The new disclosure obligation regarding modern slavery: leveraging market forces to foster a race to the top?

The Modern Slavery Act 2015, requires, amongst other things, businesses with a minimum turnover of £36 million to disclose all steps taken (if any) during the preceding financial year to ensure that slavery and human trafficking are not taking place in their supply chains and business. This is the latest in a line of both international and national reporting obligations (such as the California Transparency in Supply Chains Act of 2010 or the US Securities and Exchange Commission’s Conflict Minerals Rules) aiming at increasing transparency in supply chains and boosting corporate social responsibility. Businesses with a financial year starting today (1 April 2016) will be the first ones to be required to publish such a statement – what can they expect?

Who is affected?

Broadly, the new disclosure obligation in section 54 of the Modern Slavery Act 2015 (the “Act“) will affect any commercial organisation (whether a corporation or a partnership) undertaking the supply of goods or services in any part of the UK pursuant to its business (which includes a trade or profession), or part thereof, which has a worldwide turnover of £36m or more (including its subsidiaries but not franchisees) irrespective of whether its purpose is commercial or charitable. It should be noted that the turnover threshold is prescribed by the Secretary of State through regulation and we can, therefore, expect to see this figure revised in the future. It should also be noted that the test’s application is extra-territorial (as it is not solely limited to organisations incorporated in the UK) and, accordingly, foreign entities conducting business in the UK will need to consider carefully whether they are subject to this disclosure requirement. Helpfully, the guidance issued pursuant to the Act (Transparency in Supply Chains etc: A Practical Guide, published 29 October 2015) (the “Guidance“) clarifies that having a UK subsidiary will not in itself mean that the parent is subject to the reporting obligation. However, in the absence of a judicial determination as to the circumstances in which a non-UK based business is to be regarded as carrying on a business or part of a business “in any part of the UK”, considerable uncertainty will remain despite the government’s hope that this question will be answered by “applying a common sense approach” (the stated effect of which would be that organisations that do not have a “demonstrable business presence in the UK” will not be covered) (see Guidance paras 3.7 and 3.8).

What is required?

Organisations meeting the test outlined above must produce a statement setting out the steps taken during the previous financial year to ensure that no human trafficking or slavery is taking place in any part of their business and their supply chains or, alternatively, must produce a statement that the organisation has taken no such steps. This statement is to be published on the organisation’s website (if one exists, otherwise a written copy must be provided upon request) and a link to this must be included in a prominent place on its homepage. There is no prescribed form for the statement, although the Act does include a non-exhaustive list of areas that may be covered such as organisational structure, policies, due diligence undertaken etc. The Guidance suggests that the statement be written in plain English and that it specify actions by specific country to help readers understand the context of any actions or steps taken to minimise risks.

Prior to publication, the statement of a corporation must be approved by its board of directors and signed by a director or equivalent person (other requirements apply for partnerships).

The stated rationale for board level approval is to ensure “senior level accountability, leadership and responsibility for modern slavery and [to give] it the serious attention it deserves” (Guidance para 7.1). It is possible that, as result of this requirement, directors will be more likely to take into account the issue of modern slavery when making decisions and considering their duties under section 171 of the Companies Act 2006 (ie. to promote the success of the company for the benefit of its members as a whole having regard to, amongst others, the likely consequences of any decision in the long term and its impact on various stakeholders).

Why was this requirement introduced?

The stated aim of this disclosure requirement is to “increase competition to drive up standards” (per Home Secretary, Rt Hon Theresa May MP). This flexible approach reflects an interesting combination of soft law (flexible and open to innovation – potentially shaped by stakeholder pressure) and hard law (an enforceable obligation to report on this topic). This balancing act is not dissimilar to the UK’s “comply or explain” regime for corporate governance, albeit that it goes one step further by not referring to compliance with any particular framework or preventative scheme.

The flexibility provided by this non-prescriptive disclosure obligation is to be welcomed as the complexity of disclosure is likely to vary considerably depending on the industry and type of business affected (ranging from fully integrated to heavily reliant on outsourcing or third party suppliers).

When must the statement be published?

The Act does not prescribe a timeframe within which the statement must be published. The Guidance does, however, state that the statement should be issued as soon as reasonably practicable after the end of the relevant financial year. The Guidance further encourages organisations to report within six months of the financial year end and to consider publishing the statement at the same time as their annual accounts.

Although the Act commenced on 29 October 2015, transitional provisions were put in place exempting companies with a financial year end date between 29 October 2015 and 30 March 2016 from publishing a statement regarding the preceding financial year. Accordingly, businesses with a financial year ending 31 March 2016 are the first ones to be required to publish such a statement for the period 1 April 2015 to 31 March 2016.

What are the consequences of non-compliance?

The duty imposed by the Act is enforceable by the Secretary of State seeking an injunction for compliance in the High Court. In additional to reputational damage, non-compliance with such an injunction would entail contempt of court and potentially a fine.

A recent survey (by the Core Coalition and the Business & Human Rights Resource Centre) of the statements published to date has found many statements to be either in violation of section 54 (for eg. the requirement for a prominent link on the homepage or for the statement to be signed by a director) or to be straying substantially from the Guidance. It will be interesting to watch whether these issues are only teething problems and whether best practice will start propagating once more businesses publish their statements.

For more information:

Section 54 of the Modern Slavery Act 2015 on legislation.gov.uk

Full text of the official guidance “Transparency in Supply Chains etc: A Practical Guide