"How can companies successfully pursue business operations and/or joint ventures with state-owned enterprises (SOEs) in countries with poor human rights records without compromising their own human rights commitments?"

A state-owned enterprise (SOE) is a legal entity created by a government to undertake commercial activities on its behalf. Although SOEs may be mandated to fulfil some public functions, they should be differentiated from public entities that are established only for carrying out non-commercial operations.

SOEs are particularly active in industries that are considered strategic – for example industries considered vital for national development capital intensive industries, financial services and sectors where necessary economies of scale are only possible through the establishment of monopolistic positions. These might include, for example:

- The extraction of natural resources, including mining, oil and gas (e.g. Petrobras of Brazil)

- Defence industries, including weapons systems and communications (e.g. Hindustan Aeronautics of India)

- Public utilities, including water provision and energy generation/transfer (e.g. Perusahaan Listrik Negara of Indonesia (electricity distribution))

- Infrastructure, including telecommunications, logistics and transport (e.g. China Railway Construction Corporation Group)

- Nascent and capital intensive industries being ‘nurtured' by the state (e.g. Aviation Industry Corporation of China)

Data compiled by the UN Conference on Trade and Development (UNCTAD) in 2010 shows that around 70% of state-owned Transnational Companies (TNCs) are active in the services sector, followed by manufacturing industries (22%) and the primary sector (approx. 9%). (See Table 1: Distribution of state-owned TNCs by sector/industry, 2010 in the Background to the Dilemma below).

Where SOEs require the involvement, expertise and capital of foreign companies, this is usually achieved on the basis of a joint venture structure (for example in the case of large-scale extractive projects) or through licensing agreements (for example, the licencing of certain technology to SOEs by foreign companies).

In certain countries, wholly foreign-owned companies face formal or informal restrictions on their market access, in which case SOEs are a natural partner. In addition, SOEs can represent potentially attractive business partners in their own right, due to often strong connections with host governments, favourable regulatory treatment and substantial balance sheets that allow them to participate in major projects.

Many SOEs have internationalised their operations, leading to the emergence of state-owned TNCs. As SOEs extend their reach beyond their home borders, it becomes more likely foreign companies will become involved in joint projects in a wider range of locations. UNCTAD data from 2011 suggests that at least 650 state-owned TNCs are doing business around the world through more than 8,500 foreign affiliates. About 56% of such enterprises originate from developing economies, such as China, India, Malaysia, South Africa and the United Arab Emirates. In 2010, 19 of the world's 100 biggest multinational companies, as well as 28 out of the 100 biggest in emerging markets in 2009, were state-owned TNCs.

According to UNCTAD, the government is a majority shareholder in about 44% of state-owned TNCs, and a holder of less than 50% of the stock in 42% of TNCs. In the latter type of state-owned TNCs, the government is usually the largest minority shareholder, or owns ‘golden shares' which enable it to influence the composition of the board of directors and the way the enterprise is managed.

In certain circumstances, working with SOEs can present foreign companies with higher risks of complicity in the undermining of human rights – particularly if the ‘parent' state of that SOE itself demonstrates weak human rights performance.

In particular, this is because unlike most other companies, SOEs:

• Are more likely to pursue non-commercial objectives, including geostrategic, political and social objectives that trump company reputation or profitability (it should be noted, that where ‘parent' governments do respect human rights – the opposite can equally be true, with SOEs used to support the human rights of citizens in a way that goes beyond commercial considerations)
• Are likely to be less transparent and accountable to markets and consumers than their non-government linked counterparts
• Often enjoy a position of market domination due to the advantages conferred on them by their ‘parent' governments, reducing their incentives for acting in a responsible, accountable way that will appeal to investors and customers
• Can operate with higher levels of impunity from legal sanction or political censure than other companies
• May come under pressure to transfer knowledge and know-how to ‘parent' governments that may then be misused to commit human rights violations
• May – in certain circumstances – be subject to sovereign immunity, or may be used by governments to distance themselves from human rights abuses carried out on their behalf

These themes are explored in further detail below.

Considering this, the dilemma for a responsible company is to find ways to continue investing in or working with SOEs whose 'parent' states have weak human rights records, whilst ensuring such work does not compromise its own human rights obligations.

See Working with SOEs case studies

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Companies willing to pursue business activities in partnerships with SOEs or in industries where they are most active can face different challenges, which include the following:

• Non-commercial objectives: SOEs in emerging markets tend to be used to promote governmental policy or as instruments of foreign policy in the case of state-owned MNCs, pursuing objectives other than the commercial success of the enterprise. Depending on the specific SOE – and the nature of the state that exercises control over it – this can have positive or negative human rights impacts.

For example, SOEs have been used in both developed and emerging markets to promote broader societal goals, including higher levels of employment, the avoidance of mass layoffs in times of economic difficulty or the provision of affordable food and energy to the local population. Whilst this can make SOEs economically unsustainable without government support – it can do much to further a range of human rights.

On the other hand, SOEs can also be used by states with poor human rights records to pursue political, strategic or social goals in a way that either ignores consequential human rights impacts – or deliberately promotes actions that undermine human rights (or have the potential to do so) to attain their broader goals. The government in question may be willing to use SOEs in such a way even where such aims undermine the reputation of the SOE in the eyes of potential investors and customers. This might include, for example, the furtherance of national foreign policy interests, domestic repression, the development of certain types of weaponry, the aggressive clearance of land to expedite national projects or the generation of revenues for geostrategic partners who are involved in human rights violations.

Internal repression: In May 2011, for example, it was reported that the Bahrain Petroleum Company (BAPCO) had fired 293 workers for taking part in anti-government protests and general strikes. The figures were provided by Abdulhussain bin Ali Mirza who is both the kingdom's energy minister – and CEO of BAPCO.

National economic/foreign policy: A seven year investigation into the then state-owned Elf-Aquitaine oil company in France highlighted an apparent web of corruption between senior executives, a number of French politicians and the state. Between 1989 and 1993, it is reported that the company misappropriated around US$530 million in funds. Much of this money was apparently used to bribe foreign players to secure business contracts in Africa, South America, Russia, Spain and Germany between 1989 and 1993. So extensive was the corruption, that it has been claimed it allowed French governments to turn Elf-Aquitaine – then France's largest company – into an extension of its foreign policy apparatus.

For example, authorities in Taiwan have claimed that Elf Aquitaine paid bribes through French defence firm Thomson-CSF (now Thales) to persuade both French and Taiwanese authorities to approve the sale of six frigates for US$2.8 billion. The frigates purchased were more expensive than the vessels originally planned for, were built in France rather than Taiwan – again contrary to original plans – and integrated Thomson-CSF equipment. Investigations into the deal in France have reportedly made little progress.

Societal values: In June 2008, it was reported that the Pars Special Economic Energy Zone Company – a major state-controlled employer on Iran's Gulf Coast – told single members of their workforce that they needed to get married or would be fired. Local journalists said this was part of an effort to reduce the number of prostitutes working in the area. The company is reported as saying: 'As being married is one of the criteria of employment, we are announcing for the last time that all the female and male colleagues have until September 21 to go ahead with this important and moral religious duty.'

• Corporate governance: In many cases SOEs will not have the same internal checks, balances and incentives that often exist within MNCs operating in the open market – particularly listed MNCs. Even where such internal checks and balances do exist, they will not necessarily be focused on purely commercial issues – making SOEs less responsive to market pressure. For example, the appointment of managers in SOEs may be based on other than commercial performance, reducing their accountability within the company – or to non-government shareholders.

In addition, unless they are listed, SOEs do not need to provide information on their performance – or to use this information to help drive the value of their shares. This can undermine effective external oversight – and, in certain circumstances, create ample ground for corruption and political manipulation.

SOEs are also insulated to some degree from pressure from potential creditors – as their debt rating is often linked to that of their ‘parent' government (owing to the assumption that that government will bail them out in a worst-case scenario). In turn, this increases the chances of an SOE being granted a loan where a private firm with a similar performance would have been rejected or been offered less favourable terms and conditions. The government's ability to combine the ownership of SOEs with regulatory powers, which can be used to the advantage of SOEs, can further insulate SOEs from normal market forces.

