Modern Slavery Act – transparency in supply chains requirements come into force

Posted: 19/11/2015

The Modern Slavery (Transparency in Supply Chains) Regulations have brought into force section 54 of the Modern Slavery Act 2015, with effect from 29 October 2015. The new measures will apply to financial years ending on or after 31 March 2016. 

Section 54 of the Act requires commercial organisations with a global turnover of at least £36 million, that carry on a business or part of a business in the UK, to produce a slavery and human trafficking statement for each financial year. The statement must contain details of the steps that the organisation has taken in that year to identify and eradicate modern slavery from both its own business and its supply chain (or state that no steps have been taken, if this is the case). The expression ‘modern slavery’ encompasses the offences of slavery, servitude and forced or compulsory labour and human trafficking, set out in sections 1 and 2 of the Act. 

To coincide with section 54 coming into force, the government has published guidance, entitled Transparency in Supply Chains etc: A practical guide, explaining what is meant by the expressions modern slavery and human trafficking, who is required to comply with the new requirements, the steps involved in producing and approving a statement, some practical steps an organisation may wish to take with regard to training and supply chain due diligence, as well as what an organisation should do if it identifies the existence of modern slavery within its supply chain. 

The Act requires organisations to prepare and publish a statement, rather than to take any positive steps to eradicate slavery from their supply chains. However, the government envisages that commercial pressure will be brought to bear on those organisations that fail to take action. The new requirements will make transparent what a particular organisation is or is not doing, and will enable members of the public, employees, consumers and investors to make informed decisions about which organisations they do business with. Statements (and any failures to produce them), are likely to attract the attention of some NGOs and sections of the media that report on social and human rights issues. The consequences of failing to take the issue seriously, in terms of damage to reputation and competitive disadvantage, could be significant. 

The definition of ‘commercial organisation’ under the Act is very wide and there is no minimum level of business that must be carried on in the UK itself, so the new provisions are likely to be applicable to a large number of organisations and groups that have some commercial presence in the UK. 

Which organisations will be affected?

The requirement to produce a statement applies to ‘commercial organisations’ – including companies, partnerships and LLPs, wherever incorporated or established - that carry on a business or part of a business in the UK and have a global turnover of not less than £36 million. 

‘Turnover’ for these purposes, means the amount derived from the provision of goods and services falling within the ordinary activities of the organisation (or its subsidiaries) after deduction of any trade discounts, VAT and any other turnover-based taxes. In calculating the turnover of an organisation, account must be taken of the turnover of that organisation and each of its subsidiaries (regardless of where they are formed or operate). Significantly, provided an organisation engages in commercial activities and meets the turnover threshold, it does not matter that it pursues primarily educational or charitable aims or carries out public functions – it will still be required to comply. ‘Supply chain’ has its ordinary, everyday meaning. 

There is no minimum level of business or turnover that must be attributable to the UK itself, provided that, applying a common sense approach, an organisation can be said to be ‘carrying on a business or part of a business in the UK’. The government has said it anticipates that this will ‘mean that organisations that do not have a demonstrable business presence in the United Kingdom will not be caught by the provision’ and ‘having a UK subsidiary will not, in itself, mean that a parent company is carrying on a business in the UK, since a subsidiary may act completely independently of its parent or other group companies’. However, ultimately the courts will be the final arbiter, taking into account the particular facts. 

Where both a parent and subsidiary in the same group are each required to produce a statement, the guidance states that they can produce a single statement, provided that the statement fully covers the steps that each of the organisations has taken. Where a subsidiary is part of the parent organisation’s own business or forms part of its supply chain, then the parent’s statement should cover any steps taken in relation to that subsidiary. Where a subsidiary within a group does not carry on a business or part of a business in the UK, then it will not need to produce a statement, but steps taken in relation to it will need to be included in the statement prepared by another group member if its activities form part of the supply chain or business of that other company. In the interests of improving transparency, the guidance strongly encourages organisations within a group to produce statements, even where they are not legally obliged to do so and particularly so where these organisations operate high risk industries or locations. 

In some cases, it may not be obvious whether the activities of a particular company within a group form part of the business of another organisation within the same group. Given the emphasis the government is placing on complying with the spirit rather than the letter of Act, in cases of doubt, it would seem prudent for an organisation to produce a statement. 

Where franchise models operate, in calculating the turnover of the franchisor, the turnover of franchisees will be ignored. However, the guidance states that ‘franchisors who meet the turnover threshold may wish to consider the impact on their brand of the activities of franchisees in relation to modern slavery, and in so doing report on the steps taken to ensure the franchise as a whole is free from modern slavery’. Where a particular franchisee exceeds the turnover threshold in its own right, then it will be required to produce its own statement. 

Once an organisation has produced a slavery and human trafficking statement, the government strongly recommends that it should continue to do so in respect of subsequent financial years, even where its turnover falls below the threshold as this will enable consumers to chart an organisation’s progress, year-on-year and will demonstrate a genuine commitment to eradicating slavery and human trafficking. 

What should the statement say?

The Act is not prescriptive in terms of the form or content of a statement. The amount and type of information included will depend on the sector in which an organisation operates (for example, what is required for a retailer with overseas suppliers may be very different to what is required for a professional services firm operating solely in the UK), the complexity of its structure and supply chains and the sectors and countries in which its suppliers operate. 

However, a statement should:

• be written in simple language that is easily understood;
• be succinct but cover all relevant points;
• be in English – but may also be in other languages relevant to a particular organisation’s business and supply chains;
• specify steps taken on a country by country basis, where applicable;
• provide appropriate links to other publications, policies and publicly available documents for the organisation; and
• be true and refer to actual steps taken or begun. 

