Modern Slavery and Supply Chains

September 20, 2015

In February 2015 the government launched a consultation on the provision contained in the Modern Slavery Act 2015 which imposes a requirement on commercial organisations to publish an annual slavery and human trafficking statement. A particular issue was to identify the turnover threshold for the application to business – should it be very high so as to concentrate on the very largest of companies, or should it be £36 million (the UK Companies Act threshold for large companies) or should it be some other figure?

The government has decided, based on that consultation (which closed in May), to apply the £36 million large company threshold. This means many businesses will be subject to these requirements (the government estimates about 12,000 businesses will be caught). This was based on the responses from 84 respondents – 80% of whom felt that £36 million was appropriate.

What does the Modern Slavery Act mean for businesses?

The Modern Slavery Act 2015 (s 54) will require all businesses:

·        which carry out any or part of a  business in the UK

·        which supply goods or services

·        have an annual turnover exceeding £36 million

to publish a slavery and human trafficking statement each financial year.

The legislation expressly states that a business can comply with this requirement by simply stating that no steps have been taken to ensure its supply chain is free from slavery. For low-profile businesses for whom public reputation is of little importance, this might be a realistic option. However, for many businesses this will not be an attractive option.

Annual slavery and human trafficking statement

So what should the annual statement say? The Home Office has to date been deliberately vague in this regard by releasing only high level guidance on the areas of activity which should be covered by the statement. The intention is to allow flexibility for different organisations and sectors to determine, demonstrate and explain their policies and practices with regard to slavery and human trafficking in the way that is most appropriate to them, and to reflect the level of risk of such exploitation in a particular industry.

While the Home Office has confirmed some guidance (set out below) we expect further clarification in due course, and also that best practices and reporting norms will develop over time as the market adjusts to this new requirement.

The five general areas of activity which need to be covered in the annual statement are as follows:

·  a brief description of an organisation’s business model and supply chain relationships;

·  a business’s policies relating to modern slavery, including due diligence and auditing processes implemented;

·  training available and provided to those in a) supply chain management and b) the rest of the organisation;

·  the principal risks related to slavery and human trafficking including, how the organisation evaluates and manages those risks in their organisation and their supply chain; and

·  relevant key performance indicators (ie measures that will assist the reader of a slavery and human trafficking statement to assess the effectiveness of the activities described in the statement).

As the statements will be produced annually, performance indicators are likely to be useful in demonstrating progress from one year to the next. The choice of which measures to use will depend on the individual circumstances of the business.

The legislation and guidance is also clear that organisations should take the issue of modern slavery seriously, and at the highest levels. The annual statement needs to be signed off by the most senior people in an organisation, be they directors, partners or otherwise.

What this means for your business

If a business’s turnover exceeds £36 million then it will be required to comply with the supply chain transparency requirement.

Businesses therefore need to start to consider:

·  their supply chain – this is not just the immediate suppliers but also further down the supply chain and will include the sourcing of labour (eg by recruitment agents);

·  what policies they have in place with regard to slavery and human trafficking, and the extent to which those will stand up to public scrutiny;

·  the practices of their current and future contractors and sub-contractors including identifying jurisdictions or types of suppliers who present most risk;

·  procurement practices and consider checks, audits, changes to contracts and internal and external policy I anticipate that reputable organisations, especially those with higher risk supply chains, will want to ensure that their procurement contracts include adequate audit rights to support audit and compliance, obligations to provide data and reports to support risk assessments, and warranties from suppliers that they do not tolerate modern slavery and human trafficking in their supply chains;

·  what training (if any) they deliver to the business and other members of the supply chain in relation to the identification and management of the risk of modern slavery;

·  the internal review processes in place within their business to measure the success of the initiatives, policies and procedures in place to combat these practices;

·  the involvement of external auditors to check for and report on compliance.

For multinational companies with extensive international supply chains in high-profile sectors,  many of these steps will already be in place and therefore the statement will require the reporting of existing risk assessment and measures taken to challenge them. This will be especially the case for organisations active in jurisdictions with existing similar legislation (eg California).

UK quoted companies may have already started to anticipate these requirements given their obligation to report in their annual strategic report on human rights where relevant to their business. For other companies this will be a very new requirement.

I anticipate that in the 2015/16 reports (subject to the transitional arrangements set out below) many companies which have not already assessed and managed this supply chain risk will simply include an outline description of their supply chain, and comment that they are assessing risks and actions. In subsequent years I expect that different approaches will emerge:

·  companies with little interest in public reputation who are low profile will state they have done nothing;

·  companies who consider the likelihood of an incidence of modern slavery in their supply chain is low (eg a UK only business with limited UK supply chain in a low-risk sector) might make that observation and take little or no further action (although the Home Office has been at pains to point out that modern slavery does happen in the UK and therefore a domestic business should not be complacent);

·  substantial multinational companies with international supply chains in higher risk sectors who have already have existing corporate social responsibility or ethical sourcing functions will report in detail.

The challenge for companies is seeking to show that they are taking appropriate action without committing to disproportionate cost. Actions will be informed by the public profile of the company and its sector.

How should the Slavery and Human Trafficking Statement be published?

It must be approved by the board of directors and signed by a director. The Act stipulates requirements for LLPs, limited partnerships and partnerships.

If the business has a website, it must publish the slavery and human trafficking statement on that website with a link in a prominent place on that website’s homepage. This suggests that simply burying the statement in the annual report is not sufficient. If the business has no website then it must provide a copy of the statement on written request within 30 days of a request.

How is this enforced?

The government can enforce the obligation by seeking an injunction (or in Scotland specific performance of a statutory duty). If a business ignored the injunction then it would be in contempt of court, potentially leading to unlimited fines.

I do not anticipate that the government will take legal enforcement action for some time. It is likely that the Anti-Slavery Commissioner will promote best practice, ensure the new requirements are publicised and then, after a time, begin naming high-profile companies which are not in compliance. Pressure groups will also be challenging target companies. Legal enforcement will then be a last resort.

Transitional provisions

The supply chain requirements are expected to come into force in October 2015. The government has indicated that there will be transitional provisions implemented so that slavery and human trafficking statements are not required where an organisation’s financial year end is within close proximity to the date on which the duty to publish the statement comes into force. However, those transitional arrangements have not been published. Businesses issuing their annual report this calendar year are likely then to state that they have as yet taken no steps.

Further statutory guidance expected

Further detail regarding the statutory guidance on the annual slavery and human trafficking statement is due to be produced and published to coincide with the legislation coming into force.

Useful resources

Modern Slavery Act 2015

David Lowe is a Partner in the commercial contracts team at Wragge Lawrence Graham & Co: