Multiple Bipartisan 5G Wireless Bills Advance in Congress

5G wireless technology has captured the attention of Congress.  At least 30 5G-related bills have been introduced in the House and Senate this Congress, signaling widespread interest by lawmakers in 5G. Several of these bills, addressing a range of issues including national security concerns, the promotion of U.S. leadership in international 5G standards-setting bodies, and the deployment of domestic 5G infrastructure, have passed through committee with strong bipartisan support.

The Secure 5G and Beyond Act (S. 893, H.R. 2881), introduced this past spring by bipartisan groups of lawmakers in both chambers, would require the president to develop a whole-of-government national security strategy to ensure the safety of 5G wireless systems and infrastructure, in consultation with the Federal Communications Commission (FCC), the National Telecommunications and Information Administration (NTIA), the Department of Homeland Security (DHS), the Director of National Intelligence (DNI), and the Department of Defense (DOD). In particular, the Act calls for the strategy to protect the competitiveness of U.S. companies and the integrity of standards of international standards-setting bodies. The bill, which was reported favorably out of both the Senate Commerce Committee and the House Energy & Commerce Committee earlier this month, also requires an assessment of the full range of threats to U.S. leadership in 5G and future generations of wireless communications systems, and an assessment of the global competitiveness and vulnerabilities of U.S. manufacturers building 5G devices and infrastructure. Negotiations to move these bills to the floorare ongoing in both the House and Senate.

Earlier this month the House Energy & Commerce Committee also passed the Promoting United States Wireless Leadership Act of 2019 (H.R. 4500), which encourages more participation by U.S. companies and other U.S. stakeholders in global standards-setting bodies.

And just last week, the Secure and Trusted Communications Networks Act of 2019 (H.R. 4998), which prohibits spending federal dollars on telecommunications equipment that could pose a threat to critical infrastructure and creates a fund to replace infrastructure equipment manufactured by certain foreign companies, passed the House on suspension of the rules, signaling strong bipartisan support. Negotiations are still ongoing in the Senate. Senator Mike Lee (R-UT) blocked passage of the House bill last week, arguing against the House bill’s use of tax dollars to fund the replacements.

In addition, Congress has also prioritized the allocation of spectrum for 5G.  The 5G Spectrum Act (S. 2881), which would mandate a public auctioning process for C band spectrum and require the FCC to make available at least 280 MHz of spectrum, was reported out of the Senate Commerce Committee and debated on the Senate floor this month. Senator John Kennedy (R-LA) is currently blocking it from moving forward.

Given the ongoing commercial release of 5G in the U.S. through 2020, we expect that legislative interest in 5G issues will continue unabated.

Momentum In Drug Pricing Reform: House Passes New Legislation on the Heels of Presidential Candidates’ Drug Pricing Proposals

Late last week, House Democrats passed Speaker Nancy Pelosi’s Elijah E. Cummings Lower Drug Costs Now Act. This bill would, among other things, permit the Department of Health and Human Services (“HHS”) to negotiate lower prices for 250 of the costliest drugs on behalf of Medicare beneficiaries and other consumers. Although this particular legislation appears to have little chance of passing the Senate and appears to lack support from President Trump, it comes on the heels of several other efforts aimed at reducing prescription drug prices. For instance, the Trump administration has released its drug pricing blueprint to use similar price control mechanisms to lower Medicare drug prices.  Additionally, just last month, Senator Cory Booker, along with Senators Bernie Sanders and Kamala Harris, introduced the Prescription Drug Affordability and Access Act (“Act” or “Prescription Act”) to regulate the cost of prescription drugs and threaten the abolishment of patent protections for non-compliant drug manufacturers. The current version of the proposal raises significant questions.

The Prescription Act proposes to create two new bodies: (1) the Bureau of Prescription Drug Affordability and Access (“Bureau”) within HHS to determine list prices for new and existing drugs; and (2) a Consumer Advisory Council (“Council”) comprised of patients, patient organizations, and medicine and health care finance experts to oversee the Bureau. Before a new drug can go to market, the Act obligates drug makers to provide the Bureau with sensitive information regarding the cost of research and development, the cost of the drug and comparable medications in other countries, and the federal investments of the drug’s discovery and production, among other things, in order for the Bureau to determine an “appropriate” price. For drugs already on the market, the Bureau would review the drug manufacturer’s cost profile and set an appropriate price based on the lesser of the Bureau-determined price or the median list price of eleven listed drug reference countries including Japan, Germany, the United Kingdom, France, Italy, Canada, Australia, Spain, the Netherlands, Switzerland, and Sweden. If drug makers charge an “inappropriate” price for a drug – i.e., a price above the amount determined by the Bureau, they must remit a rebate based on the surplus revenue earned to patients affected by the higher price. Further, if a drug maker fails to comply with the Bureau’s list price or remit excessive revenue earned within 30 days of receiving a notice that its price is “inappropriate,” HHS may void any patent related to the medication or clinical trial data or end other government-granted exclusivity. In the event HHS invalidates the patent, the Act contemplates that third parties should provide “reasonable compensation” to the patent holders, but the Act does not discuss how reasonable compensation would be determined.

In addition to the uncertainty regarding the calculation of “reasonable compensation,” the Act (like other similar proposals) does not appear to ensure that a drug product’s price reflects its true value. For instance, although the Bureau may take into account the cost of research and development for the particular drug at issue, there is no guarantee that the Bureau will account for (1) the often significant investment made in unsuccessful attempts to bring other drugs to market, or (2) the savings that a drug might bring to the healthcare market by preventing future illness or avoiding more costly treatment options. Also, the Act’s incorporation of reference pricing does not account for the nuances in healthcare systems in the reference countries, including the availability of alternative treatment methods in those countries.

Providing HHS the authority to invalidate patents and government licenses based on drug maker’s failure to abide by a drug price set on what appears to be an incomplete list of relevant factors promises to create further uncertainty for companies investing in drug product development. Companies would be well advised to continue monitoring progress on the Prescription Act, as well as drug pricing reforms more generally, as we head into an election year where government action on drug pricing appears to remain a central issue.

