Wednesday, March 03, 2021

Leveraging Soft Power Against Chinese Policies in Xinjiang and its Limits: The Financial Sector, the OECD Guidelines for Multinational Enterprises, and the Convergence of State Duty to Protect and Corporate Responsibility to Respect Human Rights


Pix Credit: Photo: Uighur protest outside the White House in 2009 | Malcolm Brown / Flickr

 One of the most potently important developments over the course of the last several years has been to shift the focus of business and human rights enforcement from operating companies to the financial sector from which operating companies derive capital. More interesting still has been the way in which that connection between human rights violations of operating companies, disciplined through the imposition of human rights based responsibilities by the institutions that finance their operations, is now being used as a private sector instrument to influence or manage the policies of states that have significant human rights dimensions.

This was evident, for example, in the context of the palm oil industry, where soft law substantive frameworks were used by host state governments as a basis for securing agreements by banks to include some measure of human rights due diligence and responsibility in their lending to operating companies in hist states (Sustainability Policy Framework: Rabobank Group).  This was expanded into a more general agreement in the form of the Dutch Banking Sector Agreement on International Responsible Business Conduct regarding Human Rights, effective on 7 December 2016 among the banks, the Dutch Banking Association (NVB), trade unions, CSOs, and the Dutch Government.Though it ended after three years (see Closing statement: The Dutch Banking sector Agreement on international business conduct regarding human rights), it provided a template for further action, one that has only been realized slowly.

That template was built around a commitment for the banks to exercise their responsibility to  respect human rights under the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights (UNGPs). That commitment, in turn, was to be focused on two areas of banking activity: corporate lending and project finance.

This approach is now being applied against Chinese policies in Xinjiang, driven by a hos of private economic and civil society actors who seek a substantial change in Chinese policies in that region. It was recently scored the beginnings of what might be an important success in embedding this framework approach to the global operations of the financial sector. As reported by OECD Watch

On January 28th, the Swiss NCP accepted the specific instance filed by the Society for Threatened Peoples (STP) against UBS related to the Swiss bank's business relationship with Hikvision, a company that is aiding China’s mass surveillance and genocide of Uighurs. This is the first OECD complaint to focus on a financial institution’s asset management business and passive products. Up until now, the NCP procedure has focused on asset owners’ direct shareholding, or banks’ mainstream lending. (OECD Watch Press Release)

The potential importance of this initial assessment ought not be be underestimated.  It suggests, at a minimum, that the human rights responsibilities of economic activity are not constrained within the limits of the autonomous legal personality of enterprises.  Instead, it suggests that the human rights responsibilities of business are intertwined within and through the production chains in which enterprises connect toward common projects. At the same time it suggests a closer connection between breaches of the state duty to protect human rights and the corporate responsibility of respect human rights along global production chains.  This moves us beyond the limits of complicity based liability to a more integrated approach.  But it does more than it--it also suggests a more seamless connection between the policies of states realized through economic activity and the activities of business. In this case--just as banks may serve as instruments for respect for human rights (through their financing or financial services activities) of operating companies, so too may may they serve as the bearers of liability for state policies that may be found in violation of the state duty to protect human rights.  In other words, the initial assessment underlines the way that private responsibilities to respect human rights can be used to nudge (or pressure) states toward compliance with their autonomous (but connected) duty to protect human rights.  In this case that nudging focuses on macro-economic policy as well as the specifics of human rights in China.  

 The full report of the Swiss NCP (Initial Assessment: Specific Instance regarding UBS Group AG submitted by the Society for Threatened Peoples Switzerland) follows along with the OECD Watch analysis and my own brief observations. 


1.  The essence of the initial assessment was centered on the existence, as a matter of the "law" of NCP Special Instance (discussed here) of a business relationship between a financing mechanism (UBS Group AG) and a Chinese operating company (Hangzhou Hikvision Digital Technology, Co.). "The Swiss NCP comes to the conclusion that a business relationship according to the OECD Guidelines between UBS and Hikvision and a direct link between UBS’s products and services and the alleged human rights violations could not be excluded with regard to the UBS fund sold by UBS. However, in relation to UBS’s role as custodian for Hikvision shares on behalf of clients, the Swiss NCP concludes that no business relationship between UBS and Hikvision exists."(Initial Assessment: Executive Summary).

