As we explained in our recent article (here), the Modern Slavery Act 2015 (MSA) imposes obligations on most large commercial organisations that operate in the UK to publish an annual “Transparency in Supply Chain” (TISC) statement. The government has now published guidance (here) on how it expects businesses to comply with these obligations. The government has made it clear that it expects the MSA to drive a ‘race to the top’, and for organisations to improve the quality of their disclosures each year.
Organisations are not required to guarantee that their supply chains are slavery free, but they do have to explain what steps they have taken to ensure that slavery is not taking place.
Which organisations are covered by the MSA?
The MSA applies to all commercial organisations that carry on a business in the UK, supply goods or services and have a total worldwide annual turnover of £36m or more. The government’s guidance clarifies what this means in practice:
- What is a ‘commercial organisation’?: The tests for what constitutes a ‘commercial organisation’ and whether it ‘carries on a business’ in the UK are intended to have a wide application. They will include any body corporate or partnership, in any part of a group structure, whether it 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. A common sense approach should be taken when assessing whether these terms apply.
- How does the turnover test apply to groups?: The £36m turnover threshold includes the turnover of any subsidiary undertaking (but not parent), even if that subsidiary is based entirely outside the UK. A parent company with a foreign subsidiary will also need to include in its statement the steps taken in relation to the foreign subsidiary, if that subsidiary is part of the same business (or supply chain).
- A single statement for groups of companies?: For larger groups, the obligation is likely to apply to more than one organisation within that group. Rather than each company producing a separate statement, the parent company may produce a single statement, which its subsidiaries can also use, provided it covers the steps taken by those subsidiaries.
- When will the first TISC statements start to appear?: 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 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 it is expected that the activities reported on in those statements will be starting now (if they haven’t already).
“It is simply not acceptable for any organisation to say, in the twenty-first century, that they did not know”
For organisations that are required to produce a TISC statement, the MSA does not attempt to lay down prescriptive requirements as to the steps that an organisation should take, or what should be included in a TISC statement. Nevertheless, legislators hope that pressure from the government, NGOs, activists and potentially investors and consumers will drive businesses to develop market-leading anti-slavery programmes. To be effective, anti-slavery programmes will need to go beyond a ‘box-ticking’ approach, of high-level policies and questionnaires. Organisations will need to be prepared to ask the hard questions and commit to taking action where the answers given are insufficient.
There is no single solution to assessing and addressing the risks of modern slavery within a business and its supply chain. However, guidance can be found from a number of sources including, the UK government, international organisations and initiatives such as the UN Global Compact (see here). Furthermore, the following elements are all likely to form part of an effective anti-slavery programme:
- Understanding risk: Modern slavery and forced labour will not always be easy to distinguish from working practices that are poor but not illegal. The widespread use of contract workers can also reduce the visibility on labour conditions across a supply chain.
- Minimum standards: Organisations should be clear about the minimum standards they expect from their supply chains and take the lead in improving conditions where necessary. This may be communicated, for example, through procurement policies, clauses in contracts and / or employer codes of practice.
- Consequences: The ethos behind the MSA is that the purchasing power of big businesses can be a highly effective tool to drive out unacceptable working practices. To achieve this, organisations must be clear about what they will do if they discover any unacceptable practices, which may ultimately include ceasing trading and reporting to appropriate local authorities.
- Co-operation: Part of the expectation in focusing upon purchasing power is that businesses will work with suppliers that are willing to improve, and so support them in improving conditions. It may also be appropriate to engage with NGOs working in the region or cooperate with sector initiatives.
- Reliability: Calling in third parties to conduct independent audits is one way to ensure working conditions are accurately captured, and findings are seen as objective. Clear policies and procedures on whistleblowing will give workers confidence to raise concerns themselves.
What are the consequences of not producing a TISC statement?
There is no legal penalty for not complying (although the MSA gives the Secretary of State the power to seek an injunction to force a corporate to make such a statement). The real risk is reputational rather than legal. This will be particularly so when it comes to sectors where corporate reputation is a key part of the business model. Listed entities will also be aware of the importance of ethical investment, either by specific ethical investment funds, or as part of responsible investment principles for other investors.
The wider picture: compliance programmes
While the obligation to produce a TISC statement is a new one, the work that feeds into that statement is likely to be part of a business’s wider compliance programme that covers, for example:
- Compliance with laws such as the UK Bribery Act and US Foreign Corrupt Practices Act, which carry criminal sanctions for breach.
- Ethical trading and corporate social responsibility, which are driven largely by cultural and reputational considerations.
- Supply chain risk management, which may include fraud or contractual risk-management.
The government has acknowledged that anti-slavery programmes may not be fully developed during the first year of reporting under the new obligations. It is likely to be an iterative process. Nevertheless, organisations need to be prepared to explain what they are doing and how they are going to build on current activities. As well as their own reporting obligations, suppliers will also need to work with their customers that are required to report, to explain what steps they have taken downstream.
The challenges may be considerable, but the benefits of a fully-functioning and integrated reporting programme go beyond legal compliance and reputation management. For many, this will be a key element in maintaining and building their external brand and internal culture. As many have found from anti-bribery and corruption measures, shining a light on supply chains, particularly in higher-risk jurisdictions, can bring other benefits. These might include uncovering other illicit behaviour, developing closer relationships and developing more stable supply chains.