Regulating Due Diligence by Dr Isaac Ogbodu, Head of Due Diligence and Special Research with Greystone law and risk.
The examples we will look at indicate at least four
main regulatory approaches through which States
can ensure human rights due diligence activities
by business. Usually these approaches co-exist
within the same jurisdictions and legal systems.
The first approach imposes a due diligence
requirement as a matter of regulatory compliance.
States implement rules that require business
enterprises to conduct due diligence, either as a
direct legal obligation formulated in a rule, or
indirectly by offering companies the opportunity to
use due diligence as a defense against charges of
criminal, civil or administrative violations. For
example, the courts use business due diligence to
assess business compliance with environmental
laws (US, CEPA), labor (China overseas workers),
consumer protection (Germany) and anti-
corruption laws (US FCAP / UK BA). Similarly,
regulatory agencies regularly require business due
diligence as the basis upon which to grant
approvals and licenses for business activities (EIA
in India and Ghana; Germany/construction). Anti-
money laundering laws are increasingly global
(e.g. OECD, China) their KYC or CDD provisions are
forms of due diligence.
The second regulatory approach provides
incentives and benefits to companies in return for
their being able to demonstrate due diligence
practice. For example, (Japan / Korea / Taiwan
Green Procurement / US Federal Procurement re
child labour; US Davis-Bacon re social dumping /
wages in construction and fed contracts; Norway
Pension Fund Global ethical screening) in order for
business enterprises to qualify for export credit,
labeling schemes or other forms of State support,
States often require due diligence on environmental
and social risks (the Dutch “Trade and Industry
Tool” for ODA requires a company to submit a risk
assessment of impacts; US Trade preferences
Hope Act in Haiti)
A third approach is for States to encourage due
diligence through transparency and disclosure
mechanisms. States implement rules that require
business enterprises to disclose due diligence with
the intention that markets and society will attempt
to constrain any identified harms. For example,
(Aarhus Convention in EU re environmental info to
stakeholders), securities laws in most countries,
consumer protection laws (France, Argentina,
Germany, EU) and reporting requirements for
corporate social responsibility (Denmark, Norway,
Spain, Malaysia) operate on the logic that
information serves the interests and will prompt
action by investors, regulators, and people who
might be adversely affected by a business activity.
(US California web site disclosure re DD for human
trafficking, for co. over 100 mill).
A fourth category involves a combination of one or
more of these approaches. States regularly
combine aspects of these approaches in order to
construct an incentive structure that promotes
respect by business for the standards set down in
the rules and ensures that compliance can be
assessed in an efficient and effective manner. For
example, administrative rules governing
environmental protection, labor rights, consumer
protection or anti-corruption may require business
due diligence as the bases for a license or
approval, and may also require regular reporting
disclosure of due diligence activities by business.
Enforcement of such rules can combine a
combination of administrative penalty (fines),
criminal law sanctions and the possibility of civil
action, in which due diligence can be a defense.
In general, what these approaches show is that it
is entirely possible for States to use their roles as
regulators, purchasers, financiers, investors, and
owners, to ensure the incentives for business are
based on ensuring a business respect’s human
rights, including through the use of due diligence.

I would like to say a word about what we found
with respect to jurisdiction the reach of due
diligence and its significance for jurisdiction:
As you all know, contemporary business activity is
integrated across national and organizational
boundaries. Companies operate through networks
of suppliers, sub-contractors, franchisees, and
distributors, often located in different States. The
corporate group usually includes a number of
separate legal entities, over which the parent
company, which owns part or all of the stock,
exercises variable degrees of control. These
various entities may be incorporated or operate in
different jurisdictions. As a result, most products
and services available today may be said to be the
result of collaboration between a number of
business entities, entertaining contractual or
investment links, and often escaping the
jurisdiction of any single State.
The problem is that respect for legal standards,
such as environmental protection, or labor rights,
may be undermined by the creative use of
business relationships, the various forms of
business entities and the organization or structure
of corporate groups.
Our analysis suggests due diligence is used by
these different legal regimes to overcome the
obstacles to effective regulation posed by complex
corporate structures or trans-jurisdictional
activities. Over time, the legal regimes governing
due diligence activities have adapted their reach to
the activities and relationships created by this
integration of business enterprises.
In national legal systems, the responsibility of
business enterprises to conduct due diligence does
not end at the legal boundary of the individual
company. Due diligence extends throughout the
corporate group and in some cases to all business
relationships globally. This is true in the national
and international laws governing of anti-corruption
(UK), workplace safety (China), conflict minerals
(US), anti-discrimination against people with
disabilities (US) and with respect to civil actions
(and the EU Brussels I Regulation e.g. NL/Shell
Nigeria both of which deploy due diligence in this
regard).
The intent of such provisions is to prevent
business enterprises from escaping responsibility
by outsourcing risky activities to others through
their business relationships. These laws approach
responsibility in a way that recognizes the formal
limits of the legal entity but does not allow the
choice of organizational forms to create obstacles
to addressing the potential harms or violations
arising from the business activities of that entity.
The purpose of the due diligence concept is to
require a business to identify, prevent or mitigate,
and account for, a harm or violation. By doing so
across a firm’s business relationships globally, the
scope of due diligence is designed to overcome
other legal boundaries, such as the reality of
separate legal entities, or separate jurisdictions. Its
scope is, therefore, often determined first and
foremost by the nature of the harm to be avoided.
With that I would like to conclude by adding that
our report made a series of recommendations
about practical steps legislators could take to both
encourage and require due diligence by
businesses. These ranged from the use of due
diligence in licensing, procurement and export
credit activities, in transparency and reporting
requirements and all the way over to the place of
due diligence as a defense for companies facing
civil or criminal actions.
We heard earlier today that the problem with
ensuring that business acts responsibly is that
“everything is voluntary”. Based on my
participation in the Expert Group I am convinced
that era is coming to a close. It is now time for
lawmakers to give at least as much regulatory
attention to protecting human rights from abuse by
businesses as they do the protecting against other
public goods threatened by business activity. The
question for policy makers is no longer whether to
regulate, but how to regulate – both fairly and
effectively – to protect human rights.