IRS Proposes Sweeping § 162(m) Regulations

Earlier this week, the IRS issued long-awaited proposed regulations under Section 162(m) of the Internal Revenue Code.  Our colleagues at Covington’s Tax Reporting & Withholding Blog published a comprehensive summary and analysis of the proposed regulations.  As you will see, the proposed regulations fell short of proposing workable solutions for public companies wrestling with the changes brought about by the Tax Cuts and Jobs Act, and would pull in new categories of companies that were not previously subject to the Section 162(m) limitation on deductible executive compensation.  Please visit the Tax Reporting & Withholding Blog for more information.

New Online Political Advertising Rules Coming to California January 1

Amid ongoing focus on how social media and other companies approach online advertising, California’s latest effort to require disclosure of online advertising will take effect January 1.  We blogged on these revisions to the California DISCLOSE Act, sometimes called the Social Media DISCLOSE Act, when they passed back in 2018.  Absent federal action, we expect to see the states continue to push into this area, potentially requiring online ad disclosure and imposing requirements on advertisers or campaigns to keep a file or record of online ads they place or display.

The London Metal Exchange Policy on Responsible Sourcing and the Evolving Supply Chain Due Diligence Landscape

In Part 3 of our blog series to honour the UN’s World Human Rights Day, we consider the evolving mineral supply chain due diligence landscape, focusing particularly on the implications of the London Metal Exchange Policy on Responsible Sourcing for the extractive industry.

In October 2019, the London Metal Exchange (LME) unveiled a new policy to promote the responsible sourcing of metals.  The Policy on Responsible Sourcing (the LME Policy) sets out mandatory labour, environmental and supply chain due diligence requirements, and preventing conflict minerals from being sold on the exchange is a core tenant.  Metal producers (also referred to as “companies”) should take note of the new rules because the LME is the world’s largest market for industrial metals, and will not list non-compliant product lines, or brands, on its exchange.   As a result, producers that fail to adhere to the rules are likely to lose opportunities to compete for contracts.

The adoption of responsible sourcing obligations builds on a global shift in the extractives industry.  Over the past decade, organisations and institutions, such as the International Council on Mining and Metals, the Extractive Industries Transparency Initiative and the Organisation for Economic Cooperation and Development (OECD), have developed and refined various standards to encourage more sustainable and ethical practices.  These initiatives have largely been driven by market participants’ desire to reduce supply chain and operational risks; consumer demand for ethically sourced goods; and encouragement from the international community and investors to better align business practices with human rights and sustainable development principles.

Also of note are an increasing number of mandatory requirements; for example, EU-based companies are required to disclose under non-financial reporting rules their due diligence and key performance indicators around “conflict minerals” and, from 2021, they will have to abide by specific supply chain due diligence requirements if they are importing tin, tantalum and tungsten, their ores, or gold originating from conflict-affected and high-risk areas (CAHRA).  And publicly-listed U.S. companies have similar obligations pursuant to the Dodd Frank Act.

Within this evolving due diligence landscape, the LME Policy is notable in a number of respects.  It (1) obligates producers to comply with international due diligence standards that are, in many cases, more stringent than applicable national law; (2) requires third-party audits of producers’ environmental and occupational health and safety practices; (3) provides LME with investigatory and enforcement powers; and (4) creates a grievance mechanism whereby third parties can report potential instances of brand non-compliance.  The new sourcing requirements will be particularly consequential for producers reliant on minerals from resource-rich areas in Africa, such as the Great Lakes Region where there is ongoing conflict and child labour issues.

  1. Mandatory Risk-Based Due Diligence Requirements

The LME Policy obligates companies to implement risk-based based due diligence systems based on the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (OECD Guidance).  The objective of this requirement is to prevent the sourcing of conflict minerals

First steps for companies under the LME Policy include establishing a policy for the supply chain of minerals originating from CAHRAs and forming an internal management team to support supply chain due diligence.  Once those steps are completed, producers must undertake a risk assessment to identify whether any red flags are present across their supply chain (also referred to as “red flag assessment” or “RFA”).   A non-exhaustive list of red flags include minerals originating from CAHRAs and known upstream companies that have interest in companies that supply minerals from or operate in a CAHRA.

Brands of producers that identify red flags are required to adhere to additional rules specified by Track A — the most stringent of three compliance tracks.  In comparison, producers that do not identify red flags have the liberty to choose Track A, Track B, or Track C.

Track Requirements 

  • Track A: To manage and mitigate their red flag risks, producers will be required to select an OECD Guidance-aligned standard to adhere to. A standard in accord with the OECD Guidance would require a producer to (1) assess the risk of adverse impacts, such as the risk related to financially contributing to non-state armed groups; (2) devise and implement a risk management plan; (3) have its practices audited by an independent, third party; and (4) publicly report on their due diligences policies and practices.
  • Track B: A third party auditor must confirm the accuracy of the RFAs, and companies are required to publish a copy of the auditor’s report online.
  • Track C: The LME, itself, will verify the accuracy of the RFAs, and the exchange plans to make more and more details from the RFAs publicly accessible over time.

Producers of listed Track A brands are required to submit their first standard audit report on December 31, 2023, while producers of listed Track B and Track C brands will be required to submit their first audit report to LME by June 30, 2022.  Producers of unlisted brands (i.e. brands that have never been listed on the exchange) applying to join the exchange after the relevant deadlines must submit audit reports as part of their applications. 

  1. Mandatory Certification Scheme

The LME Policy requires third-party audits of brands to verify their compliance with the International Organisation for Standardisation’s (ISO) 14001 and 45001 standards, or equivalent programs.  The two ISO standards require the implementation and maintenance of environmental management systems and occupational health and safety management systems, respectively.  To develop such systems, companies will have to establish relevant policies (i.e. environmental policies) and processes to further those policies, monitor progress toward achieving policy objectives, and review and report on outcomes to facilitate improvements.

Significantly, only producers’ smelting facilities (or equivalent facilities responsible for the final substantive step in production of LME grade metal) are required to meet the certification requirements.

Producers with brands listed on the exchange must submit their initial certifications by December 31, 2023.  After December 31, 2023, producers of unlisted brands must submit the certifications as part of their applications to join the exchange. 

  1. LME Oversight & Enforcement Capabilities 

LME will have the authority to verify compliance with the new policy and to enforce it.  For example, in the event that the LME determines that a brand is non-compliant, the LME may suspend or de-list the brand, or publish a public notice expressing that the brand is non-compliant.  Additionally, the LME will have discretion to reclassify a non-Track A brand to Track A at any time, if it is presented with information that would merit such action. 

