19 June 2015
The Modern Slavery Act will require businesses to prepare an annual statement detailing the steps they have taken to ensure their suppliers are not employing forced labour
Ensuring the integrity of the supply chain has never been more important. With increasing pressure on delivery times, businesses need to take every measure possible to ensure continuity of supply. This is reflected in supply contracts but also in carrying out enhanced due diligence throughout the supply chain and keeping it under review.
A major issue for companies in the West is the reputational damage that can be suffered when exploitative labour by their overseas suppliers is exposed.
Last month’s fire at a shoe factory in Manila, Philippines, which killed 70 people, is a stark reminder of this. Survivors and relatives of the victims allege that the employees were working for pay below the minimum wage, in unsafe conditions and with no health and safety training.
Similarly, the 2013 fire at Rana Plaza in Dhaka, Bangladesh, which killed 1,100 people, did serious damage to the reputation of those Western retailers who were discovered to have been sourcing cheap production from that facility. This incident prompted the Pope to describe the employees’ working conditions at Rana Plaza as ‘slave labour’. Karel De Gucht, the European Trade Commissioner, used the term ‘modern slavery’.
Modern slavery has established a greater resonance with the Modern Slavery Act (MSA) coming into force earlier in 2015. Section 54 includes a provision requiring large businesses to state publicly each year the action that they have taken to ensure their supply chains are slavery free. Slavery includes forced or compulsory labour.
The reporting requirement is not yet in force but is predicted to take effect in October 2015. The annual statement may include information about the organisation’s structure, business and supply chains together with its policies relating to slavery and human trafficking. It should identify:
The annual statement must be approved by the board and signed by a director. It must be published on the website, with a link to the statement on the homepage.
There is uncertainty as to what will constitute a sufficiently large business for these purposes. The secretary of state has yet to publish a minimum turnover threshold.
This new requirement is in line with the recent trend towards enhanced reporting by quoted companies. Such companies must already disclose information about social, community and human rights issues in strategic reports. This must have sufficient detail on the effectiveness of any company policy to communicate an understanding of the development, performance or position of the company’s business.
The FRC published guidance in 2014 on how quoted companies can comply with their existing reporting obligations, but the secretary of state will be publishing further guidelines to assist companies in the preparation of the annual statement on supply chains. The government will also be empowered to enforce the requirement to prepare a statement, by way of injunction if necessary.
The reporting requirements introduced by the Act will call for certain companies to undertake due diligence throughout the supply chain.
UK companies should already be used to doing this following the enactment of the Bribery Act 2010. This Act makes UK companies potentially liable for bribery committed by intermediaries acting on their behalf, including in overseas jurisdictions. Such intermediaries are increasingly being required to sign up and adhere to the UK anti-bribery policy.
There are a number of other reasons for carrying out effective due diligence throughout the supply chain. The issue of the integrity of IT systems and threats to cyber security, for example, should by now be a board-level concern. UK companies should be examining whether their suppliers have any history of data security breaches and ensuring that security of personal data and other sensitive information is maintained.
It is also important to avoid breaching international sanctions. Be sure that suppliers are not selling to, buying from or otherwise dealing with embargoed countries or restricted parties.
Other measures that need to be in place include establishing that the local economy is stable. It should:
Failure to deliver in one part of the supply chain can have serious consequences. As well as addressing risk areas in their contractual documentation, UK businesses should be looking for warning signals and have fall-back positions if things go wrong.
Provenance demonstrates the need to be aware and prepared for risk. The reputational damage suffered by retailers following the horsemeat scandal in 2013 provides a clear illustration of why it is important to know what your suppliers are doing.
Other risks can arise from natural forces overseas – from the Icelandic volcano to the Japanese tsunami. It is important that companies understand such risks faced by their overseas suppliers and are in a position to plan for suspended performance, allocating risk and responsibility accordingly.
Some opponents of the Government’s proposals to introduce new measures to tackle illegal immigration suggest that, if enacted, they will drive more immigrant labour underground where there is little legal or regulatory protection available to employees, and a greater likelihood of slavery arising.
Until the relevant provisions of the Act come into force, it is not possible to say when the first statement will be required. Companies likely to be subject to the due diligence requirement should, however, already be reviewing how they monitor their supply chain to ensure they will be able to comply.
Most UK businesses will take umbrage at any suggestion that they have anything to do with slavery. In most cases they will be right. It would, however, be a brave director who would say with certainty that there is no forced labour, anywhere in the world, working in any factory, farm, hotel or shop, for any of their direct suppliers or those further down their supply chain.
Richard Naish is Corporate Partner at Walker Morris LLP