Bridging the gap between human rights and business
How auditors are key to helping companies implement the UK's Modern Slavery Act 2015.
You may be forgiven for thinking that the new UK Modern Slavery Act 2015 (MSA), introduced in October 2015, is a domain solely for lawyers to advise upon. Of course legal advice is important, in particular with regard to the wording of existing and new contracts. However, for companies to fully demonstrate compliance with the MSA, a change in corporate behaviour will be required.
As an audit partner of 17 years, and having worked in the field of business and human rights for the last three years, our training and understanding of business puts us in an ideal position to bridge the gap between human rights and business. Our inquiring nature, a healthy dose of professional scepticism and our independence and integrity are the perfect competencies required to advise companies.
Following the introduction of the Bribery Act in 2010, professional firms of accountants started advising companies on the implementation of anti-bribery programmes. They have also been providing internal audit services to management as to the effectiveness of those programmes. In some countries in the EU, this assurance is even provided externally to demonstrate to companies’ stakeholders that this issue is taken seriously by the company and its board.
In the UK, the MSA was partly based on the Bribery Act, and much of the way companies have implemented the Bribery Act also applies to the MSA.
However, there is one issue, initiated in the Bribery Act, that has gone deeper in the MSA. The Bribery Act applies to all UK companies and subsidiaries whether incorporated in the UK or internationally. These companies don’t have a responsibility to take steps to ensure their suppliers are free of bribery (unless specifically involved in the provision of that product or service for the UK related company). However, under the MSA, these companies do have a responsibility to take steps to ensure slavery and human trafficking does not exist in their supply chain, no matter what the tier of the supplier or lack of contractual relationship with the UK related company.
This is the biggest complication for companies; it is asking them to take responsibility for the behaviours of companies outside of their legal control, and in particular ones with whom they may not even have a contractual relationship.
The facts about the Modern Slavery Act 2015
The Modern Slavery Act applies to all UK legally incorporated entities with total turnover of more than £36m. Where there is a UK parent of a group with overseas subsidiaries, the turnover threshold applies to the whole group. For example, a UK company that has £1m of turnover arising from UK business but has overseas subsidiaries with £35m of turnover will still need to comply.
The principal obligation for companies lies in Section 54 of the Act. This requires companies to prepare a slavery and human trafficking statement for each financial year. This is now also being referred to as the Transparency in Supply Chains Statement.
This statement must be prepared for each financial year and is either:
- a statement of the steps the organisation has taken during the financial year to ensure that slavery and human trafficking is not taking place:
- in any of its supply chains, and
- in any part of its own business; or
- a statement that the organisation has taken no such steps.
The Act suggests that this statement may include information about:
- the organisation’s structure, its business and its supply chains
- its policies in relation to slavery and human trafficking
- its due diligence processes in relation to slavery and human trafficking in its business and supply chains
- the parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk
- its effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate
- the training about slavery and human trafficking available to its staff.
The main reason that companies are trying to work out how best to comply is because this statement must be signed by a director, approved by the board and published in a ‘prominent’ place on the company’s website.
If it wasn’t for this requirement, it is unlikely that the Act would be attracting so much attention.
Although the MSA states that the duty to make this statement can be enforced by civil injunction, it would seem that the main driver for companies is that of reputational risk. The potential for adverse PR is likely to result in companies properly addressing the spirit of the law and not just the letter.
There will also be pressure from the larger UK companies who will have to be seen to be enquiring about the steps their suppliers are taking to ensure that there is no slavery or human trafficking in their business or in their supply chains. While the MSA applies to those companies meeting the turnover threshold, the reality is that companies under the threshold will need to update their policies and processes if they want to work in supply chains of companies over the threshold.
The solution is likely to require two sets of advisers: first, lawyers to advise on the wording of clauses in supplier contracts and, second, professional services firms to advise on the design, implementation and monitoring of processes within both the company and its supply chain.
To help with the latter, the government issued guidance to help companies in their implementation of the MSA. The guidance recommends the use of the United Nations Guiding Principles Reporting Framework to meet their responsibilities. This guidance was co-developed by the large professional services firm Mazars, and the core team that drafted the United Nations Guiding principles on Business and Human Rights.
For companies, the key will be to demonstrate authenticity in their statements. They shouldn’t over-claim, but they should set out the pragmatic steps they are taking, or will take, to do their best to ensure there is no slavery or human trafficking. Typical steps may include:
- the senior management team participating in a training workshop
- understanding where current and potential impacts may lie
- mapping supply chains and focusing on those high-risk areas
- designing and implementing policies and procedures
- training the workforce and suppliers
- monitoring the effectiveness of procedures.
While the MSA has good intentions for improving corporate behaviours, the lack of realistic direct sanction may prove its shortcoming. In the meantime, there is great potential for negative reputational impacts if companies are called to account by journalists and NGOs. The positives of compliance are also worth playing for: a greater understanding of behaviours within supply chains should lead to improved supply chain performance (both financially and reputationally); enhanced brand differentiation through improved ethical performance and a superior culture demonstrated by respect for the individual.
Richard Karmel – partner, Mazars LLP
About the author
Richard is responsible for Mazars’ award-winning business and human rights reporting line in the UK. Along with his team, Richard has devised an approach to help protect the reputation of organisations while ensuring they align their activities with the United Nations Guiding Principles. Currently, Richard is a key member of the project team for the Reporting and Assurance Framework Initiative which has designed a government and United Nations recommended reporting framework that is a guide for companies on what good reporting of their human rights performance looks like. The team is also in the process of designing a related Assurance Guidance to act as a guide for both internal and external assurance providers. In 2014, this Initiative was officially supported by the United Nations Working Group on Business and Human Rights. His more recent work includes advising companies on how best to address the UK’s Modern Slavery Act.
Richard qualified as a Chartered Accountant in 1992 with a large firm of accountants. Richard is seen as an expert in the field of Business and Human Rights and is regularly asked to speak publicly on the subject at universities and think tanks. In November 2015, at the United Nations Forum in Geneva, he moderated a panel with experts from business, government and standard setters.