Collectively, such issues can result in SOEs having limited accountability other than to their ‘parent' governments – as well as limited transparency around their activities. This can make them less responsive to outside pressure (whether from customers, other shareholders, the media, foreign governments or otherwise) with respect to their human rights performance – even where it is affecting their reputation and/or commercial performance.

Whilst these factors can reduce internal company incentives for the proactive and responsibly human rights management specifically, it can also have broader, more general impacts in terms of general management capabilities within an SOE – with unintentional consequences in terms of social and environmental impacts.

In Venezuela, for example, state oil firm PDVSA has faced a range of operational challenges – including low rates of production – as well as a number of high profile environmental and social incidents that have put employees and local people at risk. Industry professionals, for example, suggest the company produces significantly less oil than it claims to – and has highlighted the inability of the company to secure the necessary foreign partners to optimise its operations. This is attributed to the political risks involved, following the 2009 seizure of the assets of 60 oil service companies by PDVSA (with the assistance of the state). It has also been suggested that as the senior management of the company is increasingly taken up by political appointees with limited management experience in the oil sector – the operational capabilities of the company have been undermined. This may be one of the causes of its relatively poor environmental and safety performance – including a high profile oil spill in February 2012 at a PDVSA-operation in Monagas state that contaminated the local river that supplies the state capital Maturin.

• Market dominance: SOEs often enjoy a monopolistic or semi-monopolistic market position – due to preferable treatment on the part of their ‘parent' governments. Such treatment might include preferential access to bank capital, lower interest rates on loans from state banks, favourable tax regimes or lower rates on raw materials – or even legally mandated monopolies. They may be also allowed to follow more lax corporate governance requirements compared to privately-owned companies, to help them achieve a competitive advantage.

Aside from such ‘structural' advantages, governments are more likely to support projects developed by their own SOEs in order to maximise public revenues and market control. As a result, many SOEs are not exposed to the full rigours of the market, can enjoy significant economies of scale and can be more lucrative than they otherwise would be. Furthermore, foreign MNCs seeking to enter the industry in question will have little choice but to partner with such SOEs – due to their dominant market position.

This reduces the incentives for SOEs to demonstrate strong social and environmental performance – and by extension human rights performance – as they have little to fear in terms of losing their social licence to operate, from competitors who demonstrate higher levels of non-financial performance – or (to some degree) their potential ability to attract investors and business partners.

For instance, since 2006, inadequate health and safety standards in Chinese SOEs were the cause of 157 major workplace accidents which resulted in 965 deaths, predominantly in construction, coal mining and the petrochemical industry. This was considered by Huang Shuhe, vice director of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), a body managing centrally-owned SOEs in China, as evidence of lax work safety management by the SOEs.

• Weak human rights oversight: Where their ‘parent' states demonstrate weak human rights performance, SOEs have little incentive to proactively manage their own human rights performance. This is because they are less likely to face political or regulatory sanction for their actions within their home jurisdictions – and are likely to enjoy a certain level of impunity, especially if such actions are actively endorsed by their ‘parent' state.

Furthermore, states with weak human rights performance are more likely to view actions and policies that undermine human rights as legitimate tools of statecraft. This is particularly the case where governments are deliberately trying to cultivate national corporate ‘champions'. In turn, they may use SOEs – as effective extensions of the state – to effect such actions and policies on their own behalf.

Furthermore, the ‘parent' state in question – which will also enjoy regulatory powers – may have real incentives to ensure that its SOEs are relatively free from laws and regulations that would limit their value to the state – whether in economic terms or in terms of the state's broader political, social and geo-strategic goals. This might include their ability to operate in highly challenging but highly lucrative contexts that would otherwise be impossible for mainstream MNCs to pursue due to the inherent social, environmental or human rights risks – and the consequential threat to their reputations, brands and share prices.

Even in absence of official regulation and oversight, SOEs are often well protected from the normal market pressures that would otherwise discourage mainstream MNCs from carrying out – or being complicit in –human rights abuses. For example, many of the commercial pressures that apply to mainstream MNCs with poor human rights records are as much focused on the risks entailed in committing or being associated with the human rights abuses – as they are on morality. These risks include the potential for legal sanctions, loss of social licence to operate and the inability to access financing. Again, in many cases, SOEs will not – in reality – face any of these risks, as they are a) owned by the regulators; b) have a social licence that is assured as a result of state-backing; and c) have potential access to the full financial resources of the state. As a result, a SOE with a poor human rights record is likely to face fewer market/commercial sanctions than a mainstream MNC – with consequences for its style of management and operational behaviour.

• Technology transfer: Even where an SOE does not act in a way that undermines human rights, its close relationship to its ‘parent' state means it may come under pressure to transfer (either legally or illicitly) its technology and know-how. Depending on the technology in question, if such a transfer takes place to a government that displays weak human rights performance, it is possible that it will be utilised by the state to carry out actions that further undermine human rights. This might include, for example, the misuse of communications or other advanced technology gained by SOEs through their partnerships with foreign MNCs to facilitate repressive internal security campaigns – or to develop weaponry that is used in a way that results in human rights violations.

For example, in Iran, the standards-based, lawful interception capability of basic 2G/2.5G mobile networks supplied by Nokia Siemens Networks to two local mobile phone operators in 2008 was reportedly used by the authorities to illegitimately monitor the communications of political dissidents. A ‘monitoring centre' acquired from Nokia Siemens Networks by the Mobile Communication Company of Iran (MCCI) and Irancell in 2008 was originally intended for the lawful interception and analysis of data (for details see the Product Misuse dilemma).

MCCI is owned by the Telecommunications Company of Iran (TCI), which is the only state-owned fixed-line operator. Athough Irancell is a private company, the Iran Electronic Development Company (IEDC) is a majority (51%) shareholder. In turn, the IEDC is owned by Iran Electronics Industries, which is a state-owned subsidiary of Iran's Defence Industries Organisation, and Mostazafan Foundation, allegedly controlled by Iran's Revolutionary Guard Corps.

Joint venture cooperation between General Electric (GE) and Chinese aviation SOE Aviation Industry Corporation (AVIC) for the production of national commercial jetliners also raised concerns as reported by the New York Times and Washington Post regarding the potential misuse of GE's technology in future. GE was reported to have transferred some of its sophisticated proprietary technology to AVIC (including its Integrated Modular Avionics (IMA) technology) that could one day see Chinese commercial airplanes competing with those of Boeing and Airbus. The strategic commercial opportunity offered by this cooperation is clear. However, concerns have been raised that this technology could be misused by China to improve its military aircraft technology. Depending on future actions carried out by the Chinese state, this military technology could be used to undermine human rights both within China and abroad – representing a potential reputational risk to GE itself.

GE has taken a range of measures to ensure its IMA technology cannot be used in military applications, which is further explored in a dedicated case study (see case study).

In addition to these more practical considerations, there are some potential implications under international law around the relationship between an SOE and its ‘parent' state – as well as the nature of the acts carried out by its ‘parent' state. This includes the potential ability of the SOE – in certain circumstances – to claim state immunity for certain of its actions, as well as the difficulties involved in establishing the responsibility of the ‘parent' state for the actions of its SOEs:

• Sovereign immunity: Under a doctrine of public international law on state immunity, the rules of one state are not applicable to the other state (unless the state waives such immunity expressly or by implication), resulting in national courts being prevented from adjudicating or enforcing awards against foreign states and their property. Immunity can also potentially cover SOEs.

A 2004 UN Convention on Jurisdictional Immunities of States and Their Property, grants immunity from jurisdiction and enforcement to ‘agencies or instrumentalities of the State or other entities, to the extent that they are entitled to perform or are actually performing acts in the exercise of sovereign authority of the State'. Although the Convention is not yet in force, it is believed to be ‘the most authoritative statement available on the current international understanding of the limits of state immunity in civil cases'.

In certain cases, where an SOE is acting on behalf of its ‘parent state', this may mean that foreign business partners cannot pursue legitimate legal claims against them. This is particularly the case of SOEs used by governments as instruments for pursuing non-commercial objectives.

