Operation in conflict zones

A conflict zone represents one of the highest risk and most unstable environments that a business can operate in. John Ruggie, the United Nations special representative on human rights and business, has argued that conflicts represent "unique circumstances" where some of the most offensive corporate-related human rights abuses take place.

There are two key risks that arise when businesses operate in conflict zones that banks should be aware of:

Loss of reputation and financial assets

By handling resources or by paying ‘taxes' to armies or militias involved in human rights abuses, companies can play a central role in the political economy of a conflict. Companies operating in conflict zones may be complicit in abuses committed by the armed factions that they are - directly or indirectly - supporting. By investing in companies that are involved conflict zones, banks might therefore develop reputational risks as a result of becoming enmeshed in subsequent investigations, and experience financial losses due to involvement in possible civil litigation.

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Complicity to human rights abuses and funding of conflict

By investing in companies that exploit or trade natural resources in a way that benefits groups involved in serious human rights abuses, banks can provide mechanisms for the financing that allows conflict to continue. Many of the world's deposits of oil, gas and minerals are found in areas with a high risk of conflict and the links between civil wars and natural resources are well documented. A recent report from the United Nations Environment Programme concluded that over the last sixty years at least forty percent of all intrastate conflicts have a link to natural resources and that these conflicts are twice as likely to relapse within five years. Companies can thus fund conflict through trading in natural resources sourced from a conflict zone. Banks can also fund conflict by doing business with these companies, or by providing the payment mechanisms or the business loans for this to happen.

Due to the breakdown in the rule of law that so often characterises a conflict zone, the home states of businesses operating in conflict zones, the businesses themselves and the banks that support them need to develop specific policies to prevent businesses from aggravating the conflict or becoming complicit in human rights abuses. In this respect, the business community has begun to recognise its responsibilities. The International Organisation of Employers (IOE) stated that: "All companies have the same responsibilities in weak governance zones as they do elsewhere. They are expected to obey the law, even if it is not enforced, and to respect the principles of relevant international instruments where national law is absent."

To date there is little recognition from business or governments that trading internationally in resources that fuel conflict and human rights abuses is unacceptable. In addition, existing financial transparency initiatives (undertaken by - amongst others - the Basel Committee on Banking Supervision, the Financial Action Task Force the International Organization of Securities Commissions and the Wolfsberg Group) have not addressed the need to combat the flow of funds from abuses of natural resources in cases of conflict. Although such activity could often fall within the parameters of standards and regulations designed to address money laundering, terrorist finance or corruption, the existing standards do not directly address the steps that a financial institution is supposed to take in handling the proceeds of the sale of coltan, diamonds, oil and gas, tanzanite, timber or similar commodities that warring political factions have used to sustain conflict. Current standards only require that financial institutions avoid the proceeds of corruption and that they respect UN sanctions.

One exception to the above is the global diamond trade, which is regulated by the Kimberley Process, a joint government, industry and civil society initiative to stem the flow of rough diamonds used by rebel movements to finance wars against legitimate governments.

However, the limitations of this sector-specific response are highlighted by cases such as Ivory Coast. Here the country's diamond deposits are controlled by rebels and Ivorian diamond exports are therefore subject to UN Sanctions. Yet the same insurgents make far more money from the international cocoa trade, benefiting from the cocoa industry's refusal to acknowledge its responsibility to clean up its supply chain.

Financial institutions play a vital role as a facilitator for companies operating in conflict zones or trading in natural resources sourced from these areas. Standards for this type of financing are currently under-developed and urgently need strengthening if financial institutions want to avoid exposing themselves to potential legal liability and reputational risk. The bank's policy should therefore ensure that it will not invest in companies that aggravate conflicts or that are complicit to human rights abuses.