  1. Third-Party Grievance Mechanism 

Significantly, any person may submit concerns to the LME that a brand does not adhere to the responsible sourcing requirements.  After receiving grievances, LME has broad discretion to determine whether and how to investigate.  According to the LME Policy, compelling producers to undertake an independent audit of the facts at the center of third party grievances is one method that the exchange may employ. 

Considerations for Companies Subject to the LME Policy

There are several immediate takeaways for companies subject to LME Policy:

  • If fully implemented, the LME’s mandatory due diligence and certification requirements will increase compliance costs for metal producers. Producers reliant on minerals from areas such as the Great Lakes Region of Africa will have to be especially diligent and consistent in their compliance efforts.
  • Achieving the relevant environmental and occupational health and safety certifications can improve producers’ reputations and stakeholder confidence, as well as help them gain a more holistic picture of their operations. Additionally, implementing supply chain due diligence can help producers to eliminate liability risks, as jurisdictions around the world enact laws to tackle issues, like child labour and corruption.
  • The LME Policy’s reference to the OECD Guidance reflects a broader trend of government and private institutions giving “soft law” responsible business conduct standards, such as those set by the OECD and the United Nations Guiding Principles on Business and Human Rights, a more legal and practical effect by incorporating them into binding policies. For example, governments have integrated these standards into international investment treaties and national extractives licensing regimes.  Thus, for actors in the metals industry there is value in developing an understanding of relevant soft law standards and following the evolution of standards and their application.
  • Given the growing use of non-judicial grievance mechanisms by civil society organisations, non-governmental organisations, and communities, producers can likely expect the LME grievance mechanism to be actively used. 

***

Covington’s Business and Human Rights team draws upon attorneys and policy experts with deep human rights backgrounds including service in government and international organisations, with non-governmental organisations, in media, and within multinational corporations, and integrates them across our U.S., European, African and Asian offices. We regularly advise clients with respect to human rights due diligence, best emerging practices in their policies and procedures, risk mitigation and litigation.

Terrence Neal: Not admitted to the District of Columbia Bar; supervised by the principals of the firm. 

The Week Ahead in the European Parliament –  December 13, 2019

Summary

Next week, the Members of the European Parliament (“MEPs”) will travel to Strasbourg for plenary sessions.  This will be the last week of the European Parliament before they recess for the Christmas holidays.  They will return on January 6, 2020.

On Monday, MEPs will debate fair taxation in a digitalised and global economy.  In recent months, talks on an EU-wide digital services tax have stalled among representatives of the Member States at the EU level.  Taxation is a purely national competence, meaning that the EU can only take legislative action if all Member States agree on a specific proposal.  Nevertheless, MEPs are keen to push for further EU action through the OECD level, which also happens to be preferred by certain Member States that blocked the EU-level talks.  EU Commissioner for the Economy Paolo Gentiloni stated in October that the EU will draft a back-up proposal for a digital services tax with which it can move forward in Q3 of 2020, if negotiations within the OECD stagnate.

On Wednesday, MEPs will have a topical debate on the compatibility of the current EU-Mercosur Free Trade Agreement with the Commission’s proposal for a European Green Deal.  Negotiations on the EU-Mercosur Free Trade Agreement have been concluded in July, but the Agreement has received criticism that it could potentially contribute to deforestation and illegal logging in South America.  The Commission has dismissed these claims. Whether the Trade Agreement is also compatible with the new ambitious ecological goals of the proposed European Green Deal will have to be seen, as only rough outlines of these new policies were presented earlier this week.

On Thursday, MEPs will listen and discuss a statement of the Commission regarding the announcement of United States Trade Representative (“USTR”) to launch a section 301 investigation into the digital services tax of Member States.  The USTR is already considering to impose tariffs on up to $2.4 billion worth of imports from France, because it argues that the French tax on digital services unfairly discriminates against big U.S. tech companies.  France’s digital services tax, that which signed into law by Macron in July 2019, sparked a diplomatic row between the U.S. and France in August.  The governments agreed to a truce at the G7 summit to find a solution within 90 days.  That deadline passed last week without results, putting the option of tariffs back on the table.  The EU’s Trade Commissioner, Phil Hogan, responded by saying that, as in all trade matters, the EU will act as one and will take appropriate counter-measures if the U.S. will go ahead with imposing tariffs on European imports.  More details are expected in this Commission statement.

Meetings and Agenda

Monday, December 16, 2019 

Plenary Session

17:00 – 23:00

Debates

  • Resumption of session and order of business
  • Commission statement – Commemoration of the 30th anniversary of the Romanian revolution of December 1989

Vote: Thursday

  • VAT fraud and payment service providers
  • Requirements for payment service providers
  • Measures to strengthen administrative cooperation in order to combat VAT fraud
  • Appointment of members of the Executive Board of the European Central Bank
  • Fair taxation in a digitalised and globalised economy

Vote: Wednesday

  • Macro-financial assistance to the Hashemite Kingdom of Jordan
  • One-minute speeches

Committee on Civil Liberties, Justice and Home Affairs

19:30 – 22:30

Debate

  • Structured dialogue with Margaritis SCHINAS, Vice-President for Promoting our European Way of Life, European Commission (19.30-21.00)

Joint debate

  • Hungary: Council Presidency conclusions on the evaluation of the annual rule of law dialogue and presentation of the Article 7(1) TEU procedure in the Council regarding the situation of the rule of law in Hungary – presentation by Tytti TUPPURAINEN, Minister for European Affairs, Finland
  • Poland: state of play regarding the situation of the rule of law in Poland in the framework of the Article 7(1) TEU procedure – presentation by Tytti TUPPURAINEN, Minister for European Affairs, Finland and Didier REYNDERS, Commissioner for Justice, European Commission

Possibly

  • Ad-hoc LIBE Delegation to Malta, 2-3 December 2019 – presentation of a draft mission report

Tuesday, December 17, 2019

Plenary Session

9:00 – 11:50

Debates

  • Commission statement – The Rule of Law in Malta, after the recent revelations around the murder of Daphne Caruana Galizia 