The Convention does not include an exception to state immunity in cases of violations of internationally recognised human rights – an omission which has been criticised by scholars – leaving it up to individual forum states to define the limits of state immunity in each particular case. Although a ‘restrictive' approach to the state immunity doctrine, offering exceptions only for sovereign rather than purely commercial acts of states, is prevailing over ‘absolute' immunity in civil proceedings, there is no unanimous agreement on what constitutes a ‘sovereign act'.The answer differs subject to jurisdiction, as, in the absence of a treaty regulating this issue on an international plane, the limits of state immunity continue to be a matter of customary international law and depend on the practices of individual forum states.

Likewise, the limits of state immunity (and by extension SOE immunity) from enforcement – which is separate from immunity from jurisdiction as examined above – are not clear and depend on forum states' approaches. Immunity from enforcement refers to procedures of arrest or attachment by the courts or authorities of one (forum) state against the assets of the other (liable) state in relation to civil or criminal proceedings launched against the liable state.

In the context of criminal proceedings, research from international law firm Clifford Chance suggests that state immunity seems to be capable of protecting state agents (whether natural or legal persons) of a foreign state with regard to official acts performed on behalf of the state – with only limited exceptions to immunity being provided by international treaties and customary international law.

In contrast to existing case law on state immunity in criminal, tax and competition law, the issue of state immunity is less well developed in the regulatory context. Limited research suggests that in order for the ‘restrictive approach' to state immunity to apply (i.e in the case of an agency enforcing host state regulations against another state's SOE (or other state-controlled entities and agencies), a number of factors might be considered. These include:

- The types of remedies to be awarded (compensatory remedies as compared to punitive)

- The nature of an enforcement agency (public or private)

- The applicable definition of the foreign state and

- The type of a foreign entity concerned.

As a result, there is likely to be great uncertainty around the enforcement of laws and regulations against an SOE in municipal courts or other competent adjudicatory bodies of countries outside of its ‘parent' state. Indeed, the outcome is likely to depend largely on the location of the proceedings and the approach of the court in the forum state.

In turn, a lack of predictability as to when SOEs may be refused immunity for actions giving rise to human rights violations may result in a degree of moral hazard, leading to SOEs engaging in controversial practices in the belief that they may well not be held accountable. This increases the risk of companies being faced with such violations by their SOE partners.

• State responsibility: Under the UN Guiding Principles, ‘States should take additional steps to protect against human rights abuses by business enterprises that are owned or controlled by the State... including, where appropriate, by requiring human rights due diligence'. The Commentary to this Principle clarifies that:

"Where a business enterprise is controlled by the State or where its acts can be attributed otherwise to the State, an abuse of human rights by the business enterprise may entail a violation of the State's own international law obligations. Moreover, the closer a business enterprise is to the State, or the more it relies on statutory authority or taxpayer support, the stronger the State's policy rationale becomes for ensuring that the enterprise respects human rights."

States can exercise different degrees of control over SOEs. First of all, states' prime source of leverage over their SOEs – is their sole or major shareholder position, which provides funding to SOEs. Secondly, the state may have its own directors on the board of SOEs or oblige SOEs to directly report to the minister responsible for the sector. States may also set objectives for SOEs by means of the laws establishing a company, for instance.

Nonetheless, as Professor Muchlinski, Professor in International Commercial Law at School of Oriental and African Studies (SOAS) of the University of London notes: "international law recognises the doctrine of corporate separation and will only lift the corporate veil in cases of fraud or evasion". In addition, with reference to the International Law Commission's Articles on State Responsibility (ILC Articles), he argues that the fact of state ownership of SOEs and control or the ‘closeness' of SOEs to their home states is ‘too loose a connection in legal terms' for the purpose of attribution of responsibility to the home states. In his opinion, the only exceptions, in line with the ILC Articles 5 and 8, could be:

- Where an enterprise was empowered by law to exercise governmental function, which is unusual for SOEs, and the violation was committed in the exercise of such function; or

- Where the state has authorised the controversial practices concerned as a result of its position of control over SOEs, which needs to be established in each individual case.

In light of such arguments, there is little reason for ‘parent' states to closely regulate their SOEs to ensure that the state itself is not implicated in their misconduct or abuse of human rights. On the other hand, foreign MNCs working with SOEs will continue to face high risks of complicity in the wrongdoings of SOE partners if they are found or perceived to have failed to use their position of control or ‘closeness' to prevent violations, or assisted with the perpetration of human rights abuses in some way.

It is also possible that ‘parent' states might use SOEs as agents to carry out actions that transgress relevant laws or result in the undermining of human rights – or ‘turn a blind eye' to the same. This would allow the state to distance itself from the resulting controversy and/or international legal proceedings, by taking advantage of the difficulties of establishing state responsibility.

See Working with SOEs case studies

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Real-world examples

Violations by BOTAŞ resulting in additional costs for BP and the BTC Consortium

The Baku-Tbilisi-Ceyhan (BTC) project involves the construction and maintenance of a 1,768 km long oil pipeline, connecting the Caspian and Mediterranean seas and passing through the territory of three states – Azerbaijan, Georgia and Turkey. The construction of different segments of the pipeline, which started in April 2003, was managed by different parties. In Azerbaijan and Georgia, works were led by BP, the project's operator, and BTC Co, a project company. In Turkey, state-owned company BOTAŞ played the role of managing contractor. BOTAŞ was also to become an operator of the pipeline in Turkey once construction was completed, receiving an estimated US$70 million per year in operating fees. The Turkish government guaranteed the performance of all of BOTAŞ's duties on the project, as well as all payments to be made by the company under its contracts.

However, the manner in which BOTAŞ fulfilled its duties attracted negative media attention to the project. This related to a number of factors, including an allegedly under-priced lump sum turn-key contract, a tight deadline for the completion of construction work supported by stringent time penalties to be paid by BOTAŞ (and the Turkish government) in the case of delays, and limited regulation of BOTAŞ' social and environmental and human rights standards by the Turkish government. Critics – including Amnesty International and a range of other NGOs – claimed these factors contributed to sub-optimal practices by BOTAŞ, including:

• The way it expropriated land for the project (an otherwise lengthy process that could have resulted in the payment of heavy delay penalties to the BTC consortium) and the nature of the compensation paid
• BOTAŞ' general operational standards, which allegedly heightened the environmental and safety risks associated with the project in Turkey

Poor performance by the Turkish SOE not only led to increased costs, but also resulted in BP needing to spend further resources (both in terms of money and time of its CSR personnel) to protect the reputation of the company, which was damaged by activist campaigns and negative media attention.

Angola's state diamond company Endiama implicated in case alleging serious human rights abuses in Lunda Norte

In March 2012, it was reported that the attorney general of Angola had summoned witnesses to testify in a case that implicates senior military and security officials in torture and murder carried out in the diamond fields in Lunda Norte in north-east Angola. The case was initiated in November 2011, by local human rights activist Rafael Marques de Morais. In his deposition, Marques referred to testimony that implicates the Sociedade Mineira do Cuango (SMC) consortium in acts of torture and murder against local people and artisanal miners. The respondents named in the case are partners in the Angolan mining company Sociedade Lumanhe and the directors of Bermuda-based ITM Mining, which together make up the SMC consortium – along with state diamond company Endiama.

Since the end of the civil war in 2002, the government has granted diamond mining concessions that previously helped fund UNITA to companies owned by senior military figures and others linked to the MPLA dominated government. It is claimed that many of the grantees have established private security companies to secure this land from artisanal miners and relocate local people – often through the carrying out of severe human rights abuses, and often with impunity.

Companies seeking to gain diamond mining licences in Angola are likely to be required to partner with Endiama in the carrying out of their activities (e.g. via joint-ventures). Although the case was ongoing at the time of writing, this could present serious reputational risks for such companies. This is particularly the case given the apparent vulnerability of consumer confidence in the diamond retail market to allegations of human rights abuses, as well as growing concern that the Kimberley Process – an international initiative to address ‘conflict diamonds' in the 1990s – is failing to adequately address such issues.

