The Corporate Sustainability Due Diligence Directive (CSDDD) is designed to ensure entities conduct thorough due diligence across their value chains to identify and address adverse business impacts. However, this isn't uncharted territory; due diligence measures, akin to those proposed under the CSDDD, have long been integral to export control compliance. 

This article is written by Herman Annink ([email protected]) and Sefa Gecikli ([email protected]). Herman and Sefa are both part of RSM Netherlands Business Consulting Services with a focus on Trade Compliance and Supply Chain Management.  

This article aims to connect the established tenets of EU export control and sanction regulations with the emerging mandates of the CSDDD. Examining the interplay between due diligence practices under the CSDDD and the existing due diligence protocols of export control regimes, we shed light on how companies can enhance their compliance strategies proactively.

The European Council recently reached an agreement on The Corporate Sustainability Due Diligence Directive (CSDDD) , paving the way for its formal adoption, pending approval by the European Parliament and endorsement by the European Commission. This directive mandates that companies establish and implement due diligence processes to identify, prevent, mitigate, and ultimately eliminate negative impacts on human rights and the environment within their operations, including those of their subsidiaries and throughout their direct and indirect business relationships.

The draft agreement indicates that while guidance may be provided by relevant authorities to help companies with practical implementation, the CSDDD itself has yet to define the due diligence process in great detail.  It draws upon the six steps established by the OECD Due Diligence Guidance for Responsible Business Conduct, covering policy integration, impact assessment, impact prevention, monitoring, communication, and remediation.

Relationship between CSDDD and Export Controls

The draft agreement's recital, discussing the relationship between export control rules and the CSDDD, clarifies that activities within the directive's scope should not include the distribution, transport, storage, and disposal of products once they have been authorized for export by a Member State. This refers to both the export controls under Regulation (EU) 2021/821 (EU Dual Use Regulation), as well as national controls over weapons, munitions, or war materials. This directive is supported by these and other laws aiming to mitigate adverse impacts on human rights and environmental protection.

Notably, EU Dual Use Regulation establishes a system for managing the export, brokering, technical assistance, transit, and transfer of dual-use items, including software and technology that could be utilized for cyber-surveillance, with a particular emphasis on preventing their use in serious human rights violations or internal repression. Additionally, Regulation (EU) 2019/125 addresses the export of goods like chemical substances, potentially used for capital punishment or torture, by either prohibiting or regulating such exports to prevent cruel, inhuman, or degrading treatment.

Harmonizing CSDDD and Export Control Due Diligence

However, of particular relevance to this article, the recital of the CSDDD mentions that adhering to this Directive should aid in meeting the requirements and aims of these legislative acts mentioned above, along with the terms and conditions of the applicable authorizations. Exporters are advised to consider their due diligence outcomes under this Directive when aligning with these other legislative frameworks.

This highlights that the due diligence practices within export control regimes and the CSDDD share similar objectives and concerns. Indeed, the criteria outlined in the Common Military Position (2008/944) and Regulation (EU) 2021/821 primarily focus on human rights and humanitarian law, alongside other pertinent considerations. Consequently, the objectives of export controls, in addition to safeguarding international peace, security, and stability, emphasize the protection of human rights.
While the European framework for export control does not explicitly mandate due diligence requirements, its objectives inherently necessitate adherence to due diligence practices to ensure effective compliance. Thus, the established due diligence procedures and policies from export control can offer valuable insights for implementing due diligence in accordance with the CSDDD.

The relationship does not end here, especially concerning risk mitigation. Article 7 of the CSDDD indicates that for potential adverse impacts that cannot be fully prevented or mitigated, companies are encouraged to seek contractual commitments from indirect business partners. This aims to ensure alignment with the company’s ethical guidelines or a prevention action plan. Those familiar with export control regulations will recognize this approach. In the realm of export controls, it's common for entities to utilize end-user statements or contractual restrictions to limit certain end-destinations, end-uses or end-users, thereby mitigating risks to impair international peace, security and stability but also violation of human rights and international humanitarian law and internal repression.

Forward Thinking

Given the shared objectives and the interconnectedness of these spheres, the due diligence practices from export control can provide valuable insights for the CSDDD procedures, especially for the downstream activities. In the realm of export control, due diligence typically encompasses several key aspects that can also be critical for identifying risks under the CSDDD:

  • Who: This pertains to understanding business partners, particularly looking out for any involvement with sanctioned individuals or entities, as well as those implicated in human rights violations who may misuse an entity’s products or services to the detriment of human rights or the environment.
  • Where: This involves assessing end-user locations, focusing on the use of products in high-risk jurisdictions that could escalate regional conflicts, contribute to human rights abuses, or infringe upon privacy and other human rights in areas known for such issues.
  • What: This addresses product-level scrutiny to evaluate potential adverse impacts of products within the entity's value chain.
  • Purpose: This examines the intended uses of products, especially those with dual-use potential or possible applications in military or industrial contexts that could be deemed sensitive.
  • How: This looks at transaction-level details, including the sourcing and logistics of goods that might involve routes or jurisdictions associated with sanction evasion, illicit financial practices, human rights abuses.

To leverage these perspectives, entities must first grasp their products' nature, characteristics, and the potential for negative use and consequences. Subsequently, they should map the countries within their value chain to evaluate their risk profiles. Conducting due diligence on, including screening, business partners is also crucial in this process. Utilizing compliance tools to gather global data on regulatory enforcement, sanctions and other risk factors concerning both individuals and legal entities in the value chain is essential. Additionally, media screening, by employing specific keywords related to potential risks, can determine any associations these parties might have with the considerations outlined by the CSDDD. 

RSM is Thought Leader in the field of Sustainability and Supply Chain Management Consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.  
 

  Briefly mentioning, for EU companies, the scope encompasses those with over 1,000 employees or a global net turnover exceeding EUR 450 million on a stand-alone or consolidated basis at the ultimate parent level. It also includes companies earning more than EUR 22.5 million from franchisee or licensee royalties in the EU (including EEA countries) in the last financial year, and if the company or its ultimate parent boasts a net worldwide turnover of EUR 80 million. For non-EU companies, the criteria apply to those with a global net turnover exceeding EUR 450 million generated within the EU (including EEA countries), or those obtaining over EUR 22.5 million from franchisee or licensee royalties in the EU in the last financial year, with the additional requirement of having a net worldwide turnover of EUR 80 million generated through EU activities, on a stand-alone or consolidated basis at the ultimate parent level.