The Modern Slavery Act 2015 introduces new transparency requirements for certain commercial organisations which will need careful preparation and PR handling. These are likely to come into force from October 2015.
Section 54 of the Act requires large businesses to state each year the action they have taken to ensure their organisation and supply chains are free from slavery and human trafficking, effectively introducing a new transparency requirement. Certain duties are likely to be passed on to smaller businesses in the supply chain. Some transitional provisions will be put in place for businesses that have their end of financial year close to the commencement date. For some businesses, compliance with the new provisions may be onerous; those affected by the Act should begin preparing the necessary policies and procedures as early as possible. Worst case scenario, a failure to comply may lead to the Secretary of State bringing civil proceedings for an injunction against the business to enforce compliance. There are of course potential adverse publicity issues whether or not an organisation complies.
Who will be subject to the transparency duty?
The duty will extend to “large” businesses that supply goods or services and operate as bodies corporate (wherever incorporated) or partnerships (wherever formed), provided that their business or part of their business is conducted in the UK.
The application of the transparency requirement will be determined by reference to a business’ annual turnover. The threshold is to be specified in a statutory instrument, and is expected to be at the level of £36 million per year, which is in line with the definition of a large company in the Companies Act 2006. It is not clear whether the turnover figure will relate to the UK based part of the business only, or take into account the global turnover. The Government’s response to the consultation (29 July 2015) seems to suggest that the qualifying turnover will be the total global turnover of the entire group, even if a small part of the business is based in the UK.
The transparency requirement is therefore likely to have a significant extra territorial effect by capturing businesses registered or formed overseas running some of their operations in the UK and by including any overseas parts of the business for the purposes of the turnover threshold. For such businesses that do not already have appropriate safeguards and policies in place, the initial stages of preparing for compliance with the new duty may involve considerable time and expense.
Smaller businesses that are or wish to become part of the supply chain of large companies will also find themselves indirectly caught by the new transparency requirement.
The content of the statement
A UK entity that is caught by the transparency requirement will need to publish a statement of the steps it has taken during the financial year to ensure that slavery and human trafficking is not taking place in its business and its supply chains; alternatively, that it has taken no such steps. The information that may be provided includes as the organisation’s structure and supply chains, the existence of any relevant policies, the existence of any due diligence processes in its business and in relation to its supply chains, any weak areas in the business and its supply chains exposed to the risk of slavery and human trafficking, internal training available and the relevant safeguards and key performance indicators in place.
A guidance document which is due to be published by the Government will provide more detailed information about the suggested content of a transparency statement under the Act.
Complying with the requirement
The annual statement must be approved by the board of directors and signed by a director in case of companies, and approved by the members and signed by a designated member in case of limited liability partnerships (LLPs). For other types of partnerships, the statement must be signed by a partner.
If the business has a website, the statement must be published on that website, with a link to the statement in a prominent place on the homepage. Businesses that do not have a website will be required to provide copies of the statements upon request.
It is estimated that over 12,000 companies with a turnover of over £36 million will be directly affected by the duty to produce and publish annual statements under the Act, mostly within the manufacturing and retail industries. However, the impact of this duty will be much more far reaching. Smaller businesses that are or wish to become part of the supply chain of large companies will be indirectly affected by the transparency requirement. To ensure their own compliance, large companies will need to require their suppliers to have appropriate measures in place to enable monitoring, identifying and addressing any issues relating to modern slavery and human trafficking. This will be achieved by supplier due diligence checks, purchasing policies and additional contractual undertakings, as well as similar obligations being introduced into any sub-contracting arrangements.
The transparency requirement will create additional reputational concerns for large businesses, subjecting them to more detailed public scrutiny. This may be where the real risk of non-compliance lies, through pressure from shareholders, the media or pressure-groups, rather than enforcement action by the Secretary of State. However, similar pressures will be put on smaller businesses, who are likely to be pushed to achieve similar standards of compliance to remain competitive and become attractive to investors.
While some companies may already report on human rights and slavery issues as part of their corporate responsibility reporting or under the Companies Act 2006 additional reporting requirements for listed companies, it would be prudent for large companies and smaller businesses that may be indirectly caught by the effects of the new transparency requirement to start taking steps towards compliance. Although the Act does not impose any positive requirements on businesses to address issues involving modern slavery and human trafficking, the requirement to produce an annual statement is designed to indirectly achieve this effect. It is of course possible to publish a statement to the effect that no steps have been taken during the financial year to ensure slavery and human trafficking is not taking place in the business or its supply chain, but this is unlikely to be received well by customers and business partners. Businesses that may be directly or indirectly caught by the effects of the transparency requirement may wish to consider:
- developing or updating policies dealing with slavery and trafficking, including dealing with third parties such as agents and suppliers;
- making available appropriate training for staff;
- investigating and identifying potential risk areas within the business and its supply chains and devising strategies to minimise those risks;
- incorporating appropriate requirements in procurement policies, suppliers codes of conduct, contracts with suppliers;
- developing key performance indicators to show the effectiveness of activities described in the statement and the progress made since the last financial year.
The Government will in due course publish guidance to help businesses to prepare the required statements. However, considering the reputational risks involved, it would be prudent for businesses who may be caught by these provisions (directly or indirectly) to start looking at updating their systems and practices as soon as possible.
If your business may be affected by the Modern Slavery Act 2015, and you would like to discuss the issues raised in this article further, please contact Melanie Carter.
Posted on 19/08/2015 in Legal UpdatesBack to Knowledge