Export controls and human rights: Impact on risk and due diligence

Any business trading strategic goods, software and technology needs to have a trade compliance function that is readily aware of human rights risks in their supply chain. This has long been the case but is now even more important as regulators increasingly take human rights considerations into account when making export licensing decisions.
 

What’s driving this spotlight on human rights risks?

The Deloitte Global third-party risk management survey 2023 highlights that national and regional legislation is emerging that places "stringent obligations on organisations to report and implement strategies in areas such as protecting and respecting human rights conditions”.

Similarly, export controls, which regulate trade in strategic items, and which traditionally aim to uphold national security, have become linked with human security through the advancement of the ESG agenda, and through legislative initiatives in the United States, the United Kingdom, and the European Union. Consequently, trade compliance functions must be equipped with the right processes and tools to manage human-rights-related risk in their supply chains.

The Biden Administration has taken significant measures to use export controls as a tool intended to counter state and non-state misuse of goods and technology that could violate human rights. This was demonstrated during the 2023 Summit of Democracy, where a written code of conduct was endorsed which places international human rights law alongside the multilateral export controls regimes. Endorsing countries have committed to applying controls so relevant goods, software, and technologies are used in compliance with international human rights law and not misused to interfere with privacy unlawfully, or arbitrarily or to commit serious human rights violations.

In 2021, the US Bureau of Industry and Security (BIS) implemented a rule change in the Export Administration Regulations, which requires enhanced consideration of human rights concerns when submitting licensing applications. BIS and partner agencies now consider any assurances or safeguards to minimise the risk of human rights violations that may arise because a recipient of a controlled item misuses it. As entities and individuals engaged in or enabling human rights violations can be added to the Entity List, exporters must exercise due diligence with regards to identifying human rights concerns and include all known facts in their license application.

During the recast of the EU Dual Use Regulation, the European Parliament also advocated for human rights considerations to be taken into account by the member states when assessing licensing applications. The recast regulation adopted in 2021 imposed stricter controls on cyber-surveillance technology to prevent it from being used to violate human rights and to protect European security, and the security and privacy of individuals. In 2021, the UK government also amended its licensing criteria to ensure controlled items are not used for internal repression or to commit serious violations of international humanitarian law.
 

What does this mean for businesses?
 

The above legislation and regulations mean that companies must now consider human rights risks in their supply chains. Imperatively, companies need to ensure they screen and conduct an appropriate level of due diligence on all third parties and take into consideration the human rights and rule of law context in the countries where they are exporting controlled items to. Businesses will need to adapt their current import and export processes to rule out human rights concerns. This requires considering possibilities of forced labour, diversion of controlled items to a destination affected by violence, and possibilities of end-users been involved in human rights abuses, or even misdirecting the items against EU security and citizens. If companies don’t conduct robust and effective due diligence on all third-parties, they could suffer an adverse impact on their ESG credentials, losing earned reputations with shareholders investors, and consumers, and losing export privileges.

Deloitte’s Trade Compliance team can support companies in ensuring compliance with export control regulations by providing export classification and export licensing services, sanctions and denied party screening, putting in place export control frameworks and conducting internal compliance program reviews. Notably, we can support companies in identifying potential human rights issues and concerns, and in mitigating the risk of any potential export control violations in relation to human rights within the supply chain. Our Trade Compliance team can provide specialised corporate intelligence services to enable integrity due diligence in relation to particular suppliers or third parties of concern.

For further guidance or support, please contact the Trade Compliance Partner Julia Hurley or Director Warren Bayliss.