The UK has recently introduced new laws on “modern slavery” and “trafficking”, through the Modern Slavery Act 2015 (MSA). Importantly, this includes a requirement for organisations that fall within the relevant provisions of the MSA to publish an annual “Transparency in Supply Chain”, or “TISC”, statement – essentially a statement setting out the steps that the organisation has taken over the previous year to eradicate slavery and trafficking in its supply chains.
The headline news is that the obligation to produce a TISC statement applies to organisations that carry on business within the UK, not just those which are incorporated or headquartered in the UK.
Is your business required to make a TISC statement?
The requirement to make a TISC statement applies to all commercial organisations that:
- carry on a business, or part of a business, in the UK;
- supply goods or services; and
- have a total worldwide annual turnover of £36m or more.
“Commercial organisation” includes any body corporate or partnership, in any part of a group structure. It does not matter where, or in which jurisdiction, the partnership or body was incorporated or formed.
“Carrying on business in the UK”
In its guidance on the new disclosure obligation, the UK government has indicated that a “common sense approach” should be taken when assessing whether or not an organisation can properly be regarded as carrying on a business, or part of a business, in the UK.
The UK government’s guidance states that “organisations that do not have a demonstrable business presence in the UK” will not be caught by the test. Similarly, just because an overseas parent company has a UK subsidiary does not necessarily mean that the parent company is carrying on business in the UK, because the subsidiary may be conducting an independent business from that of its parent. But where a subsidiary’s UK operations form part of an overseas parent’s business, the overseas parent will be considered to carry on business in the UK.
It does not matter ifthe partnership or body is a for-profit business or not-for-profit charitable, educational, public, or other organisation, so long as it engages in commercial activities in the UK.
The turnover test
The turnover test is assessed by reference to each commercial organisation, and includes the turnover of any subsidiary undertaking of that entity, but doesn’t look any further up the chain of ownership to turnover of any parent of the relevant commercial organisation. For the purposes of the turnover test it is irrelevant where the subsidiary undertaking is based or where it carries on its business.
Statements by groups of companies
Each commercial organisation meeting the tests described above is required to produce a TISC statement, but a group TISC statement can be made by the parent company for itself and each of its subsidiaries that is otherwise required to prepare a TISC statement in its own right.
Where a subsidiary undertaking does not, in its own right, need to prepare a TISC statement (for example, because its turnover (when consolidated with that of its own subsidiary undertakings) is less than £36m), it may still need to form part of the parent’s TISC statement if its operations form part of the business or supply chains of the parent (or other subsidiary undertaking of the parent which is itself required to prepare a TISC statement).
Impact on multinational groups
The following examples illustrate how these tests might apply to a non-UK company (Parent) with a subsidiary with a UK business (UK Sub) and, in Example 3, a non-UK subsidiary (Non-UK Sub) whose business is conducted wholly outside the UK.
- Example 1: Parent is based outside the UK but conducts business in the UK. Parent’s annual turnover is £20m. UK Sub has a turnover over £36m.
Both Parent and UK Sub are required to produce a TISC statement, although one statement can be produced which covers both.
- Example 2: Parent is based outside the UK but conducts business in the UK. Parent’s annual turnover is £20m. UK Sub has a turnover of £18m.
Only Parent is required to produce a TISC statement (because UK Sub’s turnover is less than £36m), but it will need to include the steps taken in relation to UK Sub if its activities form part of Parent’s supply chain or business.
- Example 3: Parent is based outside the UK but conducts business in the UK. UK Sub has a turnover over £36m. Non-UK Sub does not carry on any business in the UK.
As with Example 1, Parent and UK Sub are each required to produce a TISC statement (although, again, one statement can be produced which covers both). If Non-UK Sub is part of Parent’s or UK Sub’s supply chain or business, steps taken in respect of it should be included as part of the relevant company’s TISC statement (or group statement). If not, there is no requirement to include Non-UK Sub in any TISC statement, but the business may still choose to for reputational or other reasons.
- Example 4: Parent does not carry on any business in the UK. UK Sub carries on its business independently from Parent and has a turnover over £36m.
Only UK Sub is required to produce a TISC statement, but again, the business may choose to produce a statement that includes other group companies.
Contents of the TISC statement
The MSA does not lay down prescriptive requirements as to the steps that an organisation should take or what should be included in a TISC statement, but the UK government’s guidance sets out some tips on how and what to disclose.
The type of information that the UK government expects an organisation to cover in a TISC statement includes the following:
- details of the organisation’s structure, business and supply chains;
- the organisation’s policies on slavery and human trafficking;
- the due diligence it has undertaken in its business and on its supply chain;
- the organisation’s assessment of risk of slavery in its business or supply chain, the steps it has taken to address those risks, and how effective those steps have been; and
- the training which it gives to its staff.
What do businesses need to do now?
If your organisation carries out any commercial activity in the UK and has a global annual turnover of £36 million or more, it is likely that you will have reporting obligations under the MSA.
The MSA does not impose fines or prosecution if statements are insufficiently detailed or robust (it is permissable simply to make a statement that no steps have been taken), although the Secretary of State has the power to intervene by court order to force organisations to publish a statement. Nonetheless, with the potential for negative publicity in relation to such a sensitive issue, the reputational stakes for those required to publish a TISC statement are high.
Organisations with a financial year ending on or before 30 March 2016 are not required to produce a TISC statement for the current financial year. Organisations with financial years ending on 31 March 2016 or later will need to produce a TISC statement covering the steps taken in the current financial year. This should be published after the end of that financial year (the UK government’s guidance suggests that this should be within 6 months of the financial year end).
This means that we may not see any TISC statements until the middle of 2016 (although some organisations publish similar statements either voluntarily or as a result of non-UK regulatory requirements). Nevertheless, organisations should start to plan their statements now).
How can we help?
Organisations may wish to take more detailed advice on how the MSA applies to them, particularly when it comes to international group companies, and we would be happy to assist with that work.
We also advise clients on the implementation of compliance and monitoring programs that integrate reporting under the MSA with wider anti-bribery, fraud and supply chain risk management. For many, the TISC statement will become one more addition to the suite of key reporting measurements derived from an integrated approach to business risk, which enable management to have proper oversight of the risks their organisations face.