Brazil's state oil and gas company, Petrobas exposes partner companies to risk of association with graft

In 2014, news reports alleged that senior politicians received kickbacks from oil contracts as part of a scheme to buy votes. By 2015, 47 politicians were under investigation for complicity in bribery at the state-owned Petrobas oil company, an SOE with a quasi-monopoly over Brazilian oil and gas production. In addition, Vaccari Neto, treasurer of President Dilma Rousseff's Workers' Party (PT), was arrested in April 2015. He was charged with receiving "irregular donations" for the PT through inflated Petrobas supplier contracts. Neto was alleged to have transferred approximately US$200 million between 2003 and 2013, siphoned off from over-priced contracts between Petrobas and its engineering and construction suppliers.

In November 2015, criminal prosecutor Deltan Martinazzo Dallagnol warned that the prosecution will be scrutinising relations between international contractors and Petrobas. Companies such as Rolls-Royce, Maersk, Keppel Corporation and Sembcorp Marine, as well as international banks, have been accused, in testimony given by former Petrobas executives, of directly or indirectly paying bribes through agents, brokers or consultants. Although the companies deny involvement, there is considerable public pressure on them to collaborate with the prosecution's investigation. The unfolding scandal illustrates the risks of collaborating with state-owned enterprises in a governance environment where bribery occurs with impunity.

Investors called on to divest from PetroChina to address CNPC ‘support' for Darfur genocide

In 2007, the Sudan Divestment Task Force (SDTF) activist group in the US called on investors – including Berkshire Hathaway, Fidelity Investments, JP Morgan and Templeton – to divest shares in publicly-listed PetroChina – a subsidiary of state owned China National Petroleum Corporation (CNPC). It did so on the basis that CNPC was a "corporate sponsor" of the Khartoum regime that was allegedly responsible for genocide in the Darfur region of Sudan. The SDTF noted that:

"Seventy to eighty percent of oil revenues are used to support Sudan's military which, in turn, prosecutes Darfur's genocide. When Sudan's first significant oil exports hit the market in early 2000, Sudanese army spokesman Gen. Mohamed Osman Yassin said that:

Sudan ‘will this year [2000] reach self-sufficiency in light, medium and heavy weapons from its local production,' thanks to its' unprecedented economic boom, particularly in the field of oil exploration and exportation . . .'"

The SDTF also noted that Beijing had deliberately courted the Khartoum regime, in its efforts to secure a stable oil supply to feed the booming Chinese economy – whilst inuring it from the volatility of open-market purchases. Whilst the US and EU were imposing sanctions on Khartoum, China – and the CNPC – reportedly invested billions of dollars in the country, whilst Beijing allegedly facilitated arms transfers and provided important diplomatic support via the UN Security Council. According to the SDTF, Sudan's oil exports accounted for 7% of China's total oil consumption – with between 50 and 80% of Sudan's oil going to China, primarily through the CNPC.

The SDTF also published more detailed human rights allegations linked to Sudan's two largest oil consortiums, Greater Nile Petroleum Operating Company (GNPOC – which includes Petronas of Malaysia and ONGC of India) and Petrodar (which also includes Petronas, Chinese state-controlled oil company Sinopec and Tri-Ocean Energy of Egypt). The SDTF reported that CNPC had respective stakes of 40% and enjoyed significant a significant degree of control over both. These allegations related, for example, to allegations of killings and rapes by GNPOC personnel, the forceful displacement of people by the Sudanese armed forces to facilitate their work, and the utilisation of GNPOC infrastructure by the Sudanese military to carry out operations that resulted in serious human rights abuses. The allegations relating to Petrodar include the forceful displacement of local populations (involving killings) and the application of cheap and environmentally harmful engineering.

GAIL India and the CNPC focus of activist attention in relation to Myanmar's Shwe Gas Project

The Shwe Gas Project in Myanmar has attracted negative media attention as a result of reports by two NGOs, EarthRights International and the Shwe Gas Movement (a Burmese community-based human rights NGO). In its 2011 report, Sold Out, the Shwe Gas Movement alleges the project is associated with serious human rights violations, such as a lack of engagement with indigenous communities, the forced relocation of communities without compensation, arbitrary arrests and detention and other forms of intimidation of individuals who speak out against the project, and the use of forced labour. The Gas Project has been the focus on protests by affected communities expressing grievances at the alleged expropriation of their lands without adequate compensation. In a country where public protest is still strictly controlled by the regime, community protest can expose companies to the risk of association with the repression of freedom of expression and freedom of assembly.

Companies involved in the project include China National Petroleum Corporation (CNPC) (51% interest in the gas pipeline project) and Daewoo International (51% interest in the gas extraction project). Whilst Daewoo International is not government owned, South Korea's ‘chaebol' system of government-championed, politically-loyal conglomerates – means the relationship is closer than that between most MNC's and their home governments. In addition, GAIL India, which is approximately 65% owned by the Indian government – with the second largest set of shareholders (14%) being foreign institutional investors – reportedly has a 9% stake in gas extraction and 4% in gas transmission. Meanwhile, Myanma Oil and Gas Enterprise (100% owned by the Myanmar state) reportedly has 8% and 15% shareholdings respectively.

Relevant issues that the Shwe Gas Movement says is associated with the project include destruction of local fishing and farming industries, inadequate local job creation, a lack of local economic development and mass displacement (as a result of food insecurity, forced labour, land confiscation and a range of additional human rights abuses). The report notes that "Housing, land and property rights are non-existent and the military is able to confiscate land with impunity."

According to the Shwe Gas Movement, the associated 793 km oil and gas pipeline corridor that traverses the country will cut across areas of active conflict between armed ethnic groups and Burma's 'notorious' army – with 33 Burma Army battalions currently deployed in 21 townships along the corridor route. The group notes that experience has shown that an 'increase in militarization leads directly to increased abuses against local populations in Burma, including seizures of farm land, forced relocations, forced labor, torture and sexual violence.' Indeed, it notes such abuses have already begun.

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Defining complicity

Companies can potentially be found to be complicit in human rights violations committed by others – whether in law or in fact. According to guidance produced by the Office of the High Commissioner for Human Rights (OHCHR):

"A company is complicit in human rights abuses if it authorises, tolerates, or knowingly ignores human rights abuses committed by an entity associated with it, or if the company knowingly provides practical assistance or encouragement that has a substantial effect on the perpetration of human rights abuse. The participation of the company need not actually cause the abuse. Rather the company's assistance or encouragement has to be to a degree that, without such participation, the abuses most probably would not have occurred to the same extent or in the same way."

The Business Leaders Initiative on Human Rights (BLIHR), a business-led programme developing practical tools and methodologies for applying human rights principles and standards, has identified four scenarios to illustrate the notion of complicity:

• When a company actively assists, directly or indirectly, in human rights violations committed by others, e.g. where a company provides information to a government that it knows will be used to violate human rights
• When a company is in a partnership with a government and knows, or should have known before agreeing to the partnership, that the government is likely to commit abuses in carrying out its part of the agreement, e.g. forced relocation of peoples
• When a company benefits from human rights violations even if it does not positively assist or cause them, e.g. abuses committed by security forces, such as the suppression of a peaceful protest against business activities or the use of repressive measures while guarding company facilities
• When a company is silent or inactive in the face of systematic or continuous human rights violations, e.g. inaction or acceptance by companies of systematic discrimination in employment law against particular groups.

Depending on the nature of a companies' relationship to an SOE that commits human rights abuses – or the nature of their involvement in such abuses, complicity may have a range of negative consequences both legal and otherwise (see below).

For example, in 2014, news reports alleged that senior politicians received kickbacks from oil contracts as part of a scheme to buy votes. By 2015, 47 politicians were under investigation for complicity in bribery at the state-owned Petrobas oil company, an SOE with a quasi-monopoly over Brazilian oil and gas production. In addition, Vaccari Neto, treasurer of President Dilma Rousseff's Workers' Party (PT), was arrested in April 2015. He was charged with receiving "irregular donations" for the PT through inflated Petrobas supplier contracts. Neto was alleged to have transferred approximately US$200 million between 2003 and 2013, allegedly siphoned off from over-priced contracts between Petrobas and its engineering and construction suppliers.

