Including the Arms Sector in the EU Corporate Due Diligence Directive

The imminent passage of the EU Corporate Sustainability Due Diligence Directive (CSDDD) into law could drastically change the regulatory makeup of the arms industry in Europe. As the EU Parliament, Commission and Council prepare to enter the so-called ‘trilogues’ to adopt a final text, an open question is whether they will include the arms trade within the scope of the Directive. If so, the resulting provisions could include corporate due diligence obligations for downstream elements of the value chain, thus reinforcing monitoring and verification. This post highlights the accountability deficit in the current European firearms export regime and shows how the CSDDD could help redress this situation while preventing trafficking and diversion.

Background

Four of the top ten arms exporters worldwide are EU member states. France is the third-largest, accounting for an estimated 11% of global arms sales during the period 2018-2022. It is followed by Germany, Italy and Spain, which together represented 10.6% of sales during the same timeframe. Taken together, these EU countries account for over one-fifth of arms exports worldwide.

As weapons sales increase exponentially, the UN considers that civilian firearms holdings represent a general risk of diversion by casual loss, theft or illegal transfer. Indeed, only 12% of the approximately 857 million civilian arms held worldwide are registered. Additionally, the UN’s Global Study on Arms Trafficking 2020 identified Europe as a “major departure point” for illicit flows.

Alarmingly, European weapons and their components are constantly found in conflict zones and at-risk areas where war crimes, crimes against humanity and serious human rights violations are taking place. For example, a recent report has identified European firms from Germany, Austria and France as supplying Myanmar’s military junta with materials to produce weapons while circumventing sanctions. Worse still, European arms exports could be contributing to the commission of war crimes in Yemen and Ukraine. Incorporating downstream due diligence obligations in the CSDDD would tackle irresponsible arms sales and improve oversight.

The accountability deficit

Current EU laws contain no mandatory rules for EU Member States to provide public data on the import or export of firearms, or on revenues and expenditures under these headings. Nor do they require compulsory end-user controls in the case of exports, which would allow third parties to verify whether the weapons reached their intended destination. The Firearms Regulation, for instance, only requires EU Member States to establish a regime of export, import and international transit licensing. For its part, the EU Common Position on Arms Exports requires human rights risk assessments, but has a decision making system that is undermined by the practice of undercutting (when a country decides to issue a license that was refused by another member state) and lack of transparency.

Furthermore, the Arms Trade Treaty, to which all EU member states are a party, authorizes export licences as long as states have assessed the potential that the arms will not contribute to serious human rights violations, the commission of war crimes, crimes against humanity and genocide, as well as terrorism and transnational crimes. This assessment should identify an “overriding risk” of any “negative consequences”, but the definition and scope of said risk is left to the interpretation of the individual state parties. This often leads to a conflict of interest, given that the same states who are mandated with conducting the risk assessment are sometimes the owners of arms companies.

UN experts have found that, in examining several cases against European-issued licenses, EU member states often appear to disregard their obligations towards the EU Common Position and the Arms Trade Treaty. This is exacerbated by the linguistic ambiguities in the official translations of the EU Common Position.  This creates a general and widespread lack of access to justice and transparency that is perpetuated by a lack of oversight, regulation and due diligence obligations over the production, usage, export and disposal of European-manufactured weapons.

Finally, the European arms industry enjoys protections in many jurisdictions, including secrecy for licensing and export agreements through state-approved national security or foreign policy exceptions. Consequently, judicial remedies for victims of gun violence perpetrated with products exported on the basis of negligent sales are alarmingly deficient. These exceptions have jeopardized the right to a remedy to which survivors of gun violence are entitled, including under domestic and international human rights law.

The CSDDD proposals

In February 2022, the European Commission published its proposal for a Directive on corporate sustainability due diligence. The proposal intends to encourage European-based and European-registered corporations of a certain size to adopt responsible and sustainable business practices by identifying, and where necessary, preventing, mitigating or ending harmful impacts of their business dealings on human rights and the environment. With that proposal comes the Commission’s intent to harmonise remedy enforcement for persons adversely impacted by corporate activity.

To ensure a broad application of the proposal, the Commission provided for an expansive material scope of corporate due diligence obligations, most notably by providing an all-encompassing definition of value chains, applicable to all sectors. The European Council, however, in its negotiating position published in December 2022, restricted the scope of value chains and carved out the weapons manufacturing sector from the Directive by excluding products subject to export controls such as weapons.

‘Value chain’ versus ‘chain of activities’

Under Article 3(g) of the CSDDD Directive, the Commission defines value chains as “activities related to the production of goods or the provision of services by a company”. The scope of the concept of value chains here encompasses upstream and downstream business activities, ranging from the production of goods or the provision of services to the “use and disposal of the product”. If this wording were to enter into force, this broad definition would impose an obligation on corporations, including the weapons manufacturing sector, to ensure that their business activities along the entire value chain do not adversely affect the enjoyment of human rights or the environment. Weapons manufacturers would thus be obliged to ensure that the life of their products, extending to the use of the product and its disposal, does not result in adverse impacts on human rights.

The European Council, however, disagreed with the European Commission, and called for the replacement of the term ‘value chain’ with the term ‘chain of activities’. This means that the usage of a corporation’s product will be excluded from its due diligence obligations. The Council wishes to exclude from such obligations the weapons manufacturing sector, which would be exempt from due diligence obligations related “to the distribution, transport, storage and disposal” of weapons. According to the Council, this sector is subject to national export controls, meaning that each EU member state may individually decide on how to regulate the export of weapons and its authorization.

Liability and remedies

In terms of liability, the Commission proposed that corporations would be liable for any damage suffered by legal or natural persons, including damage caused in conjunction with indirect business partners, so long as the corporation failed to prevent and cease possible adverse impacts. But in the Council’s proposal, damages caused by the corporation’s direct and indirect business partners are removed, and due diligence obligations are limited to “established business relationships” only. Human rights organizations have pointed out that this carveout will result in a lack of accountability.

Either way, the inclusion of any civil liability provisions, however expansive or restrictive they may be, will compel EU member states to adapt their domestic due diligence legislation to align with the CSDDD. The German due diligence supply chain act (Lieferkettensorgfaltspflichtengesetz, LkSG), for instance, which excludes recourse to civil liability, would have to be amended.

Importantly, the provisions in the CSDDD or other due diligence laws which include civil liability provisions such as the French Loi de Vigilance and the current Dutch due diligence proposal, do not exclude the possibility of liability arising from tort law and other causes of action. In two high-profile cases, for example, German companies Heckler & Koch and Sig Sauer were held liable for breaking administrative and trade laws through unlawful exports to Mexico and Colombia, respectively.

Other proposals

To address these challenges, a separate Proposal for a Regulation on Arms Import, Export and Transit was presented by the European Commission in October 2022 which seeks to create harmonized rules for the import and export of civilian firearms and would supersede the Firearms Regulation. This proposal includes clear provisions for improved cooperation and information exchange between national authorities within the EU, and provides for end-user controls and common risk assessments that are institutionalized at the EU level. This initiative is currently in its early drafting stages and will surely be subject to further negotiations.

Given its position as a major export region, Europe has an outsize role in defining global standards to prevent firearms trafficking and diversion. In this regard, the CSDDD can contribute to improving the regulatory landscape by incorporating downstream activities of the firearms industry within its scope which would encompass the distribution, retail, use and disposal of firearms. Victims and survivors would also benefit from robust provisions on remedies for damages caused by direct and indirect business partners.

Note: An earlier version of this post stated that 750 million civilian weapons are illegally held worldwide. The text was edited by the authors on May 23^rd 2023 to remove this reference.