2. "Business relationship" was essential to connect the alleged wrongdoing of the operating company (Hikvision) with the activities of UBS. "According to the submitting party, this company manufactures technology used for surveillance of the Uyghurs and other Turkic minorities living in the Xinjiang Uyghur Autonomous Region in China. On the grounds of its involvement in the crackdown on ethnic minority communities in the region, Hikvision, together with 27 other entities, was blacklisted by the United States (hereafter “US”) in October 2019."; Ibid., ¶1). UBS' failures were centered on its inability or failures to comply with its own Code of Conduct or its responsibilities to implement the OECD Guidelines for Multinational Enterprises in the way that the complaining party thought was appropriate in the circumstances. "By having entered and maintained a business relationship with Hikvision, the STP contends that UBS has neither fulfilled its duties regarding due diligence, i.e. avoided infringing on the rights of the ethnic minorities living in Xinjiang, nor sought ways to prevent or mitigate, i.e. address, the adverse human rights impacts despite being directly linked to them through its products and services." (Ibid.). 

3. It is perhaps important to note the way in which the imperatives of human rights due diligence has moved to the foreground of an enterprise's responsibility to respect human rights.  Equally important, the expansion of that obligation to engage in human rights due diligence with respect not just to an enterprise's internal operations, but also with respect to the way in which it manages its role and projects its products and services within the production chains in which it is embedded.  For financial enterprises, that means with respect to its lending, its offer of financial services, or more generally its services for a fee. (described Ibid., ¶ 5(b)). It is likely that this principle of human rights due diligence is rapidly becoming a more generalized norm of international aw in the sense of the development of an expectation, within business culture, to engage in it in every aspect of enterprise operation. More important still is the equally strong push to align human rights due diligence to compliance and risk avoidance strategies grounded in the principles of prevention-mitigation-remedy.  In effect, the thrust of movement appears to be to align the cultures of public administrative agencies with those of business enterprises--at least when it comes to the human rights (end eventually the sustainability and climate impacting) effects of economic activity. 

4. As expected the parties made cases for a very broad and a very narrow reading of the OECD Guidelines respecting both the meaning of "business relation" and of the applicability of the Guidelines themselves. The Swiss NCP took something of a middle ground. That was possible in part because the Guidelines themselves are not legal documents, and the object of its measures are meant to be flexibly applied to attain behavior objectives that change business culture.

It is precisely because the OECD Guidelines are recommendations and not legally enforceable that open-ended descriptions of what is meant by business relations can be used. A legally binding character would require much more precision with regard to their scope and applicability12. This expansive reading is also applicable in terms of business relationships in the financial sector. According to an OECD reference document, for the financial sector business relationships include, for example, suppliers, clients, customers and investee companies, including a minority shareholding. The same may apply with respect to investments through index funds despite the multiple tiers of business relationships1(Ibid., ¶ 5(c)).

5. But even this somewhat flexible approach was insufficient to extend the notion to shares for which UBS acted merely as custodian (Ibid., ¶5(c). Here one engages in line drawing, but one based on principles of control rather than on principles of connection. "The mere management of clients' shares as a custodian implies a business relationship between the bank and its clients, but not with Hikvision." (Ibid.). This drew the ire of th analysts at OECD Watch (see below).   OECD Watch argues in effect that service is service--especially service for which fees are generated.  The legal relationships matter less; it is the fee, in effect, that drives the definition of business relationship. The Swiss NCP might not disagree.  But its point is quite different--here they note that the business relationship does indeed exist, but only between UBS and the entities for whom it holds Hikvision shares. 

6. There is a certain power to the Swiss NCP's conclusion. It is based, however, on a fidelity to traditional notions of corporate personality and its  consequences that are increasingly rejected--as a matter of law an politics--by those who take the position that corporate law principles ought to be subordinated to a "higher law" of international human rights, whether "hardened" in international, national, or private law. Yet one might be cautious about sweeping a century of corporate law principles (and debate) about the consequences of adopting particular views of corporate personality where corporate enterprises ae required to act as or offer services as bailiffs or custodians of property that represents investment, ownership, or control by others. The notion embraced here by the Swiss NCP is that Hikvision shares are property in the hands of  UBS, but property held in trust for the account of another.  The direct relationship, grounded in investment, is between the shareholder-client and the company. In that context, the human rights obligations run to UBS' clients rather than through Hikvision to UBS directly.

7.  And yet this also opens an opportunity that was missed by both the Swiss NCP and the Society for Threatened Peoples Switzerland. It is this: UBS might be obligated to conduct human rights due diligence for its custodial accounts, and perhaps to avoid custodial relationships with enterprises whose operations may breach human rights (and sustainability) norms. Here the direct link language of the Swiss NCP (Ibid., ¶5(c) could be usefully applied by analogy. But that would require a complaint that would be brought against UBS' clients. That, in turn, increases the difficulties of such actions, but does make it impossible.  Here the key point made by the Swiss NCP is worth considering: It is the investment relationship that is the touchstone of the responsibility. It is the provision of services that triggers responsibility grounded on the conduct of the client.  Here, though, that direct link is hard to show merely by the provision of custodial services to clients. Custodial services reaches no further than the realtionship between share owner and custodian.

