rights due diligence (HRDD) with the purpose of ‘identifying, preventing, mitigating and accounting’ for how they address their adverse human rights impacts. In the context of unilateral and extraterritorial sanctions, corporate due diligence may play a fundamental role in order to ensure that business activities in sanctioned States will not contribute to, or facilitate, human rights abuses.  Human rights due diligence, in particular, may address negative impacts on human rights of ‘overcompliance’ business practices. In effect, because of the fear of penalties from sending States, banks and other financial operators may refuse to transfer funds, or may require oft-onerous certification for each transfer, or create additional costs and delays that impede assistance leading to difficulties in importing even basic food items, health-care equipment and other forms of humanitarian aid into sanctioned countries, and this “despite the existence of applicable exemptions”. The recent Swedish Mölnlycke case perfectly illustrates this situation. Following the reimposition of US sanctions on Iran on May 8, 2018, a Swedish bandage maker, Mölnlycke, decided to halt shipments to Iran, including authorized humanitarian trade for fear of secondary sanctions. The company’s decision, prevented its Iranian business partners from being able to import the bandages, and this even though medical and other humanitarian goods were announced to be exempt from the sanctions. Mölnlycke’s decision, then, has negatively affected the right of Iranian patients “to enjoy the right to health, the rights to be free from physical and psychological pain, inhuman treatment and the right to life”. In these situations, BHR framework requires companies operating in sanctioned States to conduct human rights due diligence with regard to the policies they implement when they give execution to unilateral and extraterritorial sanctions, and this in order to identify and prevent potential involvement in harmful impacts, or mitigate it in case such an involvement occurs.

Of course, corporate responsibility to respect human rights and human rights due diligence are also pivotal in order to address risks connected to de-risking policies. In effect, the necessity to minimize the risk of exposure to penalties from sanctioning States should not be regarded as allowing business operators to terminating or ending automatically business relationships with business partners or clients in targeted countries due to compliance concerns, and this especially where ceasing business relationships might cause the company to be involved in negatively impacting human rights. Here again, responsibly exiting the sanctioned State’s market is of great importance and concerned companies should identify, mitigate or remediate the potential adverse impact on people and the environment of their exit (this point has been discussed extensively in respect to US sanctions imposed against Iran).

Conclusions

At the time of publication, the international debates on the impact of unilateral and extraterritorial sanctions are in full swing. Coercive measures or sanctions, also unilateral ones, can obviously serve legitimate purposes provided that they are proportionate and do not infringe human rights in sanctioned States. However, a major problem resides in the large expansion of the scope, grounds, purposes, targets, means and mechanisms of unilateral sanctions, with negative humanitarian effects enormously exacerbated by their extraterritorial application, the expanding use of secondary sanctions, and civil and criminal penalties against those who cooperated with States, companies and individuals targeted by primary sanctions. As far as the impact of such measures is concerned, sanctions regime should be aligned not only with the existing human rights regime but also with the business and human rights framework as crystallized in the international standards existing in this area, and first and foremost in the UNGPs. The editor of this publication deserves commendation for having provided a timely and inspiring volume, which explores and opens up new analytical perspectives on an extremely important subject matter. Overall, the book deserves a place amongst the core literature concerning international sanction law.