The scandal is damaging the reputation of multi-nationals that have partnered with Petrobas. For example, in November 2015, criminal prosecutor Deltan Martinazzo Dallagnol warned that the prosecution will be scrutinising relations between a number of international contractors and Petrobas. Companies such as Rolls-Royce, Maersk, Keppel Corporation and Sembcorp Marine, as well as international banks, have been accused, in testimony given by former Petrobas executives, of directly or indirectly paying bribes through agents, brokers or consultants. Although the companies deny involvement, there is considerable public pressure on them to collaborate with the prosecution's investigation. The unfolding scandal illustrates the risks of collaborating with state-owned enterprises in a governance environment where bribery occurs with impunity.

Legal risks

Where legal liability can arise it could be generally one of the two types: civil or tort (for complicity in inflicting damage resulting from a wrongful act) or criminal (where countries recognise the criminal liability of companies, for complicity in the commission of a prohibited crime or an offence).

There is no one-size-fits-all rule that would determine when a company is legally complicit. Rather, different tests are provided by different branches of law, such as tort law, criminal law, contract law or company law – and by different jurisdictions.

The concept of criminal complicity was examined in a 2008 Report of the International Commission of Jurists Expert Legal Panel on Corporate Complicity in International Crimes. The Report of the ICJ Panel showed how to identify the risk of a company nearing the threshold of complicit behaviour in legal terms by looking into three sets of factors:

• Causal links between a company's actions/inactions and human rights violations carried out by third parties
• Knowledge and foreseeability of human rights violations by companies
• Proximity of a company to the perpetrator of human rights violations.

In the United States, a number of plaintiffs have attempted to use the Alien Tort Claims Act (ATCA) to bring civil claims against companies for their alleged complicity in serious human rights abuses. The US is a favoured forum in this respect, as ATCA allows foreign citizens a means by which to initiate actions for legal torts committed outside of the US.

In 2004, for example, US oil company Unocal settled out of court in 2004 for the alleged use of forced labour and other abuses by the Burmese army prior to the construction of an oil pipeline. This followed the initiation of a lawsuit in the US under ATCA – John Doe I et al v. Unocal Corp. At the time the abuses took place, Unocal was (with Total, Chevron and PTT) a joint venture partner on the project with the Burmese government – via the Myanmar Oil & Gas Enterprise SOE (which held a 15% stake).

Activism

Projects carried out in joint-partnership with local SOEs have the potential to ‘build-in' operational risks from the start. In part, this is because local SOEs may feel that they are able to expedite project process with the application of minimal environmental and social standards due to their local influence – and relationship with government.

In many cases, this may be true. But when they are working with high-profile MNCs, the joint-partnership as a whole is likely to attract high levels of attention beyond the local area – including from international NGOs and activists who are keenly aware of the vulnerability of many mainstream MNCs to negative publicity at an international level. This is due to the considerable impact such attention can have on their reputation and brands – and thus their share-price, their sales, their ability to create new business partnerships and their ability to pursue new economic opportunities.

Examples of international activism in action – and the consequences of it – include the following:

Boycott: There are a number of cases where consumers have implemented boycotts against companies seen to be complicit in human rights abuses. This can be a particularly effective means of putting pressure on companies that produced consumer goods in particular – due to their specific vulnerability to broader social sentiment.

For example, in 2009, mobile communications company Nokia Siemens Network was subject to a consumer boycott in Iran following accusations, including by Nobel prize-winner Shirin Ebadi, that it supplied the Iranian government – through partnerships with companies owned and controlled by the government – with software and technology used to monitor mobile telephone calls and text messages in the aftermath of the contested 2009 election. A press release by the company stated that it provided lawful intercept capability solely for the monitoring of local voice calls in Iran.

Campaigning: Public campaigning – and the generation of negative media attention – can also act as a powerful influence on companies. In many cases, sensitivity to such attention – and the impact it is believed to have on the perceptions of company stakeholders (including customers, business partners, investors and regulators) – can, in effect, force companies to revisit their strategy, decision-making and partnerships.

In September 2011, the Brussels-based International Peace Information Service NGO published a report, "Véhicules civils militarisables" and the EU arms embargo on Sudan", in which it highlighted the role played by European vehicle manufactures in (indirectly) supplying dual-use trucks to the Sudanese armed forces, which have been accused of serious human rights abuses in the Darfur region of the country. The report notes that some of these trucks are European models, assembled by local company Giad Automotive Industry Company – and in many cases modified for military use. Giad is a partnership between SMT Engineering Co. Ltd. (76%) and the state-run Military Industry Corporation (24%). The report suggested that Giad markets and assembles trucks under license from the MAN Group of Germany and Volvo subsidiary Renault Trucks. In October 2011, it was reported that Renault Trucks had cancelled its contract with Giad – with the company suggesting it had done so without any external pressure and the decision had been made some time ago.

In December 2011, it was reported that Deutsche Bahn announced it was withdrawing from a joint project with state-run Israel Railways to construct a high speed railway between Jerusalem and Tel Aviv project – as a portion of the route is located over the pre-1967 border. The Jerusalem Post says that in February 2011, German Transportation Minister Peter Ramsauer told CEO of Deutsche Bahn that: "In recent weeks Palestinian Foreign Affairs Minister [Riyad Al-] Malki, members of the German Parliament and media have criticized a project in which DB International is acting as adviser to Israel's state-run Israel Railway". He further noted that: "I want to advise you...that this Israeli railway project which runs through occupied territory is problematic from a foreign policy standpoint and is potentially against international law".

Divestment: Both retail and institutional investors are increasingly demanding that asset managers take account of human rights issues, both in dedicated socially responsible investment (SRI) funds, and as part of the wider investment market. A 2010 Eurosif study estimated the European SRI market to have grown by 87% from 2007 to 31 December 2009, with assets under management of €5 trillion at that time. This demand has been matched by an increasing number of responsible investment products being released by asset managers.

As a result, companies perceived to be complicit in human rights abuses carried out by SOEs may find that this has an impact on their ability to attract investment from this section of the market – with potential consequences for their share price.

For example, there is an active movement to boycott companies with business links in Sudan – particularly in the US. This includes Investors Against Genocide, which runs a shareholder proposal campaign to advance ‘genocide-free' investing. In particular it focuses on "four major oil companies that are partnering with the Government of Sudan and helping to fund the genocide in Darfur". These include PetroChina, Sinopec, ONGC of India and Petronas of Malaysia – all of which are controlled by their respective governments. The campaign has had some significant results. Examples include:

• Divestment by American Funds of US$190 million of PetroChina assets in February 2010
• Divestment by the Teachers Insurance and Annuity Association, College Retirement Equities Fund (TIAA-CREF) from all holdings in PetroChina, CNPC, Sinopec and ONGC (worth US$58 million)
• Divestment by T. Rowe Price July 2007 of an estimated US$200 million in PetroChina and Sinopec assets

International sanctions

Whilst governments and their SOEs my potentially enjoy state immunity from the courts of other states, this does not preclude the imposition of diplomatic sanctions by foreign governments in response to serious human rights abuses carried out by foreign governments. Given sanctions are generally aimed at putting economic pressure on other governments, they are often directly targeted at those governments' SOEs. This can have a significant impact on company partners and their operations.

For example, in December 2011, it was reported that the EU had expanded its sanctions against the Syrian oil industry, apparently in response to the serious human rights abuses taking place as the Syrian government sought to quell internal opposition from armed and unarmed groups. This included the blacklisting of state-owned oil firms General Petroleum Corporation (GPC), Syria Trading Oil as well as GPC joint venture Al Furat Petroleum Company. Royal Dutch Shell, a partner of GPC through the Al Furat joint-venture, said it would cease activities in Syria. French oil major Total SA- also announced the suspension of its operations in the country. Although its local partner Deir Ez Zor Petroleum Corporation was not on the EU blacklist, it is 50% owned by the GPC, which is on the EU blacklist.

