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Focus on Regulation

The responsibility to respect human rights in the banking sector

The question of how the UN Guiding Principles on Business and Human Rights (UNGPs) should apply to the banking and financial services sector is one that is attracting increasing attention. Indeed, the dialogue has intensified in recent months between UN bodies responsible for interpreting and implementing the UNGPs and representatives of the financial community, including the Thun Group (an informal group of bank representatives focused on understanding the application of the UNGPs to the banking sector).

Notably, on 12 June 2017, the United Nations Office of the High Commissioner for Human Rights (OHCHR) issued guidance in response to a request from the international NGO BankTrack regarding the application of the UN Guiding Principles on Business and Human Rights (UNGPs) to the banking sector. This guidance sought to shed more light on the banking sector’s responsibilities for the human rights impacts of its activities and reaffirmed that a bank could contribute to an adverse human rights impact via its clients. Specifically, it noted that “a bank can contribute to an adverse impact through its own activities (actions or omissions)—either directly alongside other entities, or through some outside entity, such as a client“. This is of course the allegation made against Jordan-based Arab Bank Plc in a case due to be heard by the US Supreme Court on 11 October 2017. Arab Bank has been accused under the Alien Tort Statute of complicity in human rights abuses on the basis that it processed financial transactions (through a branch in New York) for groups linked to terrorist attacks committed in Israel and Palestine. This case will feature in a future Hogan Lovells Business and Human Rights blog.

The UNGPs require businesses to take steps to address adverse human rights impacts with which they are involved, which pursuant to UNGP 13, includes not only adverse human rights impacts they have “caused” or “contributed” to through their own activities, but also those that are “directly linked” to their operations, products or services by their business relationships, even if they have not contributed to those impacts. The below illustrates this distinction.

UN Interpretive Guide to the Corporate Responsibility to Respect Human Rights (United Nations 2012), page 16.

From UN Interpretive Guide to the Corporate Responsibility to Respect Human Rights (United Nations 2012), page 16.

In practice, the instances in which a financial institution could “cause” an adverse human rights may be limited, such as in relation to the treatment of its employees (e.g. discriminatory hiring practices). However, the OHCHR’s latest guidance confirms that the following examples could constitute “contributions” or “linkage” to adverse human rights impacts, requiring the bank or other financial institution to take action:

  • Financing to a client that is used by the client to act in a way that causes an adverse impact, for example financing of a construction project that results in the forced eviction of local communities.
  • Advising a client on cost-cutting on an infrastructure project, despite such cost-cutting measures making it significantly more likely that the livelihood of nearby communities would be destroyed.
  • Financing to a client that is used by the client to fund another business or entity that causes an adverse impact.

The extent of the bank’s responsibility will turn on the specific circumstances – for example did the bank know or should it have known that the risks were present and yet it took no steps to seek to get its client to prevent or mitigate – but it is clear that financial investors in a project can no longer assume they bear no responsibility for the human rights impacts of the project. It also brings into sharp focus the need for robust and ongoing human rights due diligence processes in relation to clients and transactions.

This guidance is to be contrasted to the Thun Group discussion paper in January 2017 expressing the view that a bank’s conduct could not cause or contribute to an adverse human rights impact, but could only be “directly linked” to such an impact. The implication of this distinction was that banks could not be responsible for the remediation of any adverse human rights impacts connected to their activities but only for the prevention or mitigation of such impacts, which is a less onerous responsibility.

This guidance should lead to greater clarity on the practical application of the UNGPs to the banking sector. Whatever the precise scope of a bank’s responsibility for adverse human rights impacts, it is clear that banks (like any other business) would be well-advised to undertake appropriate human rights due diligence in the context of their activities and those of their clients. What is appropriate will depend on the size, nature and context of the bank’s operations and the severity of potential adverse human rights impacts. This may go as far as demanding assurances from a client that it has put in place adequate safeguards to prevent and mitigate any human rights risks associated with the project or activity they intend to use the bank’s funds to finance. Consideration could also be given to including clauses requiring customers to comply with the UNGPs in financing agreements.

Visit Hogan Lovells’ Business and Human Rights page to see how our team can assist you with these issues.