For decades governments have used banks as an economic weapon by restricting trade and the movement of money with the use of sanctions. In 2011, HSBC was fined a whopping $1.9bn for breaching sanctions and laundering money for Iran, Libya, Sudan, Myanmar and Cuba.
Incoming legislation among a number of European countries is aimed at enforcing due diligence and corporate accountability on big companies and requiring them to have transparency in their supply chain to evidence compliance with the legislation. This is a move away from the self-regulation environment which has been in place until now and is largely acknowledged to have not worked.
The EU wants to see sustainable supply chains ‘becoming the norm’ – says Didier Reyners, Commissioner for Justice at the European Commission.
The Banks Responsibility
What has this got to do with the banks? Chocolate companies are frequently found to have child labour in their supply chain, and the chocolate companies, in turn, borrow billions of Euros from the banks.
In fact, Belgian website Fairfin calculated this year that banks operating in Belgium loaned more than 26.5 billion euros just to the multinationals that dominate the chocolate trade. The following points are taken from their report:
- At BNP Paribas we found 10.6 billion euros in investments, of which 1.4 billion euros at Mondelēz. This American multinational is led by a Belgian CEO and owns Côte d’Or, Milka and Oreo, among others.
- ING is associated with large companies active in the cocoa sector for 4.4 billion euros, including more than 400 million euros at Cargill. That is a large cocoa trader and processor that was named “Worst Company in the World” in 2019 by environmental organization Mighty Earth .
- Also KBC joins forces with a major player in the sector. They provide more than 170 million euros in loans to Barry Callebaut, the largest cocoa trader in the world. This one, like the other companies we mention here, was recently charged with using child slaves in their supply chain.
- International major bank Deutsche Bank , on the other hand, is entwined with food giant Nestlé, with a staggering 6.8 billion euros in investments in the company. In addition, Deutsche Bank provides 4 billion euros in financial support to other multinationals active in the cocoa sector.
The website has a link where you can submit an automated letter to the bank to remind them of their obligations.
But why not just fine the chocolate companies directly for non-compliance? I expect they will, but they may also target the banks.
First, the banks, who live in such a highly regulated environment, have a lot of experience in conducting due diligence. A threat of a large fine will encourage the compliance departments to add supply chain risk to their client loan assessments.
If the chocolate companies start getting loans either rejected or approved, but at higher interest rates, the cost equation starts to move in favour of taking action on the supply chain.
Secondly, from a political viewpoint, governments need to raise money to start patching the holes left by the pandemic, and sadly for the banks, nobody loves them nor cares if they get a few billion euros of fines.
So holding the banks responsible has the benefit of outsourcing the due diligence at no cost to the government, punishing the non-compliant chocolate companies, and potentially landing a windfall from a politically safe target if they fail in their new obligations.