UK: Corporate Transparency: Continuing Focus On Supply Chains

Last Updated: 18 December 2017
Article by Doug Bryden and Laura Spota

Businesses need to progress their approaches to, and governance of, human rights. In particular, organisations should track current developments relating to corporate transparency and benchmarking initiatives. For example, the UK Government's new guidance on the Modern Slavery Act 2015 ("MSA") and increased NGO surveillance of supply chain issues have moved expectations forward from last year's round of reporting.

UPDATED GOVERNMENT GUIDANCE ON MSA STATEMENTS

On 4 October 2017 the UK Government released Updated Guidance on the reporting obligation contained in section 54 of the MSA (the "Guidance").

For now, the revisions in the Guidance are demonstrative of a 'best practice' approach, encouraging companies to produce MSA statements that are more detailed, effective and practical.

A new introduction from the current Home Secretary, Amber Rudd MP, emphasises that "businesses must not be knowingly or unknowingly complicit with modern slavery... no matter how indirectly."

Key changes in the Guidance:

  • Companies that do not meet the £36m 'turnover threshold' are encouraged to voluntarily produce an MSA statement.
  • This is not only a 'best practice' point, but also useful for larger companies that are conducting diligence on their own supply chains for the purposes of their MSA statement.
  • Suggested content of an MSA statement is now prescribed more strictly.
  • Previous advice provided by the Government suggested that a company "may" include the six categories as outlined in s.54(5) of the MSA1 - the new Guidance changes this to read that they "should aim to include" these categories. References to the six categories being "not compulsory" has now been removed.
    • Additional wording has been included to place more emphasis on the MSA statement being sufficiently detailed and outlining how companies can practically evidence annual improvements and how effective their MSA compliance processes are.
  • The Guidance expands advice on how MSA statements should be approved at a board level.
  • It is considered 'best practice' for the director who signs the statement to sit on the board of the entity that approved the statement and for a date to be included on which the board approved the statement.
  • In practice, NGOs have highlighted some reluctance on behalf of company boards in approving, and directors in signing, their MSA statements - this change is intended to ensure that there is clear senior- level accountability and responsibility for modern slavery issues.
  • Organisations should ideally keep their historical statements from previous years online so that progress may be may monitored.
  • Even where turnover drops below £36 million, it is recommended that a company continue to publish an MSA statement.

NGO AND STAKEHOLDER SCRUTINY

In addition to the updated Guidance, we have also seen increased NGO oversight and benchmarking reports. The Business & Human Rights Resource Centre ("BHRRC") has put the spotlight on large UK companies with its 'First Year of FTSE 100 Reports Under The UK MSA: Towards Elimination' ("Report") and their MSA registry, which maintains a public track record of over 3,000 statements from companies in 26 sectors, headquartered in 34 countries.

The Report assesses the actions taken by the FTSE 100 companies in relation to their MSA statements and concludes that "there is a welcome cluster of leading companies taking robust action," whilst "the majority show a lacklustre response to the MSA at best."

The BHRRC places each MSA statement produced by a FTSE 100 company into 10 scoring tiers, with Marks & Spencer and SAB Miller sitting at the top and Babcock International sitting in the lowest tier. The BHRRC used six reporting areas to formulate their rankings; (i) structure, business and supply chains, (ii) policies in relation to slavery and human trafficking, (iii) due diligence process, (iv) risk assessment and management, (v) effectiveness and (vi) training. It is suggested that more than half of the companies in the FTSE 100 should be placed in the bottom four tiers of their ranking.

BHRRC's key recommendations for companies:

Ensure that boards prioritise modern slavery as part of the strategic agenda of the company. This should include implementing related policies across all relevant departments.

Collaborate with peers to investigate modern slavery risks in common supply chains and share insights "to help develop best practice".

Raise awareness among suppliers of risks and "require them to conduct due diligence in their operations and supply chains".

Pay attention to "emerging better practice of leading companies" and learn from peers' statements using the MSA registry.

