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August 17, 2022

Defense Industry Human Rights Due Diligence Guidance

Executive Summary

While vital to the maintenance of peace and security, the international trade in defense articles and services can also result in adverse human rights impacts. Defense exporters therefore must contend with a number of different risks related to the misuse of their products, including:

  • Reputational, Financial, and Governance Risks
    • Exporters may incur reputational harm through negative media coverage, publicprotests, and acts of civil disobedience owing to their human rights impacts
    • Private and institutional investors are increasingly eschewing publicly tradedcompanies that are complicit in all manner of human rights violations
    • Activist shareholders are increasingly demanding socially responsible conduct fromcompanies
  • Regulatory and Policy Risks
    • A growing number of states have imposed generally applicable due diligenceobligations to address business and human rights concerns
    • States have directed unprecedented scrutiny toward the end use of defensearticles and services, resulting in many banned transactions
    • Concerned citizens have brought court actions challenging the legitimacy of exportlicenses that would allow the delivery of defense articles and services to knownhuman rights violators
  • Legal Risks
    • A failure to disclose material information regarding human rights risks can resultin civil liability
    • Complicity in war crimes, crimes against humanity, or genocide may lead to exposure to civil or criminal liability in domestic or international fora

In this risk environment, it is in the interest of defense exporters to develop and implement a comprehensive human rights due diligence policy. Such a policy would have the following elements:

  • Risk Assessment
    • Exporters should evaluate the human rights risks of a transaction in consideration of:
      • Risks related to the industry or sector, the geographic region, and the product or service (contextual risks);
      • Risks pertaining to the client’s known policies, practices, and track record in receiving defense articles and services (client risks); and
      • The risk that a valid export license may be deemed illegitimate owing to the failings of the regulatory authority (regulatory authority reliability risk)
    • If risks cannot be adequately prevented or mitigated, the exporter should not engage in the transaction
    • Where risks are high, additional scrutiny should be applied
  • Prevention and Mitigation Measures
    • Exporters can include key contractual terms to prevent and mitigate risk, including terms related to legal compliance and cooperation in end-use monitoring, tying business incentives to responsible usage, and termination clauses
    • Exporters can provide training on safe handling and usage, relevant laws and regulations,and risk identification and treatment
    • A red-flag system can alert exporters to risks of misuse, triggering either a rebuttable presumption that it is impossible to adequately prevent or mitigate risk or the applicationof heightened scrutiny
    • Industry actors can collaborate by standardizing their due diligence practices and sharinginformation
  • End-Use Monitoring
    • Exporters can require that their clients submit periodic and incident reports concerningtheir usage of the defense articles and services
    • Where possible, exporters may engage in periodic audits and site inspections
    • Exporters can track developments by collecting open-source information and consistentlyengaging with the client and other stakeholders
  • Investigation and Remediation
    • Upon reasonable suspicion of potential misuse, an exporter should investigate whether itsubstantially contributed to the adverse impact
    • If the exporter determines that there is a reasonable likelihood that misuse has occurred, itshould activate contractual contingencies, including the cancellation of future deliveriesand the termination of business relations
    • If the exporter determines that there is a reasonable likelihood that it substantiallycontributed to an adverse impact caused by misuse, it should reform its policies andconsider appropriate forms of remediation to victims
    • Upon notification, discovery, or reasonable suspicion of potential misuse, the exportershould immediately report the incident to the authorities and cooperate fully in theinvestigation

Read the full Guidance HERE