Modern Slavery Act 2015—guidance on transparency in supply chains

Modern Slavery Act 2015—guidance on transparency in supply chains
What do corporate lawyers needs to know about the new requirement for large businesses to publish slavery and human trafficking statements? Kavita Bassan, solicitor in the Lexis®PSL Corporate team, considers the requirements under the Modern Slavery Act 2015 (MSA 2015) and Home Office guidance on transparency in supply chains.

Original news

Modern Slavery Act—guidance on slavery and human trafficking statements, LNB News 30/10/2015 75
 
The Home Office has issued guidance, 'Transparency in Supply Chains etc: A practical guide', for businesses on how to develop a credible and accurate slavery and human trafficking statement each year and comply with the requirements of MSA 2015. The guidance sets out who is required to publish a statement, the process of preparing, approving and publishing the statement and what an organisation should do if it identifies an occurrence of modern slavery.

What are the new requirements?

MSA 2015, s 54 requires certain businesses to prepare and publish slavery and human trafficking statements annually, outlining what businesses are doing (or not doing) to combat modern slavery in their supply chains and organisations. The Modern Slavery Act 2015 (Transparency in Supply Chains) Regulations 2015, SI 2015/1833, which came into force on 29 October 2015, provide that businesses with a turnover of £36m or more will be required to make such statements.
 
A 'commercial organisation' to whom MSA 2015 and the regulations apply must, for each financial year, prepare a statement about the steps a business has taken to ensure that slavery and human trafficking is not occurring in its supply chain or its organisation. If an organisation has taken no steps, then it will need to publish a statement to that effect. 'Supply chain' has its everyday meaning.
 
The guidance clarifies that the requirement does not mean that an organisation must guarantee that the entire supply chain is slavery free (which would be unduly onerous on businesses). Organisations should instead be transparent about the actions they have taken to ensure that modern slavery is not occurring.
 
Note that the reporting requirement is a minimum requirement—businesses can take measures above and beyond the statutory requirements. The government encourages businesses to do more, and expects businesses to build on their reporting year-on-year and for the statements to improve and evolve over time.Businesses to whom MSA 2015, s 54 applies with a year-end of 31 March 2016 must publish a statement for their 2015–16 financial year. Businesses with a financial year-end date between 29 October 2015 and 30 March 2016 will not be required to publish a statement for that financial year of the organisation.The government recommends that businesses that produce a slavery and human trafficking statement in one financial year should continue to produce a statement in future years even if their turnover has fallen below the £36m threshold as doing so will ensure organisations can build upon earlier statements and demonstrate to the public, consumers and investors that they are being transparent, not because they are legally required to do so, but because they consider it important.

Why have these measures been introduced?

MSA 2015 is the first piece of legislation in Europe to address the issue of modern slavery, which comprises slavery, servitude, forced or compulsory labour and human trafficking (a full definition is set out in Annex A of the guidance). MSA 2015, s 54 came about as a result of lobbying by non-governmental organisations and is widely thought to be a step in the right direction to ensure that businesses and their leaders are accountable for conditions in their supply chains and organisations. The transparency in supply chains provision is 'truly ground-breaking', according to Home Secretary, Theresa May (in the foreword to Home Office's 'Modern Slavery and Supply Chains Government Response' paper), and 'recognises the important role business can play' in tackling the scourge of modern slavery.
 
The guidance explains that the new measures have been introduced to create a level playing field between large businesses who act responsibly and those who need to change their policies and practices.Ultimately, the measures have been introduced to:

  • prevent and tackle human rights abuses against, and the exploitation, of workers in their own organisations and global supply chains, and
  • encourage ethical business practices (whether implementing or improving on existing procedures)

Further, it is important for large businesses to be transparent and accountable to investors, employees, consumers and the public. Due diligence processes and reporting are essential management tools that improve risk identification and long-term social, environmental and financial performance.

To whom do the new requirements apply?

The guidance clarifies that the requirement to prepare such a statement applies to an organisation in any part of a group structure if it:

  • is a body corporate or partnership (wherever incorporated)
  • carries on a business, or part of the business, in the UK (see further 'Who will be deemed to be carrying on a business in the UK?' below)
  • supplies goods or services, and
  • has an annual turnover of at least £36m (see further 'How will turnover be calculated?', below)

The requirement applies across all industry sectors, not just retail and manufacturing, as is the case with other laws dealing with transparency in supply chains (eg, the California Transparency in Supply Chains Act 2012).

Who will be deemed to be carrying on a business in the UK?

