Holding the Purse Strings: The Continuing Evolution of Human Rights Law and the Potential Liability of the Finance Industry for Human Rights Abuses

DOI10.1177/016934410502300102
Date01 March 2005
AuthorAdam McBeth
Publication Date01 March 2005
SubjectPart A: Article
HOLDING THE PURSE STRINGS:
THE CONTINUING EVOLUTION OF HUMAN RIGHTS
LAW AND THE POTENTIAL LIABILITY OF THE FINANCE
INDUSTRY FOR HUMAN RIGHTS ABUSES
ADAM MCBETH*
Abstract
While the responsibility of States and, in more recent times, corporations, has been thoroughly
discussed in relation to human rights, a new stage of evolution may be emerging in relation to
the liability of the financial backers of an enterprise that is accused of human rights abuses.
This article considers the basis in international law for such emerging liability and examines
some of the legal avenues used in recent domestic litigation against financial institutions. The
article concludes by examining some of the relevant instruments of ‘soft’ international law and
notes that although there is little in the way of concrete legislation or judicial precedent that
would hold financial institutions responsible for the actions of those they invest in, the potential
for the law to evolve in that direction is clear.
1. INTRODUCTION
1.1. Background
International human rights law has long existed to protect individuals and groups
from oppression and mistreatment. Initially, the focus was on States as the entities
most likely to violate human rights, and international human rights treaties were
framed accordingly. To the extent that private entities could abuse human rights,
the State was traditionally thought to be capable of protecting its people and
preventing or punishing unacceptable treatment by non-State entities. Private
actors, including corporations, were thus initially ignored by international law in
relation to human rights.
With the advent of globalisation, corporate activity has spread across national
borders and beyond the control of any one State. At the same time, many
multinational corporations have become so economically (and therefore politically)
powerful that some States are unable or unwilling to intervene in their operations to
protect human rights. This process has led to a push to enforce international human
rights law against corporations, which has been gathering momentum since the late
PART A: ARTICLES
Netherlands Quarterly of Human Rights, Vol. 23/1, 7-34, 2005.
#Netherlands Institute of Human Rights (SIM), Printed in the Netherlands. 7
* BA, LLB(Hons). Adam McBeth is a lecturer in law at Deakin University and a Ph.D.-candidate at
Monash University (both in Melbourne, Australia). An earlier version of this article was presented
by Sarah Joseph to the Centre for Corporate Responsibility and Sustainability at the University of
Zurich in November 2003. The author wishes to thank Sarah Joseph and Professor David Kinley for
their feedback and assistance in preparing this article.
8
1970s and continues with increased force today. The primary focus of this ‘second
wave’ of human rights responsibility has been on the direct perpetrators of human
rights abuses, including corporations that utilise slave labour, exploit their workers,
cause deaths in local communities or forcibly evict local people.
More recently, however, questions have been raised as to the culpability of
influential backers of entities or projects that violate human rights, where those
backers are not directly involved in the violations. This ‘third wave’ of human rights
responsibility has in its sights the financiers, silent partners and joint venturers that
might have known that their actions would contribute to human rights violations,
and might have benefited from those violations, but failed to take action to prevent
them. Among the entities most exposed to this line of argument are private financial
institutions in their roles as lenders, investors and financial backers. As financial
institutions have an unusually strong influence over their clients and business
partners by virtue of holding the purse strings, human rights advocates ask whether
they should have a legal duty to exercise that influence to protect human rights from
abuse by others.
1.2. Outline of Article
This article examines the existing and emerging legal human rights obligations of
private entities that are not directly involved in human rights abuses, but have some
connection or involvement with the direct perpetrators. Because of their special and
influential position as financiers, this article focuses on financial institutions,
including lenders and institutional investors, although much of the analysis is
equally applicable to other private entities.
The following section examines the potential positive and negative impact of
financial institutions on human rights, including in project finance and institutional
investment. In that context, it also discusses the recent development of ‘socially
responsible investment’ and its relationship to human rights.
Section 3 briefly considers the existing and emerging obligations of corporations
and private entities under international human rights law, with particular emphasis
on the exposure of financial institutions. Section 4 then discusses potential avenues
of liability under typical areas of domestic law. Those two discussions are then drawn
together in section 5, which examines a series of cases from the United States where
violations of international law principles have been alleged against private financial
institutions that have some connection with the perpetrators of serious human
rights abuses.
In contrast to that consideration of the development of ‘hard law’, the subject of
section 6 is ‘soft law’ – a body of principles that do not give rise to any compulsorily
binding legal obligations, but which nevertheless contribute to the development of
the law and influence the behaviour of the key players. Three of the most important
soft law instruments relating to human rights obligations for private commercial
entities are analysed separately for their particular application to financial
institutions.
The article notes that corporate responsibility for human rights violations is
currently in a state of evolution, but in observing a number of contemporary legal
and societal developments, concludes that thorough monitoring of human rights
performances of companies receiving investment is a vital part of a prudent risk
management strategy for the modern private financial institution.
Adam McBeth

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