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The UN ‘Protect, Respect and Remedy' Framework for Business and Human Rights provides guidance on how to protect individuals and communities from corporate related human rights harm.

The framework is comprised of three key principles:

• Protect: The state duty to protect against human rights abuses by third parties, including business;
• Respect: The corporate responsibility to respect human rights; and
• Remedy: Greater access by victims to effective remedy, both judicial and non-judicial.

The framework states that in addition to complying with national laws businesses have a responsibility, in the context of the countries where they operate, to respect human rights through their own business activities and through their relationships with third parties – such as business partners and entities in their supply chains. To meet this responsibility, the framework notes that businesses should engage in human rights due diligence and specifies the main components of the process:

Policies: Including a human rights policy containing broad commitments, supported by more detailed guidance in specific functional areas

Impact assessment: Including assessments that explicitly reference internationally recognised human rights and are used by companies to avoid potential negative human rights impacts on an ongoing basis

Integration: Including the embedding of respect for human rights throughout a company

Tracking performance: Including regular updates of human rights impact and performance

The Guiding Principles for the Implementation of the UN "Protect, Respect and Remedy" Framework aim to provide "concrete and practical recommendations" about how businesses can operationalise their responsibility to respect human rights. According to the Guiding Principles, the responsibility to respect human rights requires responsible companies to:

• Implement a human rights policy
• Apply human rights due diligence
• Provide for remediation

The UNGPs apply to all States and to all business enterprises, both transnational and others, regardless of their size, sector, location, ownership and structure.

The UNGPs have experienced widespread uptake and support from both the public and private sectors, and numerous companies have publicly stated their commitment to the Guiding Principles. The UN Guiding Principles Reporting Framework is also used by companies to report on how they respect human rights.

Companies can seek specific guidance on this and other issues relating to international labour standards from the ILO Helpdesk. This aims to help company managers and workers understand the ILO approach to socially responsible labour practices and to assist in the development of good industrial relations.

In designing a Human Rights Impact Assessment (HRIA), a company may wish to consult existing guidance documents, such as the International Finance Corporation (IFC), UN Global Compact and International Business Leaders Forum's (IBLF) Guide to Human Rights Impact Assessment and Management. This Guide provides companies with a ‘process to assess their business risks, enhance their due diligence procedures and effectively manage their human rights challenges.' The online guide takes users through different stages of the impact assessment process, including Preparation, Identification, Engagement, Assessment, Mitigation, Management and Evaluation. In addition, business can use the OECD's Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.

Leverage over SOE partners

Specific actions that responsible business might take to mitigate the risk of their SOE partners engaging in human rights violations – as well as the risk of their association with such violations – are set out below. It should be noted, however, that the ability of MNCs to influence the behaviour and human rights performance of any SOE joint ventures that they participate in will be largely dictated by their relevant shareholding.

For example, a majority holding in the joint-venture in question is likely to give them considerable control over all of the joint-venture's activities – an give it ample scope to implement the suggestions set out below with respect to the joint-venture in question. Although this will not necessarily provide absolute protection from broader accusations of complicity with SOE partners (for example, with respect to the SOE's activities, reputation and performance outside of the joint-venture), it will help it ensure that the joint venture itself performs in such a way that no abuses take place.

Where an MNC has a minority holding in a joint-venture with an SOE, its ability to influence the human rights performance of the joint-venture itself will be much more limited – meaning it will not necessarily be in a position to implement the suggestions below with respect to the joint-venture. This will leave it directly exposed to direct complicity in human rights abuses carried out by the joint venture – something that is likely to be significantly more damaging than accusations of indirect complicity in any human rights abuse by the SOE in question outside of the joint-venture.

Where an MNC is in a 50:50 joint-venture with an SOE, the implementation of these different suggestions will essentially be a matter of negotiation – in large part depending on the SOE in question recognising the value of encouraging enhanced human rights performance both to itself an in terms of attracting foreign investors/businesss partners.

Whilst not all SOE partners will necessarily be receptive to the suggestions set out below, there is a potential opportunity to build on the momentum already gained by responsible MNCs trying to influence business partners in foreign jurisdictions. For example, participants in joint-ventures are increasingly used to having to assist their MNC partners in their efforts to comply with home regulations around (for example) anti-money laundering and anti-corruption. This includes, for example, due diligence, the inclusion of relevant contractual requirements in joint-venture agreements, as well as the provision of information around business partners' performance, risks and management systems. Business partners are generally ready to cooperate in these respects, due to the need for MNC partners to satisfy (for example) the US Foreign and Corrupt Practices Act and the UK's Bribery Act. In this context, additional human rights requirements can be presented as an extension of this same dynamic.

1. Policies to address working with SOEs linked to states with weak human rights performance

A company could consider adopting a policy on working with certain SOE partners, especially with those whose home states are known for a lack of respect for human rights. This could be in addition to a general human rights policy or integrated within it. The process of working on such a tailored policy could help company officials better understand the challenges posed by JVs or other types of partnerships with SOEs in different sectors, and clarify general guidelines for actions. The policy could, for example, commit the companies to:

• Avoid conduct that could cause or contribute to such SOEs carrying out human rights abuses, including – for example – the imposition of stabilisation clauses that may have unintended consequences, unrealistic project timelines, heavy financial sanctions for delays, etc.
• Only do business with SOE partners that abide by relevant national laws and regulations that further human rights protection as they evolve – and/or commit to doing so
• Where there are no relevant national laws and regulations to address a particular human rights situation, to only do business with SOE partners that comply with relevant international human rights standards, as they evolve – and/or commit to doing so
• Where national laws provide for a lower benchmark as compared to international standards on human rights protection, to only do business with SOE partners that abide by more stringent international standards, where appropriate and feasible – and/or commit to doing so
• Abstain from business activities with SOE partners with a history of human rights violations, where the company does not have leverage to ensure its partners will follow higher standards and/or is unable to extract future guarantees as to their future conduct

2. Undertake due diligence to identify human rights risks posed by joint work with SOEs

To prevent and/or mitigate the risk of businesses being associated with controversial human rights practices by SOEs, companies might consider the following set of factors within their human rights due diligence:

Impact of the external environment

Before embarking on a business project with an SOE, a responsible company is advised to check the country hosting the project (or the home country of the SOE if the project is carried out elsewhere) for the prevalence and severity of human rights violations – as well as the government's general ability and willingness to address them. This will give an initial indication of whether SOEs may be willing to engage in controversial practices in the knowledge that they are unlikely to be held accountable by their home governments.

The screening exercise could look for violations, such as:

Labour rights violations

Violations by state security forces in the process of guarding the personnel and assets of foreign companies

Violations of property and land rights, including those of local and indigenous communities

Violations of individuals' rights through the misuse of products

The extent of corruption and its forms

Companies are also advised to get a better understanding of the industry dominated by the SOE in question and the prevalence of human rights violations in such industries – as well as whether and how SOEs are used or could be used as an instrument for undermining human rights. For instance, SOEs in developing countries tend to be key actors facilitating the corrupt activities of the government – which may have human rights impacts.

Furthermore, to address concerns about the doctrine on state immunity having the potential to shield SOEs from accountability, companies are advised to clarify for themselves the way courts in a potential forum country tend to interpret the doctrine – and the kind of exceptions from immunity they usually allow. This will help them assess the degree to which SOEs are subject to the full rule of law in their ‘parent' country.

