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Asset management firms don’t invest as principals: they invest as agents for their clients. But as principals they can choose which clients to seek to serve and in what capacity.

Firms serving authoritarian states that stand accused of crimes against humanity run serious business risks. This project identifies these risks and offers a framework for firms to address them.

Regulatory and legal risks attached to authoritarian state mandates should be recognised in business planning decisions.

The regulatory and legal environment in which investment management firms operate is constantly evolving. Firms today are legally obliged to conduct money laundering due diligence and check that existing and prospective clients are not on sanctioned entity lists. Given regulatory developments in train, firms should consider conducting human rights due diligence on their state clients in order to appropriately discount the value attached to mandate revenues for business-planning purposes.

Firstly, there is a risk that human rights due diligence becomes required by domestic law. Secondly, there is a risk that clients engaging in serious human rights abuse are moved onto Sanctioned Entity.

A Legal Requirement for Human Rights Due Diligence

There have been moves to incorporate UNGPs into national law in a number of jurisdictions. This would create a legal requirement to engage in the kinds of human rights due diligence outlined in chapter 2 and that is consistent with being a signatory of the UN Global Compact.

In early 2022 the European Commission proposed a Directive that will transfer meaningful portions of the UNGPs into domestic law for EU members. The Directive will mandate human rights due diligence for all firms with more than €150m in revenues and 500 employees, holding directors of these firms directly accountable for compliance.[1] Company law would change in regard to directors’ duties, and civil liability regime would be introduced which foresees actions for damages by victims linked to a company’s failure to comply with the Directive – as well as subjecting directors to penalties for non-compliance.[2]  This EU initiative would harmonise requirements for firms across the bloc, building on country-level requirements for large firms in France and Germany (2017 Duty of Vigilance Law and the 2021 Act on Corporate Due Diligence in Supply Chains in France and Germany respectively).[3] It follows the perceived failure of the Non-Financial Reporting Directive (NFRD) in pressuring firms to take sufficient account of their adverse impacts in their value chains.[4]

Pressures have been growing for the UK to follow the EU’s lead and legislate a requirement for corporate human rights due diligence, with calls coming from investment managers, leading firms, and civil society.[5] But it looks as though the UK is less advanced on this legislative journey.

At an international level there has been an intergovernmental working group established to create an international legally binding instrument on Transnational Corporations and Other Business Enterprises with respect to human rights.[6] On completion, this new United Nations treaty would take the requirement for human rights due diligence on the part of firms truly global.

Human Rights and Sanctioned Entities

Over half of active sanctions programmes deployed by the United States towards states reference human rights violations specifically as their rationale.[7] This proportion rises to around three-quarters when looking at United Kingdom sanctions programmes.[8] From a purely commercial perspective, revenue attached to a client who is engaging in serious human rights violations will be worth less to an investment management firm given the increased likelihood that they are moved onto a Sanctioned Entity list and forcibly off-boarded. Furthermore, such events consume significant management time and attention, legal risk (and cost) attached to correctly following unfamiliar processes, and potential reputational damage that comes from ensuing requirements to answer shareholder questions about financial exposure to sanctioned entities.[9]

Identifying states with the weakest safeguards against serious human rights violations goes some way to reducing the risk of a client being transferred to Sanctioned Entity lists, or at least having associated revenue appropriately discounted in business-planning decisions. Figure 8 shows that around half of states that fall below the Common Minimum Standard (‘the CMS’, outlined in chapter 6) find financial sanctions applied to them by the US and the UK, with around a quarter of states that clear the CMS but are nonetheless rated as Not Free by Freedom House, as Authoritarian by International IDEA, and are not a State Party to the Statute of Rome (i.e., the International Criminal Court) becoming subject to financial sanctions.

Figure 8: Proportion of States subject to Financial Sanctions, by Regime Classification

Source: Freedom House; International IDEA; Office of Foreign Assets Control, US Department of the Treasury; Office of Sanctions Implementation, HM Treasury November 2022

There are other more tentative risks on the horizon. For example, the way in which firms will be treated under the UK government’s new Foreign Influence Registration Scheme mandated by the National Security Bill is unknown.[10] In late 2022,  Colony Capital’s founder and CEO Tom Barrack faced trial in the United States over allegations of acting as an unregistered foreign lobbyist, demonstrating how managing sovereign wealth clients can raise questions around the political interactions of investment management firm personnel. Barrack was acquitted on all charges with the prosecution failing to prove that he sought to advance the UAE’s interests on a transactional basis.[11] Whether the UK takes a more expansive line towards the requirement to register, and how the courts will treat firms that engage both with the UK government on policy matters and also manage sovereign wealth funds will be evident only in time.

Managing any business without applying the appropriate discount to revenue streams according to their risk profile is foolhardy. Incorporating analysis of business vulnerabilities to client human rights violations ahead of regulatory and legal developments makes investment management firms more robust, future-proofing the business against regulatory and legal developments that appear to be in train.

Back to Executive Summary

On to Chapter 5

[1] White and Case (2022): European Commission issues major proposal on due diligence obligations to protect human rights and the environment across supply chains.

[2] European Commission (2022): Proposal for a Directive on corporate sustainability due diligence and annex

[3] White and Case (2021): The German Parliament passed the “Act on Corporate Due Diligence in Supply Chains” on 11 June 2021; Business and Human Rights Resource Centre: France’s Duty of Vigilance Law

[4] European Commission (2022): Proposal of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 pp3-4

[5] Business and Human Rights Resource Centre (2022): Investors call for a UK due diligence law; Businesses and investors call for new human rights due diligence law

[6] Business and Human Rights Resource Centre (2022): Binding treaty: a brief overview

[7] Office of Foreign Assets Control, US Department of the Treasury (2022): Sanctions Programs and Country Information, accessed November.

[8] Office of Sanctions Implementation, HM Treasury (2022): Financial sanctions targets by regime, accessed November.

[9] Reuters (2022): Credit Suisse froze $10.6 bln worth of sanctioned assets in Q1. Also see Credit Suisse Group (CS) Q2 2022 Earnings Call Transcript

[10] UK Home Office (2022): Foreign Influence Registration Scheme to make clandestine political activity illegal

[11] Financial Times (2022): Trump ally Tom Barrack acquitted on charges of acting as a foreign agent


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