12:00 – 14:00

Votes followed by explanations of votes

  • Election of the Ombudsman
  • EU-Switzerland Agreement on the stepping up of cross-border cooperation, particularly in combating terrorism and cross-border crime
    • Rapporteur: Roberta METSOLA (EPP, MT)
  • EU-Liechtenstein Agreement on the stepping up of cross-border cooperation, particularly in combating terrorism and cross-border crime
    • Rapporteur: Roberta METSOLA (EPP, MT)
  • Protocol to EU-Switzerland Agreement concerning the criteria and mechanisms for establishing the State responsible for examining a request for asylum lodged in a Member State or in Switzerland regarding the access to Eurodac for law enforcement purposes
    • Rapporteur: Jadwiga Wiśniewska (ECR, PL)

15:00 – 23:00

Debates

  • Conflict of interest and corruption affecting the protection of EU’s financial interests in Member States
  • Commission statement – EU disability strategy post 2020
  • Council and Commission statements – EU Pollinators Initiative
  • Council and Commission statements – Animal welfare conditions during transport to third countries
  • Enabling the digital transformation of health and care

Wednesday December 18 2019

Plenary Session

9:00 – 11:50

Debates

  • Commemoration of the 10th anniversary of the Lisbon Treaty and the legally binding Charter of Fundamental Rights
  • European Council and Commission statements – Conclusions of the European Council meeting of 12 and 13 December 2019

12:00 – 12:30

(Award of the Sakharov Prize)

12:30 – 14:30

VOTES followed by explanations of votes

  • CAP: Financial discipline as from financial year 2021 and flexibility between pillars in respect of calendar year 2020
    • Rapporteur: Norbert Lins (EPP, DE)
  • EU-Gambia Sustainable Fisheries Partnership Agreement and the Implementation Protocol thereto
  • Draft amending budget No 5/2019: Adjustments of administrative appropriations of EU institutions in line with the latest information available and update of revenue (own resources)
    • Rapporteur: John Howarth (S&D, UK)
  • Association of the overseas countries and territories with the European Union (‘Overseas Association Decision’)
  • Revision of Solomon Islands to the EU-Pacific States Interim Partnership Agreement
    • Rapporteur: Thomas Tobé (EPP, SE)
  • Closure of the accounts for the European Asylum Support Office (EASO) for the financial year 2017

 15:00 – 23:00

Debates

  • Topical debate (Rule 162) – Compatibility between the current EU – Mercosur Free Trade Agreement and the Commission’s proposal for a European Green Deal
  • Statement by the VPC/HR – Situation of the Uyghur in China (China-cables)
  • Motion for a resolution – Humanitarian situation in Venezuela and migration and refugee crisis
  • Statement by the VPC/HR – Situation of human rights and democracy in Nicaragua
  • Council and Commission statements – An EU strategy to put an end to female genital mutilation

Thursday, December 19, 2019

Plenary Session

9:00 – 11:50

Debates

  • Debates on cases of breaches of human rights, democracy and the rule of law (Rule 144)
  • Violations of human rights including religious freedoms in Burkina Faso
  • Afghanistan, notably the allegations of sexual abuse of boys in the Logar Province
  • The Russian “Foreign Agents” Law

12:00 – 14:00

Votes followed by explanations of votes

  • Motions for resolutions concerning debates on cases of breaches of human rights, democracy and the rule of law (Rule 144)
  • Commemoration of the 30th anniversary of the Romanian revolution of December 1989
  • The Rule of Law in Malta, after the recent revelations around the murder of Daphne Caruana Galizia
  • Situation of the Uyghur in China (China-cables)
  • Situation of human rights and democracy in Nicaragua

 Friday, December 20, 2019

No meetings of notes

Corruption and Human Rights: Inextricably Linked

In Part 2 of our business and human rights series to mark World Human Rights Day, we discuss the increasing recognition of the linkages between human rights abuses and corruption, and how companies can find efficiencies in their efforts to address these overlapping risks.

Corruption and adverse human rights impacts are often intertwined. This was a key theme at this year’s UN Forum on Business and Human Rights. Representatives of business, civil society and inter-governmental organisations referred to corruption as a key “root cause” of business-related human rights risks, and several businesses shared accounts of situations in which human rights and corruption risks in their global operations had been found to be inextricably linked. Internationally recognised human rights commonly impacted by corruption include labour rights (e.g., the prohibition against forced labour), land rights, rights surrounding security and safety, the rights to education and health, access to justice, and gender equality.

Coinciding with International Anticorruption Day on December 9th and International Human Rights Day on December 10th, in the last two weeks the US government has announced 72 new designations under the Global Magnitsky sanctions program, which targets serious human rights abuses and corruption. Moreover, on December 9th, European Union foreign ministers commenced work on a similar EU-level sanctions regime targeting human rights abuses.

Evolving regulatory landscape

It has long been acknowledged by international organisations that corruption and human rights impacts are intrinsically linked and that “the international legal frameworks for protecting human rights and fighting corruption are complementary and mutually reinforcing” (UN Human Rights Council Resolution 35/25 (2017)). International standards have thus addressed anti-corruption and human rights best practices in parallel. The OECD Guidelines for Multinational Enterprises, for example, indicate that enterprises can root out both corruption and adverse human rights impacts by developing and applying “effective self-regulatory practices and management systems that foster a relationship of confidence and mutual trust between enterprises and the societies in which they operate.” By way of further example, Pillar III of the UN Guiding Principles on Business and Human Rights underlines the importance of judicial processes free from corruption in ensuring access to remedy for victims of adverse human rights impacts.  The UN Global Compact also encompasses principles relating to both human rights and anti-corruption.

National legal frameworks have also evolved in a way that recognises the interconnectedness of corruption and human rights abuses. In recent years, for example, several countries have implemented so-called “Magnitsky” laws targeting both perpetrators of serious human rights abuses and corrupt actors. For example, in December 2017, President Trump signed executive order 13818, which authorises sanctions against foreign persons involved in serious human rights abuses or corruption, as well as any US or foreign citizen who materially assists, sponsors or provides support, goods or services to such parties.

In 2019 alone, the US designated 97 individuals and entities under its Global Magnitsky sanctions program. In the last two weeks, the Department of the Treasury’s Office of Foreign Assets Control designated 72 individuals and entities in relation to corruption in Cambodia, Latvia, and Serbia, and serious human rights abuses in Burma, Pakistan, Slovakia, Libya, the Democratic Republic of Congo and South Sudan. In a related press statement, Secretary of State Michael Pompeo indicated that the US government plans to continue to leverage the tools available under the program “to disrupt and deter human rights abuse and corruption around the globe in 2020 and beyond.”