Further Benchmarking:

Other related NGO benchmarking initiatives include:

  • Corporate Human Rights Benchmark: ranks 98 companies from three high-risk industries - agricultural, apparel and extractives - on how well they are performing against the UN Guiding Principles.
  • Know the Chain: evaluates how companies in the apparel and footwear, food and beverage and information and communications sectors address supply chain risks.
  • Behind the Brands: scores the world's largest food and beverage companies based on publicly available information regarding the social and environmental policies and procedures.

INCREASED ENFORCEMENT OF 'CORE' MSA OFFENCES

In addition to enhanced scrutiny of companies thanks to the new corporate transparency obligations under Section 54, the enhanced 'core' criminal offences have given rise to a number of headline prosecutions.

In 2016, 51 new prosecutions were started under the MSA, more than four times the number in the previous year. This included a landmark High Court ruling in June 2016 against livestock business DJ Houghton Catching Services in relation to its treatment of six workers trafficked from Lithuania. Whilst having already incurred compensation and legal costs estimated to be in excess of £1 million, the company now faces further claims brought by other workers. More recently, two brothers from Nottingham were sentenced to prison for six years for trafficking people from Poland to work in a Sports Direct warehouse.

Although distinct from the corporate transparency obligation under Section 54, these cases indicate a general direction of travel towards enhanced individual and corporate accountability as well as highlighting the devastating impact such issues can have on a company's reputation, its directors and company profits, not to mention the reputation of associated organisations.

PROPOSED UK LEGISLATIVE DEVELOPMENTS

After a brief Brexit-induced hiatus, the Modern Slavery (Transparency in Supply Chains) Bill 2017-19 (the "MSA Bill") has been re-introduced and is currently in its second reading in the House of Lords.

It is worth highlighting some of the key proposed changes, albeit they may be subject to some revision:

  • Public authorities to be included within the scope of reporting.
  • The six suggested categories of reporting set out in section 54(5) of the MSA to be made compulsory.
  • The Secretary of State to publish a list that is easily accessible, of all entities required to publish a MSA statement.
  • Where a company makes a MSA statement stating it has not taken steps to eradicate slavery and human trafficking from it supply chain and business (which is allowed under the MSA), it will now be required to explain its reasons.
  • Most noticeably, companies that do not produce a statement will be excluded from bidding for public sector contracts.

INTERNATIONAL DEVELOPMENTS

Recent developments outside of the UK demonstrate a similar trend towards enhanced corporate transparency.

For example, in February 2017, the French Parliament adopted a much-awaited law establishing a 'duty of vigilance' obligation for French parent and sub-contracting companies. This obligation requires companies to assess and address adverse impacts of their activities on people and the planet; judges may apply fines of up to €10 million when companies fail to publish their plans. Similar legislation is currently being considered in Switzerland.

In February 2017, the Dutch Parliament adopted the Child Labour Due Diligence Bill, which, if approved by the Senate, would require companies to identify and tackle child labour in its supply chains.

In September 2017, the United States Senate unanimously passed the Abolish Human Trafficking Act, which, if approved by the House of Representatives, would extend the provisions of existing legislation to establish 'Human Trafficking Justice Coordinators' in a bid to increase prosecutions for perpetrators of human trafficking. In addition, the Senate is also considering a bill that would introduce a wide range of measures to address human trafficking and the needs of victims, including improved education grant programs, public information and the consolidation of federal agency data reporting. This federal legislation builds upon the existing California Transparency in Supply Chains Act, which has been in place since 2010.

Plans are also currently in place in Australia to require large companies operating there to publicly detail on an annual basis what they are doing to combat modern slavery, following calls from businesses, investors and citizens to improve corporate reporting in this area.

CONCLUDING REMARKS

The MSA is still a very new piece of legislation. It forms part of an evolving area of law and policy which will continue to drive companies towards further transparency. With increased oversight from regulatory bodies, NGOs and customers, companies will need to keep abreast of the latest updates and industry standards. In light of these changes, it is important for companies to remain proactive in considering how best to improve upon their MSA statements and related practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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