15 Dec 2015

The Modern Slavery Act 2015 and Transparency in Supply Chains

Authored by: John Stamper

The Modern Slavery Act 2015 and Transparency in Supply Chains

In the modern economic order, international trade has inevitably increased the number of links in supply chains. The Modern Slavery Act 2015 is a UK statute with an international dimension. This article focuses specifically on section 54 of the Act, relating to transparency in supply chains and the potential impact on relevant businesses operating in the UAE.

Background

The requirements of section 54 of the Modern Slavery Act 2015 (“the Act”) came into force on 29 October 2015. While the Act itself is focused on a range of criminal offences and penalties in relation to human trafficking and slavery, section 54 specifically requires businesses to demonstrate steps taken to properly assess the labour/employment practices of suppliers.

Who is covered?

Section 54 (relating to “Supply Chain Transparency”) requires commercial organisations, supplying goods or services (i.e. engaged in commercial activities), with annual turnover of £36 million or more to publish an annual slavery and human trafficking statement identifying the steps they are taking to ensure that there is no “modern slavery” in any of their supply chains or their own organisation. If they have taken no steps, the statement must say so. The Act requires each organisation to publish the statement on their website and also include a link in a prominent place on the website’s homepage. It is important to note that the threshold figure above includes the turnover of any subsidiary undertakings (including those operating wholly outside the UK). It is not necessary for any minimum sum to have been generated within the UK.

“Commercial organisation” means a body corporate or partnership (wherever incorporated or formed) which carries on a business, or part of a business, in any part of the United Kingdom.

This is significant because it extends the reach of the Act to businesses which may be established outside the UK, but have operations within the UK. The turnover calculation includes those organisations that may only conduct some aspects of their business in the UK and recognises that supply chains can be extensive.

Obvious examples of relevant commercial organisations include supermarkets (which inevitably stock many items which have been sourced outside the UK) and international construction companies. The most public case to date involving scrutiny of a supply chain is the class action brought under the Californian Transparency in Supply Chains Act. In the ongoing case of Sud v Costco Wholesale Corp; 15-cv-03783, US District Court, Northern District of California (San Francisco) the complaint focuses on Costco’s practice of sourcing prawns from Thailand. The plaintiff (Monica Sud) is seeking an injunction barring Costco from selling products tainted by slave labour and requiring it to disclose tainted products in its supply chain. The action also seeks an order that Costco compensates purchasers of the tainted products. The claim refers to Thailand having a reputation for using unpaid forced (unpaid) labour on its fishing boats. The UK Act also provides a right for a member of the public to present a complaint on similar grounds (see further below).

Many businesses operate on a joint venture basis in diverse regions. If they have a UK presence and meet the threshold figure above, they need to be aware of how their wider supply chain operates in order to properly produce a statement in accordance with section 54.

The Act applies to businesses in all sectors provided that they are engaged in “commercial activities”. UK construction companies operating in the UAE have a particular focus on the potential impact of the Act. This largely arises from historic concerns over labour standards within the Middle East region, but is also driven by knowledge of questionable “at source” recruitment practices in the workers’ home countries. For example, many workers may have paid a substantial sum of money to agencies in their home country simply to be able to obtain work overseas. The practice of recruitment agencies charging candidates is unlawful in the UAE, but there remains inevitable difficulty in policing the activities of overseas agencies. Further difficulties arise in countries where other agencies impose a levy on workers before they are even allowed to leave the country to travel to the UAE to work.

The UAE Government’s own concerns as to the ethical treatment of expat workers coming to the country from some regions have prompted the introduction of a number of key Ministerial Resolutions which are stated to, “bring greater transparency, clarity and tighter monitoring of labour contract conditions and ensure both employer and employee enter into fully voluntary relationships”. The Resolutions, which are due to come into force in 2016 , include certain mandatory minimum standards in labour contracts and a requirement for a formal offer properly informing workers of the applicable contractual terms and conditions before they move to the UAE or move from a current UAE employer. There have been a number of reports of workers coming to the UAE to find that the actual job and/or conditions of the contract differ substantially from the job originally accepted.

What is a Supply Chain?

The UK Government guidance states that the expression “Supply Chain” must be given its ordinary everyday meaning. As such, any business engaged in the supply of goods or services falls within a supply chain, often being one of many links.

How are obligations enforced?

The Act does not impose criminal penalties for failure to ensure that there is no slavery or human trafficking in a supply chain, but the UK Government may seek an injunction to require a relevant commercial organisation to comply with its reporting requirements under section 54. The commercial imperative for ensuring compliance is best considered against the background of public scrutiny of the activities of a commercial organisation.

The UK Government’s practical guidance in respect of Transparency in Supply Chains recognises that a means to achieve this is to increase transparency by ensuring that the public, consumers, employees and investors know the steps an organisation is taking to tackle modern slavery. The requirement for businesses to publish a slavery and human trafficking statement on their website (and to include a link in a prominent place on its homepage) implicitly recognises that public perception is a potentially strong influence on lawful (and ethical) business practices. This is illustrated by the Costco case above which had an immediate negative impact on the company’s share price.

The supply chain transparency provisions of the Act only apply to commercial organisations which meet the financial threshold (in respect of annual turnover). However, the increasing public awareness of issues relating to slavery and trafficking within supply chains, makes it all the more likely that smaller businesses which are not otherwise subject to section 54 of the Act will be more conscious of the potential for “brand damage” if they do not have suitable procedures in place to properly monitor their supply chains. The Supply Chain Transparency provisions implicitly recognise that relevant businesses with reporting obligations can influence the behaviour of other links in their supply chain.

What practical steps should businesses take?

Section 54 simply relates to the publication of an annual statement regarding steps taken, but it is suggested that proper compliance with the Act requires focused due diligence. However, to ensure that the annual statement is based on credible analysis, it is submitted that a “tick-box” style audit may be insufficient. Insofar as reasonably practicable, relevant businesses will need to engage in diligent risk management conducted by objective personnel assigned to the local business unit. Staff training is also a key component of a proper framework. Difficulties will arise in relation to longer supply chains, not least in terms of verifying practices in remote locations.

Businesses operating in the UAE should review their recruitment practices and current contracts of employment to ensure compliance with the basic mandatory provisions of the Labour Law. It should also be noted that in 2016 the UAE Ministerial Resolutions referred to above will come into effect and new standard form Ministry of Labour contracts are planned to be issued. Businesses should review current limited term labour contracts to ensure compliance with the new maximum 2 year term, while also understanding the new rules to permit greater freedom for workers to change employer.

Conclusion

The potential impact of the Modern Slavery Act 2015 should not be underestimated. In view of the effect which negative publicity has on businesses which fall short of their obligations, a greater focus on compliant labour practices is essential to avoid the potential embarrassment and financial harm of a Costco type case. It is likely that businesses of varying sizes which have a strong consumer base will see the commercial imperative of demonstrating that their own Corporate Social Responsibility (“CSR”) attitudes stand up to public scrutiny.

[Originally published from The Oath]

 

[1] A full consideration of those provisions is outside the scope of this article, but will be addressed in a subsequent issue.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.