Relationships (business partners and entities in a supply chain)

The second step would be to check the ability of SOE partners to address human rights challenges posed by its human rights context – whether in its ‘parent' country or the country hosting a particular project. For this, a responsible company may consider analysing the following:

• The objectives of a government's ownership in a SOE, its ownership of share in the SOE and its influence over decision-making within the SOE. This will help a company understand the extent of control the government enjoys over its enterprises. It could also help identify whether the government expects the SOE to fulfil duties beyond its commercial objectives, and if such duties, when fulfilled, could result in human rights violations
• The corporate governance structure within SOEs. This will help a company understand whether SOEs have control mechanisms in place to mitigate the risk of poor human rights performance or undue influence from ‘parent' governments to engage in wrongful behaviour. Measures might include:
• • Levels of transparency, i.e. availability of information about the SOE's activities and – if access to such information is limited – who has got that access
  • The way the board of directors is formed and managers appointed, and whether this can potentially result in weak levels of management performance or undue political interference in decision-making
  • The existence and consistency of application of corporate sanctions and discipline mechanisms to regulate the behaviour of directors, managers and employees
  • Requirements for engagement with shareholders other than the state – and whether such interactions can influence the SOE's decision-making, performance and management (e.g. guaranteed protection for the minority shareholders' rights, local community consultation, etc.)
  • The existence of internal and external audit mechanisms – including, ideally, third-party auditing – or other forms of monitoring to ensure responsible and effective corporate management and performance
  • Internal and external reporting requirements, including adherence to relevant standards and the auditing of relevant information by independent third-parties
  • The existence of strong anti-corruption mechanisms to ensure ethical behaviour by individuals within the company
• The human rights record/risk culture of SOEs partners. This will help a company understand whether its SOE partner has already engaged in controversial practices (and if so, in what ways) – and make an assessment of whether the SOE is likely to follow similar practices in future.

Impact of the company's final products and operations

Companies should consider conducting an assessment of the human rights risks that their joint project with an SOE could exacerbate – whether in terms of the products they are producing, the technology they are using or the direct impact of their operations themselves. This exercise should enable the company to understand, for example, whether:

• Their products are likely to be misused by the SOE (or by states linked to the SOE) in such a way that undermine human rights – for example the use of dual-use vehicles supplied under a civilian, commercial contract for military purposes
• The project is being pursued for reasons other than the SOE's publicly stated purpose – for example the use of communications technology for the monitoring – and ultimate repression – of internal political opponents, instead of normal and justifiable law-enforcement activities
• There are broader political pressures that may cause the SOE to expedite a project by compromising relevant human rights standards – for example forthcoming elections, a publicised government timetable, time-dependent strategic objectives, a geo-strategic plan, etc.
• The contractual terms governing a contract are likely to encourage SOE partners to ‘cut corners'. As demonstrate in the case of BOTAŞ' role on the BTC pipeline, it has been suggested that its allegedly cavalier approach to land expropriation and compensation (amongst other issues) was in part caused by the nature of the ruling contract, which provided for tight deadlines and heavy delay penalties

To ensure it is up to date on the latest changes, the company may consider undertaking such due diligence on a regular basis – and adapting its policies and operating procedures accordingly.

3. Encourage SOE partners to follow human rights standards

Companies may – depending on their influence and context – seek to encourage SOE partners to apply higher standards of human rights in their own activities using the following methods:

• The offering of training to relevant SOE personnel to a) make them aware of the company's own human rights obligations; and b) relevant international human rights standards that the company – and by extension its SOE partners – will be expected to follow
• Making adherence to relevant human rights standards a condition (or where this is unrealistic a warranty) in their contractual agreements with SOEs. These might include, for example, adherence to international human rights standards, the exclusive use of products or technology for the purposes intended under the contract or the non-transfer of relevant technology or know-how to third parties. Such provisions are more likely to be accepted where the relevant obligations are mutual – which should not pose a challenge to responsible companies
• The inclusion in their contractual agreements with SOEs specific sanctions for non-compliance with applicable human rights standards and requirements. This might include, for example, financial sanctions linked to pollution events, proven labour violations, improper community resettlements and many other issues. Again, such sanctions are more likely to be accepted where they are of a mutual nature
• The factoring into project timelines of reasonable, defined periods for the fulfilment of social and environmental obligations including, for example, Environmental and Social Impact Assessments, community consultation, the achievement of the Free, Prior and Informed Consent (FPIC) of indigenous communities, responsible relocation and compensation, and other human rights safeguards

• Ensuring that the engagement of local contractors by SOEs (which is a legitimate requirement of states to increase the benefit of foreign investment projects for local communities) does not facilitate corrupt governmental practices. This could be achieved by committing both the company and SOE partner to:
• • Publicly disclose payments made between themselves, where reasonable and feasible
  • Disclosing information on all outsourced work, such as types of services or products contracted out and the value of contracts
  • Providing proof of the declared amounts being paid to contractors
  • Jointly checking the quality of the final work of contractors to identify whether it has been carried out as per specification – and justifies the expenses incurred in the process of its implementation

4. Agree joint-venture governance mechanisms to enhance company influence

Where an SOE partner is purely interested in maximizing their return on investment, they may be willing to yield a greater degree of control over relevant joint-ventures to their foreign MNC partners (i.e. in a way that partially de-links it from each party's actual shareholdings in the joint-venture). This is particularly the case there the foreign MNC partner is perceived to have greater commercial and/or operational capabilities – the application of which will help drive higher profits. A common example can be found of with respect to challenging oil and gas projects, for example, that national oil companies often cannot complete without the operational expertise of the international oil majors.

Clearly, where responsible companies have greater influence over project management and decision-making, they will be in a stronger position to ensure relevant human rights standards are followed – and to influence the potential actions of its SOE partner.

Relevant mechanisms that could be considered by the company to help ensure an appropriate level of control over a joint-venture include:

• The right to nominate or appoint a majority of directors
• The right to nominate or appoint the board chair with a casting vote
• The giving an independent third-party a casting vote, in case of disagreements
• The right to manage day-to-day project operations
• Pre-agreement on how human rights incidents and disputes will be dealt with, once they arise (including the granting of specific powers over their avoidance and resolution by the company)
• Reference to mediation/conciliation/arbitration where the company and SOE disagree on project decision-making
• The right to conduct audits of overall human rights compliance
• The right to terminate the agreement in the event that human rights compliances are identified during such audits and are not rectified within a reasonable amount of time

Reaching early agreement on governance mechanisms that give the company higher levels of control over decision-making may be difficult where SOEs' interests extend beyond the maximisation of profit, however – and may not always be realistic.

5. Track the human rights performance of SOE partners

Ongoing monitoring of the performance of SOE partners, where feasible, can help identify deviations from human rights standards (whether pre-agreed under a joint-venture contract or not) early on in the relationship. This offers the advantage of:

• Picking up ‘early warning signals' so that potential human rights abuses can be addressed before they even happen
• Give time for the resolution of any human rights incidents that have taken place, before they result in further reputational damage
• Identify if – and how – the SOE partner is likely to represent a human rights risk, and allow early engagement to explore ways in which such risks can be mitigated or avoided
• Help ensure (where relevant) SOE partners continue to comply with relevant, pre-agreed contractual requirements around human rights

. To achieve this, the company could, for example:

• Provide for mechanisms/bodies in their contractual agreements for the internal monitoring of human rights compliance of all joint-venture members – including regular and transparent internal reporting and/or oversight bodies. The company may request control over such a body – or the appointment of an independent body/chair. If realistic, it may make the implementation of recommendations from this body obligatory by all joint venture members
• Provide for pre-agreed audit mechanisms to address the human rights performance of all joint-venture members – either by each of their own internal audit teams, a specially formed project audit team or by independent, third-party auditors. This might include, for example announced and unannounced audits of relevant workplaces and operating sites – and assessment against a pre-agreed set of human rights standards
• Impose an obligation requiring all joint venture members to require their own contractors (through, for example, their contracts of engagement) to follow a pre-agreed set of human rights standards – and to establish mechanisms to ensure such standards are followed in practice (including, for example, effective monitoring and auditing systems – whether on an individual or collective basis). The result of this process should ideally be built into the joint-venture's internal human rights reporting mechanism as described above

6. Transparent reporting on work with SOEs

Subject to reasonable requirements of business confidentiality, companies may consider regularly and publicly reporting on their work with their SOE partner to ensure stakeholders have an informed understanding of the relevant risks and opportunities associated with the collaboration – and setting out the mechanism in place to ensure the joint-venture as a whole does not undermine human rights.