The courts will determine whether an organisation ‘carries on a business’ in the UK taking into account the particular facts in individual cases, but the guidance (at para 3.8) anticipates that:

"Applying a common sense approach will mean that organisations that do not have a demonstrable business presence in the [UK] will not be caught by the provision. Likewise, 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."

Charitable and educational organisations

An organisation with charitable or educational objectives or an organisation with purely public functions will be caught if it engages in commercial activities and has a total turnover of £36m—irrespective of the purpose for which profits are made.

Franchises

A franchiser will be caught by the provision where its turnover is over £36m. In calculating the £36m threshold, the turnover of the franchiser only is taken into account—not the turnover of any franchisee using the franchiser's trademark and distributing goods or providing services. However, franchisers 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.
 
A franchisee will need to make a slavery and human trafficking statement if its turnover is over £36m.

Parent and subsidiary organisations

Each parent and subsidiary organisation (whether it is UK-based or not) that meets the requirements of MSA 2015, s 54 must produce a statement of the steps it has taken during the financial year to ensure slavery and human trafficking is not taking place in any part of its own business and in any of its supply chains. If a foreign subsidiary is part of the parent company’s supply chain or own business, the parent company’s statement should cover any actions taken in relation to that subsidiary to prevent modern slavery. Where a foreign parent is carrying on a business or part of a business in the UK, it will be required to produce a statement.
 
There is nothing to prevent a foreign subsidiary or parent from producing a statement, even if they are not legally obliged to do so.The government recommends that:

  • non-UK subsidiaries are covered in a parent company statement, or
  • non-UK subsidiaries should be asked (by their parent company) to produce a statement themselves (if they are not legally required to do so already),

as such conduct would represent good practice and demonstrates that the organisation is committed to preventing modern slavery. This approach is recommended in particular where the non-UK subsidiary is in a high-risk industry or location.

How will turnover be calculated?

'Turnover' means the amount derived from the provision of goods and services falling within the ordinary activities of the commercial organisation or subsidiary undertaking, after deduction of:

  • trade discounts
  • value added tax, and
  • any other taxes based on the amounts so derived

'Total turnover' is calculated as:

  • the turnover of that organisation, and
  • the turnover of any of its subsidiary undertakings (including those operating wholly outside the UK)

What are the consequences of non-compliance with the requirements?

If a business fails to comply for a particular financial year, the Secretary of State can seek an injunction through the High Court (or, in Scotland, civil proceedings or specific performance of a statutory duty under the Court of Session Act 1988, s 45), requiring that the organisation complies. The organisation will be in contempt of court if it fails to comply with the injunction and may be subject to an unlimited fine.
 
An organisation will fail to comply if it has not:

  • produced a statement, or
  • published the statement on its website (if it has one), or
  • set out the steps it has taken in the relevant financial year

In addition to legal consequences for non-compliance, businesses may face consumer backlash and reputational damage for not having taken any steps or for having taken insufficient steps. Further, investors may choose to invest with businesses with more ethical practices.

What should organisations consider when drafting slavery and human trafficking statements?

Form and style

There is no prescribed form for the statement—it is up to individual organisations to determine both the presentation and level of detail of information they provide. The information in the statement will be determined by the organisation's sector, the complexity of its structure and supply chains or the particular sectors and nations its suppliers are located in.
 
Statements should:

  • be written in simple, easy to understand language
  • be succinct, but cover all the relevant points and provide appropriate links to relevant publications, documents or policies of the organisation
  • be written in English but may also be made in other languages, relevant to the organisation’s business and supply chains
  • be true and refer to actual steps undertaken or started
  • specify actions taken on a country-by-country basis (where relevant) to help investors, consumers and the public understand the context of any actions or steps taken to minimise risks

Organisations which already have corporate social responsibility (CSR) or ethical trade activities, procedures or policies in place can build on those in relation to the requirements under MSA 2015, s 54.

Organisations may choose to link to publicly available documents or policies published on their websites to support the narrative in any modern slavery statements.

Content

MSA 2015 provides a non-exhaustive list of information that may be included. A statement may include information about:

  • the organisation's structure, business and supply chains—this could include the sectors in which the organisation operates, where it sources its goods or supplies from (including high risk countries where modern slavery is prevalent), relationships with suppliers and others (including trades unions and other bodies representing workers)
  • the organisation's policies in relation to slavery and human trafficking—this could simply be adapting and/or clarifying how existing policies and practices already help to prevent modern slavery
  • the organisation's due diligence processes in relation to slavery and human trafficking in its business and supply chains—in many businesses, due diligence in relation to modern slavery may form part of a larger framework around ethical trade, CSR and human rights
  • the parts of the organisation's business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk
  • the organisation's effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate
  • the training and capacity building about slavery and human trafficking available to the organisation's staff

Annex E of the guidance provides information on the type of activity that could be included under each of the above bullet points (and why such information would be useful).