The government has identified some examples of the types of information an organisation may wish to include in its statement: 

• details of the organisation’s structure, business and supply chains;
• the organisation’s policies in relation to slavery and human trafficking;
• the due diligence processes the organisation undertakes in relation to its business and supply chains;
• identification of those parts of the organisation’s business and supply chains where there is a risk of slavery and human trafficking occurring, and the steps it has taken to identify and address those risks;
• the training available to the organisation’s staff about slavery and human trafficking; and
• the organisation’s effectiveness, year-on-year, in ensuring that slavery and human trafficking is not taking place in its business and supply chains (measured against those performance indicators it considers appropriate). 

The statement must be approved and signed off at a senior level. In the case of companies, it must be approved by the board and signed by a director, for LLPs it must be approved by the members and signed by a designated member, for limited partnerships (registered under the Limited Partnerships Act 1907) it must be signed by a general partner and for any other type of partnership it must be signed by a partner. 

Where and when does it need to be published? 

The statement must be published on an organisation’s website (where it has one), with a clearly marked link to the statement in a prominent place on the homepage (which could include in a drop down menu). The guidance suggests using a link such as ‘Modern Slavery Act Transparency Statement’. Where an organisation has more than one website, the statement, or a link to it, should be included on each website. 

Organisations that do not have a website must provide a copy of their statement to anyone who requests it within 30 days of a written request being made. 

The government has said that organisations should produce and publish their statements as soon as reasonably practicable after the end of the financial year to which they relate, and they are encouraged to report within six months of the end of the relevant financial period. 

What happens if an organisation fails to comply?

The Secretary of State is empowered to bring enforcement proceedings seeking an injunction against an organisation that fails to comply with the requirement to produce a statement. If the organisation fails to comply with the injunction, then it will be in contempt of court and liable to an unlimited fine. In addition, the government envisages that organisations that fail to comply will be penalised in terms of loss of reputation and ultimately, loss of custom and investment. 

What should an organisation do if it identifies modern slavery in practice?

The guidance sets out the actions an organisation should take where an instance of modern slavery is identified (or suspected). 

If a specific case of modern slavery is identified within the UK, it should be reported to the police immediately on 101 (or, in cases where a victim may be in immediate danger, on 999). 

If modern slavery is identified (or suspected) abroad, the response should be tailored to the local circumstances – which may involve engaging with local trade unions, NGOs, industry bodies or other organisations in some cases, and in others, might require involving local government or law enforcement agencies. The guidance also specifies what organisations should do where they feel that the local response has been inadequate. 

What steps should businesses be taking now?

The relationship between business and human rights has become an issue that increasingly businesses cannot ignore. On one hand, businesses can help advance human rights, including by offering access to higher living standards. On the other, businesses can also hinder human rights, as underlined by recurring reports from around the world of, for instance, unsafe working conditions and migrant worker exploitation. Meanwhile, there is growing worldwide recognition of the role business can and should play in ethical trade. According to the International Labour Organisation, 21 million people worldwide are victims of forced labour.

Some organisations, including UK quoted companies that are required to produce a Strategic Report, and some entities with a US presence that are subject to the California Transparency in Supply Chains Act, will already report on human rights and slavery issues and the effectiveness of any company policies on these issues and will be well-placed to comply with the new requirements. In addition, some organisations are already adhering to corporate human rights responsibility initiatives, such as the UN Global Compact, the UN Guiding Principles on Business and Human Rights or sector-specific human rights guidance produced by the European Commission. They will be reviewing existing practices in order to comply with these new requirements

Whilst the requirement under the Act is to produce a statement rather than to take positive steps to eradicate modern slavery, the government has said that ‘the provision seeks to create a race to the top by encouraging businesses to be transparent about what they are doing, thus increasing competition to drive up standards’. 

Whilst organisations with a financial year ending on or before 30 March 2016 will not have to produce a statement in respect of that financial year, they will need to report in respect of the whole of the next financial period, including any portion of it that falls before 31 March 2016, so those that are not already doing so, should be taking steps now to:

• map their supply chains by identifying suppliers and contractors and the locations in which they operate and identifying those areas of the organisation’s business and supply chains where the risk of modern slavery is the greatest;
• consider the risks of creating documents that are disclosable to third party stakeholders, regulators and investors. Non-compliance will no doubt see businesses targeted by NGOs, government bodies and the investigative media;
• consider the merits of utilising external legal advice to benefit from legal advice privilege when assessing supply chain risks;
• consider what due diligence they will need to carry out in respect of their supply chains and whether it will be undertaken in-house or outsourced. Effective policies and practices will need to be in place to support this. There are inherent risk and compliance considerations given the linkages to anti-corruption, ethics, and whistleblowing policies and procedures;
• identify who within the organisation will be responsible for co-ordinating efforts to investigate and manage the risk of modern slavery in the business and supply chains, and consider how they will be both incentivised and protected;
• ensure that the organisation is educated with regard to the legal, reputational and commercial risks of modern slavery and how to respond where modern slavery is found or suspected – this may be best effected through appropriate, targeted training, tailored to the roles that individuals perform within the organisation (for example, agency worker management, supply chain management, corporate social responsibility, procurements, HR and in-house legal) and employees should be made aware of the modern slavery helpline on 0800 0121 700;
• review existing practices and consider whether these may influence and create a modern slavery risk if not managed carefully – for example, where they require that products be sourced at the lowest cost and shipped in the fastest time;
• review existing employee and supplier codes of conduct and consider whether contracts with suppliers and contractors ought to include appropriate provisions regarding their own due diligence procedures;
• monitor other international initiatives and developments. There is a clear direction of travel regarding business and human rights. For example, the 193 member states of the UN have provisionally agreed to include a pledge to eradicate slavery and forced labour in the new sustainable development goals. 

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