This week, EU Foreign Ministers commenced preparatory work to establish a similar sanctions framework at the EU level. Further, as the new European Commission takes the reigns, a potential mandatory human rights due diligence regulation is under consideration. The direction of the new Commission and the scope of any such potential regulation is currently unclear, but it is possible that such regulation could include due diligence on broader sustainability and business integrity matters, including environmental and anti-corruption matters.

Governments are also beginning to harness anti-money laundering laws, which have long been used to target corrupt actors and the proceeds of bribery, to target human rights abuses.  For example, in the UK, the Criminal Finances Act 2017 added the concept of “gross human rights abuses” to the definition of unlawful conduct in the civil recovery section of the Proceeds of Crime Act, meaning that assets held in the UK may be vulnerable to seizure if found to be the direct or indirect proceeds of gross human rights abuses.  In the US, the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”), issued an advisory in June 2018 “to highlight the connection between corrupt senior foreign political figures and their enabling of human rights abuses,” and describing various typologies used to access the US financial system.  And in Australia, the financial regulator AUSTRAC has recently been focused on combating child exploitation, including through the use of available enforcement tools to target failures by financial institutions to implement anti-money laundering controls to detect financial transfers related to child exploitation.

Approach to compliance: addressing human rights and corruption risks in parallel

Within companies, anti-corruption compliance has been driven principally by the substantial legal and enforcement risk associated with violations of anti-bribery laws, whereas the legal risk associated with adverse human rights impacts has historically been considerably lower for companies (though there have for some time been considerable reputational and operational risks associated with such impacts). Corporate programmes to address human rights and corruption risks have therefore generally developed along separate tracks, with legal and compliance departments leading anti-corruption efforts and functions outside the legal and compliance departments (such as sustainability and/or human resources departments) leading human rights efforts.

However, as discussed in this post—and in Part 1 of our blog series—recent legal and policy developments have begun to shift the human rights landscape. The emergence of new laws and regulations targeting human rights abuses underlines the increasing importance of expanding integrity due diligence efforts beyond the typical “compliance” focus areas (such as bribery, money laundering, and sanctions risks) to identify evidence of human rights abuses by potential business partners or their beneficial owners. Efficient integration between corporate functions responsible for managing corruption and human rights risks can help to avoid duplicated effort and missed opportunities in several areas, enable more holistic assessment of cross-cutting risks, and facilitate the development of right-sized and practical risk mitigation actions.

Some steps that businesses might consider:

  • Assessing the extent to which human rights-focused third-party due diligence processes can be coordinated with existing processes to ensure that any overlapping risks are identified and to avoid duplicating internal effort or subjecting suppliers to unnecessarily complex on-boarding processes.
  • Making efforts to incorporate human rights elements into M&A and other investment transaction processes. As with anti-corruption due diligence, human rights due diligence can help a company identify known issues and evaluate their potential impact from a legal, operational, and reputational perspective, shift liability to the counterparty for legacy violations, and prepare to promptly integrate target entities or asset into the acquirer’s compliance programme to mitigate the risk of any continuing issues.
  • Ensuring effective messaging to personnel, including through training and the tone set by senior and middle management. This is fundamental to both anti-corruption and human rights compliance programmes, which often depend on obtaining buy-in from employees in jurisdictions where cultural norms or accepted practices may diverge from the company’s standards. Combining anti-corruption and human rights training can help maximise the value of training sessions and ensure that personnel develop a holistic view of the company’s core ethical values, which in turn can help to foster values-based compliance.
  • Using traditional compliance exercises focused on corruption risk (such as risk assessments and compliance audits), as an opportunity to explore human rights risks. While we would not suggest that these exercises can or should replace comprehensive human rights impact assessments, they can present valuable opportunities to gather helpful information about human rights risks and/or conduct targeted testing of the implementation of human rights compliance policies and controls.

The global business and human rights landscape: a “smart mix” of state measures and the challenges for multinational businesses

In Part One of our blog series to honour the UN’s World Human Rights Day, we consider the evolving business and human rights landscape and some of the challenges this presents for multinations. This piece was first published in the U.K.’s Law Society Gazette on 10 December 2019.

The theme of this year’s UN Forum on Business and Human Rights was ‘Time to act: Governments as catalysts for business respect for human rights.’ This annual event provides a platform for the Business and Human Rights (BHR) community to share lessons in implementation of the UN Guiding Principles on Business and Human Rights (UNGPs). Widely recognised as the authoritative standards on the prevention, mitigation and remediation of negative business impacts on human rights, the UNGPs indicate that states and businesses have different but complementary roles: states are primarily responsible for ensuring the protection of human rights and are called to implement a ‘smart mix of measures’, while businesses must ensure respect for human rights in their supply chains and operations.

While many states are developing a mix of new regulatory, enforcement and other measures, a clear message of this year’s forum was that, in isolation and without effective business implementation of human rights due diligence (HRDD), state measures are insufficient. In this piece, we consider the emerging BHR regulatory and enforcement landscape; and some of the legal and organisational challenges that multinational businesses face in their efforts to implement their commitments.

States’ ‘mix of measures’ for the protection of human rights

The rapid evolution of the global BHR regulatory landscape in recent years encompasses a mix of ‘transparency’ and ‘due diligence’ legislative initiatives at both national and regional levels. Transparency laws – including the California Transparency in Supply Chains Act, UK and Australian Modern Slavery Acts and EU Non-Financial Reporting Directive – broadly require covered entities to report on their efforts to combat the actual or potential negative impacts of their human rights activities. In contrast, due diligence laws – including the French Duty of Vigilance and the Netherlands Child Labour Due Diligence Act – require companies to actively adopt policies and practices to monitor and combat human rights risks in their operations. A plethora of further potential national-level regulatory initiatives are in the pipeline, including in Switzerland, Finland, Denmark, Canada and Hong Kong.

Further EU-level regulation may be on the horizon. At a conference run by the outgoing Finnish presidency of the EU Council last week, it became clear that the European Commission is considering a ‘mix of measures’. Some key areas of discussion include: the different options for BHR mechanisms (e.g. mandatory HRDD obligations, enhanced reporting requirements and/or amendments to corporate governance regulation), the extent to which BHR regulation might intersect with broader sustainability EU policy and regulation; and ensuring clear and workable liability provisions (e.g. based on business conduct rather than outcomes). The newly appointed Commission will be picking up the mantle on these issues.