What steps should be taken in relation to approving and publishing a statement

Approving a statement

An appropriate senior person in the organisation must approve and sign the statement to ensure senior level accountability, leadership and responsibility for modern slavery.The table below sets out who will need to approve and/or sign the statement depending on the type of organisation.
Organisation type Approved by Signed by
Body corporate, other than a limited liability partnership (LLP) Board of directors A director
LLP Members A designated member
Limited partnership (registered under the Limited Partnerships Act 1907) A general partner
Other partnership A partner

Publishing a statement

To increase transparency and accessibility, the statement should be published on an organisation’s website with a link in a prominent place on the home page (eg, clearly visible on the home page or part of a drop-down menu). The guidance recommends a link such as 'Modern Slavery Act Transparency Statement'.

If an organisation does not have a website, a copy of the statement must be provided to anyone who requests one in writing within 30 days or the receipt of the request.

If an organisation has more than one website, the statement should be placed on the most appropriate website relating to the organisation's business in the UK (or where there is more than one such website, a copy of the statement (or a link to it) should be included on each relevant website).

Organisations should publish their statements as soon as reasonably practicable after the end of the relevant financial year in which they are producing the statement, preferably within six months of their year end.

What training should be provided for employees?

Senior management should ensure everyone in the organisation is aware of the risks of modern slavery so that informed decisions are made in a timely way to manage and mitigate these risks and to monitor the implementation of relevant policies. Organisations should ensure that all employees are aware of, and understand the practical implications of, the relevant policies and procedures. This may be achieved by effective communication and training.
 
Organisations should tailor the training provided to different groups of employees, eg, the areas of focus and level of detail included in training the board of directors and training employees in different businesses throughout the supply chain are likely to be different.
 
Among other things, organisations should train employees to identify the signs of modern slavery and flag up potential issues—employees should also be informed of the Modern Slavery Helpline on 0800 0121 700 so that they may call for further information and guidance where they think they have uncovered an instance of modern slavery.

What should a business do if it has identified (or suspects) slavery or human trafficking?

The guidance specifies the actions an organisation should take if it has identified (or in some cases, suspects) an incidence of modern slavery.
 
If modern slavery is identified in the UK then such incidence should be reported to the police on 101 (or 999 if a potential victims are in immediate danger).
 
If an organisation identifies or suspects a case of modern slavery occurring abroad, then it should tailor the response to the local circumstances. The wording of the guidance suggests that different thresholds/standards apply depending on the location of the occurrence of slavery or trafficking, ie, an organisation need not report to the police a suspected incidence of slavery in the UK.If a potential victim is identified in the UK, he or she should be referred to the National Referral Mechanism to be formally identified as a victim of modern slavery and offered government-funded support. Such support is provided through a range of specialist providers across the UK.

What does this mean for corporates?

The transparency in supply chains requirements are unlikely to be overly burdensome on businesses given that many UK businesses already undertake non-financial reporting on human rights. For example, UK quoted companies are required to report (in their strategic reports) on human rights issues where necessary for an understanding of the development, performance or position of the company’s business.
 
The modern slavery statement does not amount to a guarantee that the supply chain is slavery-free—rather it provides businesses the opportunity to reflect on current practices, procedures and policies in light of modern slavery and be open and transparent with stakeholders and the public.
 
Going forward, businesses will need to know, verify and audit their supply chains more thoroughly and ensure that effective and robust policies and procedures are in place to combat and deter modern slavery. Businesses can increase the effectiveness of such policies and procedures by ensuring that adequate, tailored and relevant training is provided to employees.
 
Organisations which take no steps to prevent modern slavery in their supply chains and make statements to that effect run the risk of negative publicity, reputational damage and consumer backlash. Such indifference to human rights abuses may also put off potential and existing investors.
 

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About the author:
Jenisa is Head of Market Insights for Lexis®PSL, with responsibility for the delivery of Market Tracker, a transaction analysis product that sits within Lexis®PSL Corporate. She has over 15 years of legal publishing experience, with a focus on researching and reporting on trends and developments in the corporate and commercial legal market. Previous roles include content developer for Lexis®PSL, Legal Podcaster at Informa, and Research Editor at Practical Law Company where she specialised in reporting on cross-border corporate and commercial developments from the firm’s New York office.