This can:

Increase the self-regulation of the SOE partner (especially if it is normally unused to such levels of transparency) and – in the longer term – help adjust its overall human rights culture

Pre-empt unfounded speculation around joint projects and their human rights impacts

Reduce the likelihood of allegations of complicity against the company, where SOEs have circumvented pre-agreed mitigation mechanisms to carry out actions that undermine human rights

Demonstrate a constructive approach to the pursuit of attractive commercial opportunities, whilst proactively and responsibly balancing this against potential human rights risks

With respect to countries with high levels of corruption and/or opaque public revenue management – or SOEs from such countries – financial transparency is particularly important. This is particularly the case with respect to risks around:

Natural resource revenue management

‘Local content' procurement processes

Financial relationships with senior government officials and/or political parties

7. Establishment of grievance mechanisms to address joint-venture impacts

Companies might consider – in collaboration with their SOE partners – the establishment of grievance mechanisms for their joint-ventures to address human rights complaints. Subject to the partnership's resources, this could range from the appointment of an individual manager to gather and address complaints according to a pre-agreed set of policies, processes and outcomes – to the appointment of an entire department. Subject to the nature of a grievance (and depending on the degree to which a company is able to influence its SOE partners), remedies might include the following:

• The payment of reasonable, fair and timely compensation where an individual's rights have been infringed upon (including, for example, the payment of compensation where they have been improperly resettled)
• The commissioning of independent investigations and the publishing of their results
• The cessation and remedying – by the company, its SOE partner and/or the joint-venture as a whole – of any actions that have been found to undermine human rights
• The application of defined sanctions (ranging from financial penalties up to the cancellation of contracts, where appropriate) to punish non-compliance beyond the period given for remediation without justifiable reason
• The ‘tightening' up of contract terms between the joint-venture partners if it has been established that the original contract terms failed to act as a deterrent to irresponsible behaviour and/or the committing of human rights abuses (whether intentional or otherwise)

In addition, a confidential, third-party telephone ‘hotline' or a complaints box can be supported by companies as a mechanism for receiving and addressing the grievances of affected stakeholders and whistle-blowers. These can be run directly by the company itself – or dedicated hotlines can be established (in collaboration with their SOE partners) for specific joint ventures.

Companies should ensure that employees and other stakeholders can report human rights incidents without fear of retaliation, discrimination or disciplinary action, including – where feasible – by SOE partners. This is particularly important where the SOE in question is seen as synonymous with – or supported by – potentially repressive states. The results – having been rendered sufficiently anonymous by the third-party hotline provider – should be integrated into established human rights monitoring and auditing mechanisms for the joint venture where appropriate (see above).

For example, Shell has a Global Helpline to allow employees and other stakeholders to 'to raise concerns or dilemmas, or to seek advice on a matter related to compliance with the law and our business principles (SGBP) and Code of Conduct, in full confidence and without fear of retaliation. Reports, which can be anonymous, will be allocated to a case manager who will, if appropriate, assign an investigation team.'

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According to the United Nations Conference on Trade and Development (UNCTAD), state-owned TNCs are defined as "enterprises comprising parent enterprises and their foreign affiliates in which the government has a controlling interest (full, majority, or significant minority), whether or not listed on a stock exchange". Control is defined for the purposes of the UNCTAD Report as

"a stake of 10 per cent or more of the voting power, or where the government is the largest single shareholder. State-owned refers to both national and sub-national governments, such as regions, provinces and cities. Importantly, this definition excludes international investments by [Sovereign Wealth Funds (SWFs)], which have become more visible investors in recent years ... because they are not enterprises and are not necessarily governed by the usual corporate mechanisms".

Table 1: Distribution of state-owned TNCs by sector/industry, 2010

Sector/industry	Number	Share
Total	653	100
Primary	56	8.6
	Mining, quarrying and petroleum	48	7.4
	Others	8	1.2
Manufacturing	142	21.7
	Food, beverages and tobacco	19	2.9
	Wood and wood products	12	1.8
	Coke, petroleum and nuclear fuel	11	1.7
	Chemicals and chemical products	20	3.1
	Metals and metal products	20	3.1
	Motor vehicles and other transport equipment	27	4.1
	Others	33	5.1
Services	455	69.7
	Electricity, gas and water	63	9.6
	Construction	20	3.1
	Trade	42	6.4
	Transport, storage and communications	105	16.1
	Finance	126	19.3
	Holding	27	4.1
	Insurance	17	2.6
	Rental activities	14	2.1
	Business services	18	2.8
	Others	23	3.5

Source: UNCTAD

SOEs are particularly active in industries that are considered strategic for the development – or security of – national economies. Relevant sectors typically include natural resource extraction, energy, transport, defence, telecommunications and many others.

In many countries, access to such markets is restricted to domestic companies, in which case pairing with SOEs is the only option for foreign companies wishing to invest in these sectors. Moreover, for some projects SOEs are also an indispensable partner as they may be highly desirable business partners due to their government connections, regulatory protection, dominant market position and substantial balance sheets.

Working with SOEs in such countries can present challenges to foreign companies in terms of a potentially higher probability of exposure to human rights risks and related implications – although the opposite can equally be true depending on the SOE in question. SOEs whose ‘parent' governments have a weak record of human rights protection, however, are also more likely to share a similar lack of respect for human rights. As a result, their involvement in joint ventures or other business partnerships could result in human rights abuses – for which its mainstream business partners are held complicit.

Human rights impact

The kinds of negative human rights impact SOEs may cause – and which may expose partners to accusations of complicity – include the following:

Right to property (UNDH, Article 17): Where SOEs are carrying our impacts with a significant impact on land and property (for example large-scale engineering projects such as roads, railways, ports, mines, etc.) they are often by their very nature likely to be considered of strategic importance. In this context – and in light of their relative impunity in relation to the public authorities – there is a risk of the appropriation of land and destruction of property for project purposes, without adequate replacement or compensation. Whilst this is likely to expedite project progress in the short-term, it has the potential to seriously affect the reputation of project partners – undermining their ability to pursue opportunities in other locations – as well as the social licence to operate attached to the project itself, which may have longer term consequences in terms of operational continuity and performance.

Right to free, prior and informed consent (FPIC) (UN Declaration on the Rights of Indigenous Peoples, ILO No.169 Convention): Originally, the FPIC principle aimed to protect the rights of indigenous peoples, but is now increasingly seen as a key component to protect the rights of all communities playing host to high-impact projects. As with the right to property, SOEs are involved in projects with major social and environmental impacts – but which are perceived to be of national and/or strategic importance – they are likely to be less inclined to let progress be affected by the opposition of local communities – whether indigenous or otherwise. This will often be on the basis of ‘the good of society' or ‘democratic legitimacy'. For project partners, this may raise considerable risks –in terms of their own reputation, their ability to convince other communities and business partners that they operate in a responsible way and their own social licence to operate. It may also impact on their ability to raise funding – with the FPIC of affected indigenous communities now being a requisite for IFC funding.

Human rights violations that may ensue as a result of misuse of technology transferred to SOEs include:

Right to life (UDHR, Article 3 and ICCPR, Article 6): In certain cases, certain forms of advanced civilian technology developed by companies (e.g. radar, communications, control systems etc.) can be adapted for use in a military or security context – and can be much sought after by governments seeking to avoid expensive research and development of their own. For this reason, technology transfers from foreign companies to SOEs are potentially vulnerable to onwards transfer (legal or otherwise) and potential misuse by repressive governments. In such circumstances, the foreign company providing such technology may be subject to accusations of complicity.

Right to privacy (UDHR, Article 12 and ICCPR, Article 17): In some cases, certain electronic products (such as tracking devices, software, data analysis products, etc.) can be misused to illegitimately infringe on personal privacy, including their location, telephone discussions, electronic communications and other matters of private concern – particularly in a context of political or social repression. This is an issue of particular concern where companies are providing such technology – or technological know-how – to SOEs in repressive states, as there is a high likelihood of transfer to the state security forces.

Right to freedom of expression (UDHR, Article 19 and ICCPR, Article 19): In countries with oppressive regimes, companies transferring certain types of electronic and communications products to SOEs risk their potential misuse by the state as it pursues its own political and social goals. For example, both surveillance and ICT technology can be used to block broadcasts, articles or other communications – or to block access to information in general.

See Working with SOEs case studies

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