In October 2019, the UN Inter-Governmental Working Group on Business and Human Rights debated the potential multilateral treaty regulating the activities of transnational corporations and other business enterprises. The treaty process has been contentious, the draft text remains hotly contested, and the future of the treaty is uncertain. Nevertheless, the process demonstrates a trend in the direction of increased regulation of corporate liability for human rights impacts.

Governments are, to varying degrees, also implementing other measures. Some states have begun to ramp up enforcement action. For example, in recent months, the US Customs and Border Protection (CBP) has issued a number of ‘Withhold Release Orders’ effectively preventing goods across multiple sectors that CBP considers may be affiliated with forced labour, from being imported into the US. Some states also continue to engage with sector-specific multi-stakeholder initiatives and are seeking to integrate BHR considerations into broader state (e.g. trade) policies.

Businesses face complex challenges in human rights due diligence

Under pressure to meet this patchwork of BHR standards, many businesses are grappling with a variety of difficult legal and operational challenges.

A complex myriad of regulation

Firstly, a lack of clarity about the precise expectations surrounding corporate HRDD for businesses operating in multiple jurisdictions has led to legal tensions. For example, the global movement for increased corporate transparency compels disclosure of supply chain risks and risk mitigation measures. Yet, a rising tide of litigation being brought in a variety of jurisdictions, on a range of legal grounds is often premised on the relevant company’s global policies and public commitments to respect human rights. Adding further complexities, even the baseline concept of ‘human rights’ (or the subsect of relevant human rights) is not consistently defined across national laws and laws often make reference to concepts of HRDD contained in a variety of different ‘soft law’ standards.

Operational challenges

Secondly, although many businesses are taking steps to transform their internal infrastructure to accommodate BHR considerations, these efforts are frequently siloed in a ‘sustainability’ or ‘CSR’ role. Yet BHR best practice now suggests that human rights considerations should be embedded throughout corporate architecture, drawing in legal, compliance, human resources, procurement and other functions as appropriate.

Global reach

Global value chains are now so complex that identifying and mitigating human rights risks in even the first tier or two of supply chains can be extremely difficult. Even if accurately mapped, ensuring the effective implementation of standards throughout the supply chain is challenging. For example, a global commodities company might produce thousands of goods across the globe and each product line, geography and business partner might present different risk profiles, requiring multiple tailored risk mitigation strategies. Businesses are also becoming more aware of the limits of social auditing, and grappling with ways to strengthen oversight and enforcement of their supplier standards. Further, when operating in jurisdictions in which local laws fall short of international human rights standards, businesses must make difficult operational decisions.

Changing realities

Changing human behaviours and technologies present new waves of potential and actual adverse human rights impacts that corporations are expected to anticipate and mitigate. At the Forum, panel discussions made frequent references to the variety of issues surrounding human rights impacts of the use of technology, including artificial intelligence and technology with surveillance capabilities. Integrating appropriate risk mitigation into the development and implementation of technology is key for businesses taking steps to respect human rights. The ‘greening’ of human rights as the world grapples with the impact of environmental degradation and that nexus to human rights was also a key focus of discussion.

A different kind of risk

Further, while traditional legal risk assessment focusses on the assessment and mitigation of risks to the business (in order to protect shareholder value), HRDD calls for businesses to focus on the potential and actual risks of their operations to people. The UNGPs encourage businesses to use leverage in their business relationships, which differs from typical approaches to corporate risk management. While there are thus difficulties in integrating human rights management into traditional corporate risk matrixes, addressing such risks in line with BHR best practice is likely to also mitigate operational, reputational and legal risks.

The next frontier in BHR will therefore be the continued effort to assist businesses at a very granular level in converting academic and regulatory principles into discrete and actionable practices enabling them to implement their commitments effectively across global operations.

 

 Covington’s Business and Human Rights team draws upon attorneys and policy experts with deep human rights backgrounds including service in government and international organisations, with non-governmental organisations, in media, and within multinational corporations, and integrates them across our U.S., European, African and Asian offices. We regularly advise clients with respect to human rights due diligence, best emerging practices in their policies and procedures, risk mitigation and litigation.

New Challenges for European Defense

Two days before NATO celebrated its seventieth anniversary in Watford, close to London on December 3–4, Ursula Von Der Leyen started her 5 years as president of the European Commission. She had announced that her Commission would be ‘geopolitical’, and appointed a commissioner, the French Thierry Breton, to deal with ‘Defense Industry and Space’, among other responsibilities.

A month before the NATO summit, France’s president Emmanuel Macron, in a now-famous interview with the Economist, had declared NATO ‘brain dead’, a provocative diagnosis which sent huge shockwaves across the Atlantic as well as inside the EU. The London summit, fortunately, ended in a spirit of compromise, no member state, even Turkey, wanting to leave the impression of a failure – which would have rejoiced the ‘enemies’.

The conclusions announce the setting up of ‘a forward-looking reflection process’ on the future of the Alliance. They also, for the first time in a NATO document, mention China, whose ‘growing influence’ offers ‘opportunities’ but also ‘challenges’.

This post identifies and explains the evolution in the European vision of the security challenges for the continent as well as the tools the Union is developing to reinforce its ‘strategic autonomy’.

NATO, alive and well, thirty years after the end of the cold war

Even if the end of NATO has been predicted several times since the end of the cold war, the Alliance is still there and has demonstrated that it is flexible enough to adapt to an evolving political context.

Its strategic purpose and its tasks have indeed evolved in the thirty years after the end of the cold war, as well as its relationship with the EU, which experts on both sides consider better than it has ever been. President Trump ‘s approach to it centres on the financial contributions of each country to defense: he can claim some success in this field: overall growth of defense budgets of Alliance members will increase by 130 billion $ in 2020.

The Alliance is thus certainly not ‘brain dead’, as Macron said to the Economist.   The French president wanted to address the Turkish operation in Syria, which was launched with no NATO consultation. He also wanted to criticize the transactional approach of the Alliance by president Trump and his open hostility towards the European Union.

But more importantly, by being provocative, Macron also intended to question the strategic purpose of the Alliance, still mainly focussed on Russia at a time when the most important perceived threat in Europe is terrorism, and when the first national security priority for the US (but also more and more for the EU) is China. 

