International Recognition of the Need for Supply Chain Due Diligence: An Increase in Potential Penalties? The Modern Slavery Act 2015…4 Years On
In 2015, the Modern Slavery Act (the ‘Act’) came into force in the UK. Although a UK statute, it is potentially highly relevant to GCC businesses which have a commercial presence in the UK. Where a business meets the financial threshold (see below), its global supply chain will be subject to scrutiny under the Act - irrespective of its overseas location. Other jurisdictions are now taking a more proactive approach to ‘Supply Chain’ scrutiny. The broadly equivalent Australian legislation is particularly notable. Businesses operating in the GCC region which have a presence in the UK must familiarise themselves with Modern Slavery legislation to ensure that their supply chain is subject to effective diligence.
This note focuses only on the obligation upon a business to publish a Modern Slavery Act statement (the ‘Statement’) to identify the steps it has taken to achieve transparency in its supply chain – ultimately with the aim of ensuring it is free from slavery and exploitation of workers.
Note: When considering ‘slavery’ as a concept, it is essential to recognise that Modern-day ‘Slavery’ goes beyond conventional historic imagery. Likewise, human trafficking has many guises, including luring someone to an overseas job opportunity on the basis of misleading promises and false contracts.
The Current Requirement
Amongst wider anti-slavery measures, section 54 of the Act requires commercial organisations operating in the UK (which have an annual global turnover of £36 million or more) to publish an annual slavery and human trafficking statement. This must identify the steps they are taking to ensure that there is no “modern slavery”in any of their supply chains or within their own organisation – or must say if it has taken no such steps. The quality of statements is rather variable with many businesses paying lip-service to the spirit of the Act.
Compliance and Deterrence
A large number of businesses have not proactively engaged with their responsibilities under the MSA; largely because the Act did not include express financial penalties for failing to publish a Statement. An example of a stark expression of disregard was the dismissive approach of a senior lawyer in a GCC-headquartered business who once said to me, “Why are we wasting our time with this? There’s no financial penalty, so I don’t see the point of bothering the Board with this.”Aside from that individual lawyer’s attitude to risk management, this is a dangerous focus purely on ‘bean-counting’ (remember the Ford Pinto?).
Similarly, the head of a procurement department of an international business bemoaned the fact that it would “take too much time”to look at all of the contractual relationships. When balanced against the potential reputational impact of not engaging in the process, that investment of effort might just be a sensible use of time.
Currently, the failure to publish a Statement is likely to lead to a ‘naming and shaming’ and potentially a mandatory civil injunction to compel the business to produce the Statement. Failure to comply at that point could then lead to a financial penalty. However, this requires a judicial route rather than being a straightforward administrative/regulatory penalty for default.
As a result of businesses failing to properly engage with the prescribed requirements of the Act, in 2018, the UK Government commissioned a comprehensive independent review of the Act. This included “in relation to section 54, how to ensure compliance and drive up the quality of statements produced by eligible companies”.
The Review of UK legislation
The UK Government was initially of the view that it would be for consumers, investors and Non-Governmental Organisations (NGOs) to monitor compliance and apply commercial and publicity related pressure on businesses. In recognition of the lack of effective measures to address non-compliance, the recommendations of the review include the following:
Initial warnings, fines (as a percentage of turnover), court summons and directors’ disqualification for non-compliance with the section 54 requirement to publish a statement;
Personal accountability of a designated board member for the production of the statement;
The removal of the ‘get out’ which allows companies to report they have taken no steps to address modern slavery in their supply chains;
The six areas set out as areas that an organisation’s statement may cover will become mandatory. If a company determines that one of the headings is not applicable to their business, it shall be required to explain why; and
Reporting must include not only how businesses have carried out due diligence but also the steps that they intend to take in the future. This aims to combat the ‘get it off the desk’ approach of simply producing something rather meaningless to satisfy immediate requirements under the Act.
All of the above are recommended to be underpinned by meaningful financial sanctions.
Changing Business Attitudes
Many businesses have recognised that a demonstrably ethical approach to their supply chain scrutiny has direct commercial benefits. Perhaps cynically, it may be regarded as a new and potentially highly effective expression of Corporate Social Responsibility (‘CSR’). Business is now becoming more victim-focused whilst recognising that human rights due diligence and profitability are not mutually exclusive; this approach is becoming more embedded into international business culture.
The International Dimension
The UK is not the only jurisdiction whose slavery-related legislation has an impact beyond its borders.
The California legislation (Transparency in Supply Chains Act) is well known, but other examples include Australia, France, and Switzerland which have all moved to introduce effective legislation. Hong Kong is also currently exploring how best to adopt effective anti-slavery legislation. The inevitable impact is that international businesses will be subject to a more global push to eradicate such practices in their supply chains.
Australian legislation is particularly notable in that it has mandatory requirements (Note: There are distinct reporting requirements as between Australia [Modern Slavery Act 2018 (Cth.)] and New South Wales jurisdictions).
The reporting requirements apply to the following:
Modern Slavery Act 2018 (Cth.): Commercial organisations carrying on business in Australia with global revenue of A$100 million or more must report in the Commonwealth; and
NSW Modern Slavery Act 2018: Commercial organisations with employees in NSW and an annual turnover of between A$50 million and up to A$100 million will report only in NSW.
Within 6 months of the end of their financial year, reporting entities must submit a ‘modern slavery statement’ to the Minister for Home Affairs which details the following:
The identity of the reporting entity;
The structure, operations and supply chains of the reporting entity;
The risks of modern slavery practices in the operations and supply chains of the reporting entity, and any entities that the reporting entity owns or controls;
The actions taken by the reporting entity and any entity that the reporting entity owns or controls, to asses and address those risks;
How the reporting entity assesses the effectiveness of such actions;
The process of consultation with any entities the reporting entity owns or controls or is issuing a joint modern slavery statement with; and
Any other information that the reporting entity, or the entity giving the statement, considers relevant.
The first reporting year is 1 July 2019 – 30 June 2020. Reports will be due within 6 months of the end of the relevant financial year. Therefore, the latest long-stop date may be 31 December 2020.
The NSW Act provides potentially severe penalties for non-compliance. A fine of A$1.1 million will apply to companies which:
Fail to prepare a modern slavery statement;
Fail to publish the statement publicly in accordance with the legislation; and
Knowingly providing false or misleading information in the statement.
In light of the above developments and the growing international dimension to anti-slavery, it is clear that business must take early steps to be head of the game with effective due diligence of their supply chain.
Please contact us at firstname.lastname@example.org email@example.com to explore how we can assist in your Supply Chain scrutiny, preparation of your MSA Statement and training in identifying and managing risks (both at Tier 1 supplier level and beyond). In addition, we advise on the contractual protections and codes of conduct necessary to commit your suppliers to operate in accordance with your ethical standards.