Financial Transparency Coalition

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Is it a coincidence that the UN’s International Anti-Corruption and Human Rights Days follow on consecutively. (Friday 9 and Sat 10 December)? Possibly not. After all, human rights abuse and corruption are linked. Not least by opaque corporate ownership structures that can prevent legal redress

People living in the Niger Delta where land and rivers are indelibly polluted after decades of oil extraction have long suffered violations of several internationally recognised human rights.

These rights comprise the right to food, the right to work, the right to an adequate standard of living, and the right to health and a healthy environment.

The sheer scale of environmental degradation which has wrecked farming and fishing livelihoods in the Delta was confirmed by the United Nations Environment Programme in August when it called for an initial $1bn fund to clean up oil related pollution.

Three years prior to the UN’s detailed study, in May 2008, four Nigerian fishermen and farmers from the Delta villages of Oruma, Goi and Ikot Ada Udo filed several lawsuits against Royal Dutch Shell in the district court of the Hague where the oil giant has its international headquarters.

The villagers alleged Shell was negligent in its clean-up of oil spills and their health was adversely affected as a result.

Shell argues that a recent preliminary court ruling stated that all the spills under the spotlight were caused by sabotage.

This keenly watched case, expected to be heard in the Hague next year, is an object lesson in how corporate ownership structures can affect legal redress in alleged human rights violations.

Attempts by Royal Dutch Shell, the parent company, to argue the charges should not be leveled at the “mother company” but its Nigerian subsidiary instead prompted an 18 month delay. Royal Dutch lost that argument in December 2009.

Requests by prosecutors to access relevant information from the parent company have recently been blocked in the Dutch courts

For those like the Task Force campaigning for economic transparency, it seems the same intractable problems of corporate secrecy and difficulties establishing beneficial ownership also play out in the human rights arena.

Human rights defenders say parent companies often try to prevent attempts to bring cases against them by arguing that claims should be brought against the operating company – a subsidiary – where the alleged violation took place.

“This is not about avoidance,” stated a Shell spokesman. “It is about who is legally responsible. Like most corporate groups, Shell’s corporate structure is determined by normal business considerations.”

But for those seeking redress against alleged abuse or wrong-doing, prosecuting a subsidiary company is problematic.

The host country is often unable to hold the corporate to account for three major reasons. Firstly, legal systems in developing countries on occasion find it hard to manage lengthy and complicated cases. Secondly the subsidiary in the developing country may not have enough cash to meet the size of financial claims.

And finally, developing countries may be unwilling to hold a corporate to account due to complicity or corruption.

(That said, developed countries also have a history in preventing sensitive cases from being heard. Witness the UK government’s decision in 2006 to end an investigation into alleged bribery and false accounting in BAE’s arms deals with Saudi Arabia.)

The challenge of human rights defenders is best summed up in one phrase: piercing the corporate veil.

The corporate veil is a term given by human rights lawyers in their attempt to pin liability on the parent companies of major corporations.

Andie Lambe, head of the international justice at Global Witness, said: “Very few of the alleged abuses committed or facilitated by companies ever make it to court for a variety of reasons. One of these is that the structure of the corporation protects it from liability.”

Professor Sheldon Leader, director of the Essex University Business and Human Rights Project, added: “What Shell has said to the Netherlands’ judiciary – and it will be important to see how far other major companies argue the same – is that they do have high standards but they do not give orders to subsidiaries. Therefore, they argue, they are not responsible for damage to local populations due to the shortcomings in their subsidiaries’ performance.”

Companies may not admit to legal responsibility of their subsidiaries when difficulties arise but they certainly take responsibility for the cash they generate. When companies publish financial reports, subsidiaries are inextricably linked to the parent. Consolidated accounts, by definition, embrace the thousands, if not millions of transactions conducted by all subsidiaries in which the owner has a beneficial interest.

What’s more, quoted companies in the US and UK stock exchanges are obliged to reveal all the subsidiaries they either own outright or have substantial stakes in which are considered to be materially important.

Clearly in financial reporting, a link between the parent and subsidiary is manifest. Yet company law treats every business entity as legally separate, even within the same ‘business family’. And this is where difficulties arise in seeking to hold a parent company accountable even in instances where it knew of or supported the conduct of its subsidiary.

To remedy this, a corporate “duty of care” principle needs to be established which states that in the event of a parent financially benefitting from a subsidiary, it has a responsibility to ensure the subsidiary carries out duties in line with established laws. When the subsidiary fails to live up to required standards, the parent cannot hide behind a corporate veil but has to face legal liability.

The way giant corporations often behave when subsidiaries get into trouble is to wash their hands of responsibility. Effectively they run away. Most would call that bad parenting. And that also happens to be a human rights violation – in its own way.