8.  It is worth considering, in this respect, whether there ought to be a collusion or bad faith exception to this limitation of the extent to which UBS' responsibility extends.  Where a custodian hides the identity fo clients, where the custodian holds itself out as a principal, and where there are other elements of deception or misrepresentation, one can make a more powerful argument against UBS.  But here the argument goes to a sort of corruption and a fraiud on stakeholder communities. These ideas now appear to be worth developing. 

8. Lastly, it is worth noting the interlinking of the Swiss NCP decision and the consideration and actions of the Norwegian Pension Fund Global Ethics Council touching on the behavior of Hikvision (Ibid., citing







Swiss NCP misses the mark on UBS links to mass surveillance of Uighurs

On January 28th, the Swiss NCP accepted the specific instance filed by the Society for Threatened Peoples (STP) against UBS related to the Swiss bank's business relationship with Hikvision, a company that is aiding China’s mass surveillance and genocide of Uighurs. This is the first OECD complaint to focus on a financial institution’s asset management business and passive products. Up until now, the NCP procedure has focused on asset owners’ direct shareholding, or banks’ mainstream lending.

In its assessment, the Swiss NCP concluded that “a direct link between UBS’s products and services and the alleged human rights violations could not be excluded”. The Swiss acceptance of the case is significant because it represents the first time an NCP has recognized the responsibility banks have for their passive investments through indexed funds. In recent years, the asset management industry has seen a significant shift towards passive investment strategies, by which funds are typically invested in an index rather than in actively traded shares. Currently, over USD 10 trillion is invested in passively managed funds globally, so the recognition of banks’ responsibility for addressing impacts cause by these investments is important.

However, on a second element of the complaint, the Swiss NCP concluded that no business relationship between UBS and Hikvision exists in relation to UBS’s role as custodian for Hikvision shares on behalf of clients. This is despite UBS holding the title of the Hikvision shares, being listed publicly as the owner, and allowing its client (the ‘beneficial owner’ of the shares) to invest in the company in secret. According to research by the STP, UBS has maintained a business relationship with Hikvision since 2016. The bank is involved in the technology company through investment products and services as well as manages shares in the name of unknown investors as a “nominee shareholder”.

However, in regard to UBS acting as a nominee shareholder of shares in Hikvision, the NCP stated: “Based on the information received from UBS, the Swiss NCP concludes that UBS is not an investor in Hikvision but acts as a custodian of Hikvision shares on behalf of its clients and does not actively advise clients to buy Hikvision shares. The mere management of clients’ shares as a custodian implies a business relationship between the bank and its clients, but not with Hikvision.”

Worrying misinterpretation
This decision represents a worrying misinterpretation of the spirit of the OECD Guidelines and the UN Guiding Principles, which contain an expansive definition of business relationships: “Business relationships refer to those relationships a business enterprise has with business partners, entities in its value chain and any other non-State or State entity directly linked to its business operations, products or services.” The expansive definition of business relationships is intended to increase the scope of an enterprise’s responsibility beyond its own operations and activities to its value chains as well. In this case, UBS provides a service that is an essential part of the investment value chain, allowing the bank’s clients to invest in Hikvision.

In acting as custodian or nominee shareholder, UBS holds the title to the Hikvision shares and is listed as the owner in Hikvision’s own annual reports. Its client, the beneficial owner of the shares, remains invisible. As such, UBS is not only helping its clients to invest in Hikvision, but also helping them to do so anonymously. The fact that the bank enables its client to hold these shares in secret – in this case, in a company that is aiding mass surveillance of China’s Uighurs, including in detention camps, in what has been described as a genocide – adds an additional layer of importance to what UBS does. This is a valuable service for clients, who otherwise may not dare to make those investments.

Furthermore, the Swiss NCP’s decision does not sufficiently account for specific Chinese market conditions which mean that the only way a foreign investor or shareholder can invest in Chinese companies is via an index fund or a depositary bank. Services such as the holding of nominee shareholdings are therefore a basic prerequisite for market access in China.

Perverse incentives
For the Swiss NCP to imply that UBS has no responsibility in this regard is deeply problematic. It creates a massive, and easy, escape route for investors to avoid application of the OECD Guidelines. It clearly sets up perverse incentives whereby more investors might choose to reorganise their shareholdings this way, making it impossible for stakeholders and rightsholders to identify who they should actually be targeting when seeking to address adverse impacts and those responsible for them. More banks might offer these services essentially as a way to screen out linkage and avoid taking any responsibility despite their crucial role in the value chain.

OECD Watch and BankTrack call on the OECD to clarify the issue of business relationships in the situation of nominee shareholders and urge the Swiss NCP to reconsider its position in light of the the spirit of the OECD Guidelines and UNGPs.

Find out more about the case in the OECD Watch database.

Photo: Uighur protest outside the White House in 2009 | Malcolm Brown / Flickr


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