The Collision with Russia

The relationship with Russia did not really dominate the agenda of the Alliance during the nineties. But the fact that NATO enlarged to a number of countries from the ex- Soviet empire collided with the revival of Russia under Putin, who wanted instead to re-establish as much as possible of the destroyed Soviet Empire.

Conflicts developed all along the grey zone between Russia and the West, with the most acute in Ukraine. This brought NATO back to its original mission of containing Russia, applauded by the new NATO (and EU) members in Eastern Europe, who still consider Russia the most important threat.

As a consequence, NATO recently focused its means and energy on territorial defense, deploying combat-ready troops in its Eastern Members. This presence has never been as strong as it is now since the end of the cold war – and it is also much closer to Moscow than it was at the time.

But all Europeans do not see the relationship with Russia in the same way. Regularly, countries like France or Italy try to re-engage with Putin, conscious that Russia will always be a close neighbour, that it plays a major role on the world scene, notably in the Middle East, but also that its relative economic weakness creates the space for cooperation more than confrontation. In his interview with the Economist, Macron pleads strongly in that sense: ‘If we want to build peace in Europe, to rebuild European strategic autonomy, we need to reconsider our position with Russia’.

 Pivot to China?

In their conclusions on December 4, and for the first time in NATO’s history, the leaders of the Alliance recognised that ‘China’s growing influence and international policies present both opportunities and challenges that we need to address together as an Alliance’. ‘This is not about moving NATO into the South China Sea, but it’s about taking into account that China is coming closer to us — in the Arctic, in Africa, investing heavily in our infrastructure in Europe, in cyberspace’, said NATO Secretary General Jens Stoltenberg before the meeting.

The fact that China has developed new armaments, including long-range missiles capable of reaching Europe and the United States has also brought the allies to consider including China in new arms control negotiations after the collapse of the INF treaty.

The increasing place of China in the world economy and its growing influence in international relations has obviously influenced the way Europeans look at their security and at their own role in the world.  They also notice that competition with China is now the top national security priority for the United States. As Macron said in the Economist interview, ‘the U.S. has changed its strategy by looking more at the Pacific region rather than the Atlantic and the emergence of China clearly marginalizes Europe’.

The European Union continues to engage positively with China and does not hesitate to side with it against Washington on trade issues, for the implementation of the JCPOA  with Iran or in climate change negotiations. But recently, and for the first time, it has declared China an ‘economic competitor’ and a ’systemic rival’. Its member states have also quietly developed defensive tools, notably with regard to Chinese investments or its cyber activity. Europe clearly wants to remain an actor , not a passive observer of a US – China ‘cold war’. 

‘A Europe that Protects’

Terrorism from the Islamic state, migration from crisis areas in the Middle East and the overall problem of illegal migration encouraged EU leaders to present the enhancement of the protection of their citizens as one of the main priorities of the Union for the future. ‘A Europe that protects’ was the major slogan at the first European Council which discussed the future of Europe after the Brexit referendum of 2016.

The perspective of Brexit, paradoxically, has subtly changed, in a positive way,  the British attitude towards European defense. Clear signals have been sent that, post-Brexit, the UK wants to  remain closely linked to the Union in the defense field.

In June 2016, a few days after the Brexit referendum, the EU High Representative for Foreign Policy, Federica Mogherini, presented an ‘EU Global Strategy’, a sort of new strategic concept for European Security and Defense, in which she tried, very carefully, to identify and differentiate the various threats to the Union, in order to define the military tasks the Common Security and Defense policy of the EU should plan in the current geopolitical context.

This exercise is important because, indeed, a fundamental obstacle to the development of an autonomous European defense is and will remain for a certain time the fact that EU countries continue to have conflicting strategic priorities, for various historical and geographical reasons.

Another initiative has also been taken recently to stimulate co-operation among member states in the defense field: the ‘Permanent Structured Cooperation’ (PESCO), a tool included in the Lisbon treaty but left dormant. PESCO commits its members to jointly plan, develop and invest in shared capability projects and develop a coherent full spectrum force package. 

The ‘Defense Industry and Space’ portfolio in the European Commission

In November 2016, a few months after the presentation of the ‘Global Strategy’, president of the EU Commission Jean Claude Juncker issued a proposal for the setting up of a ‘European Defense Fund’, which would support investment in joint research and development of defense equipment and technologies. The fund would be integrated in the EU budget and managed by the EU Commission (See our blog: ‘Towards a European army’, February 2019).

This institutional innovation was quietly put in place ignoring the old Maastricht separation between the ‘community’ and the intergovernmental pillars of the EU. But nobody objected for two reasons: the need for the EU to protect its citizens; and also the urgent need for Europe to redefine its place in a changing world, which requires the involvement of all its institutions.

This does not mean that the EU Commission will deal with defense policy as such, for which it is clearly not competent. Its role is limited to the ‘Defense industry’. To create the European Defense Fund, Juncker used, as legal basis in the EU treaty,  provisions that give it the right to take ‘any useful initiative’ to promote co-ordination between member states in order to promote the Union’s industrial competitiveness.

In the new Commission, this responsibility was given to the French commissioner Thierry Breton, in charge also of the internal market and the digital single market. A new directorate general will be added in the Commission to deal exclusively with ‘Defense Industry and Space’, covering the European Defense Fund, military mobility and the EU’s space programs (Galileo, EGNOS and Copernicus).

Breton seems to have the capacity to engage in these diverse activities. He is at the same time a politician and a businessman. He was minister in the last Chirac government and later, and until now, the chairman of the most successful technology company in France, Atos.

Von Der Leyen, in her mission letter to him wants him to ‘focus on building an open and competitive European defence equipment market’, enforcing EU procurement rules on defence’ and lead on the implementation of the Action Plan on Military Mobility, in close cooperation with the Commissioner for Transport’.

The creation of the European Defense Fund was tentatively approved by the Council and the European Parliament at the beginning of 2019 after difficult debates, but its budget and funding eligibility could not be agreed. Its success indeed will depend on the outcome of the difficult debate on the so called ‘Multi-annual Financial Framework’, the framework in which the EU budget will be constrained for the period 2021 – 2027, which should be decided next year.

