Transparency in supply chains

January 2016 | PROFESSIONAL INSIGHT | RISK MANAGEMENT

Financier Worldwide Magazine

The UK’s transparency in supply chains provisions came into force on 29 October 2015. Will the provisions become the international gold standard?

The objective of the Modern Slavery Act 2015 is to prevent modern slavery entering the supply chain, as well as preventing more people becoming victims. The stated aim of the UK government is to “require businesses to be transparent about what they are doing and... increase competition to drive up standards”.

The provisions seek to create a level playing field between those who are caught by the requirements who already act responsibly and those who need to change policies to ensure they do so. The hope is that businesses will go beyond their legal duty and do more to tackle modern slavery in their supply chains because it is the right thing to do. The underlying message is that businesses that fail to comply with the provisions risk damage to their reputation and their brand and suggest that consumers, investors and NGOs apply pressure where they perceive that organisations haven’t done enough to comply.

What does it mean for UK businesses?

The UK Modern Slavery Act 2015 introduces a new area of compliance for commercial organisations. Under Section 54 of the Act, organisations with a business or part of a business in the UK, supplying goods or services, with a turnover of £36m or above, must publish an annual statement setting out what they are doing to ensure that there is no modern slavery in any of their supply chains or their own organisation.

The turnover calculation includes those organisations that are only carrying out part of their business in the UK, as well as including the turnover of foreign subsidiaries, so supply chains can be complex. It is not necessary for all £36m to be generated within the UK.

The legislation global gold standard?

In January 2012, California’s Transparency in Supply Chains Act came into force. The Californian legislation is aimed at retailers and manufacturers with a worldwide turnover of $100m or more which have their headquarters in California or which carry out business in the state. If caught, a company is required to make a statement on its website stating the steps it is taking to ensure its supply chain is free of slavery and human trafficking.

The UK has followed California’s lead by implementing the Modern Slavery Act. The UK Act, however, goes further because it is not limited to retail and manufacturers, but includes all organisations that do business in the UK.

Since its implementation in January 2012, the Californian legislation has continued to evolve; indeed, consumers have taken note of the Californian legislation. In what is believed to be the first case of its kind filed in California, Costco Wholesale Corp is being sued over allegations that Costco knowingly sold prawns from a supplier using slave labour. The complaint of the class action is that Costco bought prawns from Thailand which is reputed to be notorious for using unpaid, forced labour on its fishing boats. The prawns were then sold to Californian consumers at a profit. The remedy sought is an injunction preventing Costco from selling products which have come to market via slave labour, as well as requiring Costco to disclose which products in its supply chain have been contaminated by slave labour.

Remedies

The remedies available under the Californian legislation are similar to those in the UK Act, i.e., an injunction rather than a criminal penalty, but the pressure and consequential damage to brand is the same.

Class action

Despite only civil remedies being available, the Costco case is proceeding by way of a class action. Class actions are becoming increasingly widespread in the UK. Earlier this year, Schedule 8 of the Consumer Rights Act 2015, entitled ‘Private Actions in Competition Law’, introduced the ability of bringing collective (or class) actions in the UK. This is the first time class actions have been permitted in the UK.

Class actions could be a sign of things to come for modern slavery. If class actions under the Californian legislation become the usual way to proceed, it may be that the UK government follows suit and amends the Modern Slavery Act to allow collective actions for supply chain injunctions in this jurisdiction. In the US, class actions of consumers against companies are notorious for attracting media attention. The resulting damage to brands is unquantifiable.

Share price drop

Part of the reason for the enactment of the supply provisions of the Modern Slavery Act in the UK is to increase corporate transparency for consumers and investors alike. When the Costco case was filed in California, it was reported that the Costco share price fell by 0.3 percent after falling 1.4 percent on the Nasdaq. Those who fall foul of the UK Modern Slavery Act should beware; a similar fate could await you if you fail to comply with the provisions.

What next?

It is likely that the UK Modern Slavery Act will develop in the same way, with resulting class actions and stock market interest.

Most organisations caught by the Modern Slavery Act will have supply chains which reach across multiple jurisdictions. Suppliers across the world will be impacted as they will be subject to policies and audit requirements put in place by organisations required to comply with the UK Modern Slavery Act as they set out the steps they have taken to ensure their supply chains are slavery free. Failure to raise standards after attempts to collaborate to improve conditions could mean that supply contracts are terminated.

In the same way that other jurisdictions developed bribery legislation after the UK, the same may happen regarding modern slavery. This is especially true in Europe where a new Non-Financial Reporting Directive, which will require public interest entities to report on human rights issues (including modern slavery), will be enacted from January 2017.

The Non-Financial Reporting Directive will affect public interest entities (PIEs) with an average of 500 employees over each individual financial year. PIE’s include companies trading on a regulated market, plus credit institutions and insurance companies, as well as any company designated as a PIE by a member state (at the time of writing, the UK has not designated any PIEs).

PIEs will be required to report “to the extent necessary for an understanding of the undertaking’s development, performance, position and impact of activity” a statement relating to the following as a minimum: (i) business model; (ii) environmental; (iii) social and employee matters (including health and safety); (iv) respect for human rights; and (v) anti-corruption and bribery matters to include due diligence processes implemented.

The statement to be made by PIEs will go further than the modern slavery and human trafficking statement. Its expected effect will be to introduce the need for human rights policies in organisations. They will require principal risks of impacts to be reported, including where relevant to its business relationships.

Whilst a joint statement may be possible, it is envisaged that most companies will opt for two separate statements.

In conclusion, the UK Modern Slavery Act has gone further than any other legislation in the world. Businesses must assess whether the Act applies to them and if so, put together a strategy and implement it.

Ron Reid is a partner and Jocelyn Kirkwood is a professional support lawyer at Shoosmiths. Mr Reid can be contacted on +44 (0)370 086 8471 or by email: ron.reid@shoosmiths.co.uk. Ms Kirkwood can be contacted on +44 (0)370 086 8347 or by email: jocelyn.kirkwood@shoosmiths.co.uk.

Ron Reid and Jocelyn Kirkwood

Shoosmiths