While Congress stands poised to authorize the largest Pentagon budget in history, there are signs within the draft legislation that U.S. lawmakers are taking arms control more seriously than ever. The version of the National Defense Authorization Act (NDAA) that the House passed in July places new limits on arms sales to Saudi Arabia and requires the President to notify Congress as a matter of course 30 days before any initial and final arms shipments. Most significant is a House-approved NDAA amendment, sponsored by Rep. James McGovern (D-MA), that would ban weapons sales to countries committing genocide or war crimes, expand consideration of human rights in the transfer of defense articles and services, enhance congressional oversight over such transfers, and broaden the scope of end-use monitoring (measures to ensure that arms are not being misused), with specific reference to international human rights law.

For the defense industry, these developments should be taken as further evidence of the urgent need to more carefully vet their clientele and to monitor the human rights impacts of their products and services. A 2019 Amnesty International survey found that 22 major arms companies were “failing to take adequate steps to meet [their] responsibility to respect human rights.” To remedy this shortcoming, the defense sector might take a cue from other industries — from tech to retail to food and beverage — that have adopted human rights due diligence (HRDD) processes to root out conflict minerals, child labor, slavery, and human trafficking. A recently published report I prepared for the American Bar Association Center for Human Rights (ABACHR) analyzes how defense companies can implement a comprehensive HRDD program. Doing so is not only a human rights obligation, but a prudent business practice as well.

HRDD is a Smart Business Practice

Defense exporters face a growing array of business risks stemming from the human rights impacts of their products and services, including regulatory, financial, and legal risks. An effective HRDD regime can help to insulate companies from these threats.

Regulatory Risk

The recent NDAA amendments show that legislators and policymakers are taking an active interest in the arms trade, and in corporate social responsibility more generally. In the United States, McGovern’s amendment comes on the heels of twin war powers resolutions introduced this summer in the House and Senate that would end direct American involvement in the war in Yemen. In Europe, nearly a dozen states (including Austria, Belgium, Denmark, Finland, Germany, Greece, Italy, the Netherlands, and Sweden) have already restricted arms exports to Saudi Arabia at various points in time. Through enhanced vigilance, arms manufacturers may be able to protect lucrative business opportunities from cancellation by guaranteeing more responsible end-user behavior.

In addition to limiting arms transfers to certain states, the last two Congresses have considered a slew of other reforms that would increase oversight of and place new limits upon arms sales. Regulatory efforts are also on the rise. In 2012, the Securities and Exchange Commission (SEC) imposed a corporate due diligence requirement for conflict minerals; a pending SEC rule would add further environmental, social, and governance (ESG) disclosure requirements irrespective of industry. The European Union appears prepared to go even further after the European Commission adopted a proposal earlier this year that would require all companies of sufficient size to conduct due diligence. This initiative builds upon the HRDD duties already in place in several individual European countries. While these new compliance regimes impose obligations, they also present opportunities. Defense companies that voluntarily put their own HRDD programs into place are best positioned to anticipate, adapt to, and shape the policy landscape before regulators act.

Financial and Reputational Risk

Defense companies have incurred substantial reputational damage as media coverage has revealed the human costs of irresponsible uses of defense articles and services. At the same time, the socially responsible investing movement has grown exponentially, with Bloomberg expecting ESG funds to control one-third of all assets under management globally by 2025. A majority of funds analyzed in one study have divested from controversial weapons, and activists have made information on the defense holdings of mutual funds easily available to private and institutional investors. Many investment funds, industry associations, and financial institutions — including all but one of the largest banks in Europe — have developed human rights screening and exclusion protocols that apply to investments in the defense sector, threatening long-term access to financing. If defense companies do not respond to these financial pressures on their own initiative, their shareholders might eventually force them to — several measures  related to HRDD were put forward in this year’s proxy season at major defense companies.

Legal Risk

Legal threats loom ever larger. Most stock exchanges reference human rights in their ESG disclosure guidelines in some form, with civil penalties potentially attaching for noncompliance. While the U.S. Supreme Court has largely gutted the Alien Tort Statute (which holds U.S. persons civilly liable for violations of international law), some senators are seeking to reinvigorate it. In the meantime, litigants have achieved early success in pursuing other paths to civil liability against U.S. weapons manufacturers. In Europe, prosecutors have brought criminal charges against defense companies who violated the terms of their export licenses or are alleged to be complicit in war crimes and crimes against humanity abroad under the theory of universal jurisdiction.

HRDD is Not Only a Public Function

Defense companies that have resisted HRDD typically raise two arguments: redundancy and ignorance. Both can be easily refuted.

A Valid Export License is Not a Shield

Defense companies sometimes disclaim human rights responsibilities by pointing to the diligence regulators already perform to approve sales or grant export licenses. But this line of argument places too much faith in regulatory authorities which have, at times, been derelict in enforcing domestic and regional arms control laws.

Moreover, regulatory approval does not adequately protect arms exporters from the business risks described above. The purported potency of the current regulatory landscape has not stopped the growing tide of ESG investors and banks severing ties with the arms industry. Nor is a valid license necessarily a shield to civil or criminal liability. And regardless of present practice, the writing on the wall says that more robust HRDD regulations are coming. Diligence performed by regulators should therefore be viewed as a complement to, but not a replacement for, industry’s own HRDD.

Exporters Do Have Access to Relevant Information

Arms companies alternately lament that their capability to conduct HRDD pales in comparison to a regulator’s. Undoubtedly, states may have the means to gain access to non-public information through diplomatic relations and intelligence collection. In the narrow context of a particular business relationship, however, defense exporters also have access to valuable, pertinent information that is not widely known. The nature of the defense trade often involves through-life support contracts in which the supplier has ongoing contact with the buyer for the purpose of training, maintenance, upgrades, and additional transfers. These touchpoints can provide valuable insights into the policies and practices of the end-user. In addition, exporters can insert contract terms that require transparency and cooperation on the part of the client. While also not a replacement for active regulation, information gleaned from these HRDD efforts can complement that acquired by the government.

Conclusion

Defense companies face increasing legal and business risks from the human rights impacts of their products and services. Rather than relying on regulators to protect it from these risks, the defense industry is well-positioned to confront them on its own. The ABACHR guidance can assist in this endeavor.

In short, an HRDD plan should cover four stages: risk assessment, prevention and mitigation, end-use monitoring, and investigation and remediation.

  • Companies can evaluate risks by collecting information from various sources and mitigate them through trainings on safety and legal compliance. They can also standardize industry practices and include contractual terms that obligate and incentivize responsible behavior.
  • After delivery, companies can monitor weapons use through audits and site inspections, open-source information collection, stakeholder engagement, and both periodic and incident-related client reporting duties.
  • When a manufacturer reasonably suspects potential misuse, it should conduct a thorough investigation, which may lead to contractual contingencies, policy reforms, and remediation to victims.

An upfront investment in these HRDD practices can improve human rights outcomes and save companies substantial downstream costs.

(Eian Katz is a former Legal Advisor at the American Bar Association Center for Human Rights. This post reflects his own views and benefits from research assistance provided by Bryanna Rainwater. The views expressed herein represent the opinions of the authors. They have not been reviewed or approved by the House of Delegates or the Board of Governors of the American Bar Association and, accordingly, should not be construed as representing the position of the Association or any of its entities. Further, nothing in this post should be considered as legal advice in a specific case.)

IMAGE: Members of the Nicaraguan Army prepare their tanks to march in a military parade in Managua on September 3, 2022, to commemorate the 43rd anniversary of the founding of the Nicaraguan Army. (Photo by OSWALDO RIVAS/AFP via Getty Images)