The political will is there to give it a substantial dimension, but its amount will depend on the overall ceiling which will be decided and its share among the other priorities of the Union. The Commission proposed a budget of €13 billion for 2021-2027, €4.1 billion to directly finance competitive and collaborative research projects, in particular through grants and €8.9 billion to complement Member States’ investment by co-financing the costs for prototype development, the ensuing certification and testing requirements.

With regard to the Space industry, Von Der Leyen instructs Breton to ‘foster a strong and innovative space industry, maintaining the EU’s autonomous, reliable and cost-effective access to space’. This includes the future Space Programme, covering Galileo and EGNOS, the EU’s global and regional satellite navigation systems and Copernicus, the EU’s Earth observation programme.

Copernicus, which was created in 2014 with the European Space Agency (ESA) should be used to reach EUs climate objectives, by monitoring CO2 emissions. Galileo could help improving the crucial link between space and defence and security: Breton is asked to ‘support the Member States in increasing the uptake of the Galileo Public Regulated Service, which can be used by governments for emergency services, peacekeeping operations and crisis management’.

The ‘Geopolitical ‘Dimension

The wish of its president to make it ‘geopolitical’ is a clear indication that the new European Commission will be more assertive than the previous one in dealing with the global challenges of today. Europe no longer wants to be ‘just the continent of consumption’. Ursula Von Der Leyen, a former Defense minister, intends to play her own role in this field. She visited both the Climate conference in Madrid and the African Union seat in Addis Ababa during her first week in office.

High Representative Josep Borrell and several other commissioners will deal with external relations: the Greek Schinas will deal with the migration policy; the Finnish Urpilainen with International Development policy; the Hungarian  Várhelyi receives the politically-sensitive enlargement and neighbourhood policy; The Irish Hogan will be in charge of  trade policy; the Slovenian Janez Lenarčič has been designated Commissioner for ‘Crisis Management’.

If the Union wants to enhance its global role, the major challenge will obviously be to restore a unity of vision among its members at a time when populist and illiberal forces open divisions among the EU members North and South, East and West. The negotiation on the new multi-annual financial framework will also be divisive. And, if the 27 have managed until now to remain united for the negotiation of the withdrawal treaty, it will be more difficult to keep this unity when the future relationship with the UK after Brexit will need to be decided.

As for NATO, I will quote an ex-British ambassador, Peter Ricketts, in an opinion published in the FT after this month summit: ‘the most fundamental question of all is whether a military alliance can survive without a single overarching threat to bind members together’.  The question is yes, he adds, ‘provided it is also a functioning alliance’. To judge by the atmosphere and the rows which surrounded the Watford meeting, this is, unfortunately, not certain.

Advanced Competition Law Conference Brussels – Joint Presentation on Recent EU Cartel Enforcement

On 27 November, Johan Ysewyn and Annemarie ter Heegde (DG COMP) presented the highlights of recent EU cartel enforcement in their annual presentation at the Advanced EU Competition Law Conference in Brussels. They covered the developments in the traditional three pillars of enforcement, policy and court review.

In terms of enforcement, the European Commission ( “EC”) issued three settlement decisions, confirming the continued success of the settlement instrument. The only traditional infringement decision this year was the second re-adoption of the Reinforcing Bars decision, a procedural saga which had been ongoing since its first adoption in 2002. The EC granted a 50% fine reduction in recognition of the long duration of proceedings.The EC wrapped up its second investigation in Occupant Safety Systems (II), bringing the total amount of cartel-related fines in the automotive sector to over €2 billion. The two Forex decisions are perhaps the most interesting: separate decisions were issued with respect to each of the chatrooms, under the name Three-Way Banana Split and Essex Express, in which the participating banks exchanged commercially sensitive information. A third leg of the investigation is ongoing.

As to policy output, the EC has been taking a number of measures to address the steady decline in European leniency applications – a topic which remains high on the agenda. In addition to the recently introduced anonymous whistle-blower tool and an increased focus on ex officio investigations (e.g. Alliance Casino & Intermarché), the EC has set up its new ELeniency tool, enabling companies to make online submissions in the context of leniency applications, settlement procedures and cooperating procedures. Covington, together with the Brussels School of Competition have organised a second survey on leniency, addressed to practitioners, regulators and companies, to verify the impact of these developments on their position towards the instrument.  If you want to participate in the survey, please click here and we will send you the link.

Furthermore, Member States have until 4 February 2021 to implement the ECN+ Directive. This should give the National Competition Authorities additional instruments to enforce competition law alongside the EC in the European Cartel Network (“ECN”). Finally, the EC has also provided guidance on business secrets and voluntary confidentiality rings, to further facilitate access to file.

The Courts have continued to closely scrutinise the EC’s decisions, recently focussing largely on the requirement to adequately state its reasons when departing from the standard methodology of the Fining Guidelines, leading it to annul the EC’s decision against Icap v Commission and HSBC v Commission, and to grant a 40% reduction of the fine in Pometon v Commission.

The order of leniency applications was discussed in Recylex v Commission, where the Court confirmed that an undertaking cannot move up the leniency order if another undertaking has been disqualified from leniency for not meeting its duty of cooperation.

In Campine v Commission, the Court found that the Commission should have taken account of the two significant gaps in Campine’s participation in the Car batter recycling cartel. Although Campine had not publicly distanced itself from the infringement during these periods, the Court found that the Commission should have brought forward additional evidence in order to find a single and continuous, rather than single and repeated infringements. This had a substantial impact on the duration of the cartel – and resulted in a fine reduction.

The Court also provided a welcome clarification to its position on hybrid settlements in Pometon v Commission, after it gave the EC a stark warning that it should respect the rights of defence of non-settling parties, and the presumption of their innocence in particular. It has now been made clear that staggered hybrid procedures are possible, insofar as the settlement decision does not contain a legal qualification of the role of the non-settling parties, but remains limited to a description of the facts in that respect.

Looking forward, the speakers expect a continued scrutiny of the proof and motivation of EC decisions by the Courts. Of interest in the next years will be cartels where the theory of harm revolves around restrictions of innovation, e.g. in the context of the Car Emissions investigation. The speakers expect deepening cooperation within the ECN and the continued scrutiny by the Commission of automotive, financial services and industrial sectors. The settlement instrument is expected to continue its success of recent years, yet the future of the leniency instrument is an area to watch – in particular in view of recent EC policy initiatives and increased cooperation within the ECN.

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