ESG: Modern slavery bill proposes new offences and heavy penalties

When the Modern Slavery Act (MSA 2015) was introduced in 2015 it was world leading. However, since then a number of states including Australia, Canada, France, Germany, Italy and the Netherlands, as well as the EU, have introduced (or, in the case of the EU, proposed) similar and in some cases more demanding requirements. We explored some of these legislative pushes towards mandatory human rights and environmental due diligence requirements here. By comparison and with the growing focus on ESG and corporate supply chain transparency, the MSA 2015 has since been much criticised for its lack of teeth.

Fast-forward five years to September 2020, when following a year-long consultation, the UK Government committed to bringing forward legislation designed to improve the quality of modern slavery reporting. This was to be an “ambitious package” of “powerful new measures to strengthen and future-proof the Modern Slavery Act’s transparency legislation” and to “ensure that large businesses and public bodies tackle modern slavery risks in supply chains.” We commented previously on the Government’s plans for reform. Until recently, progress on this package has been relatively slow due to a lack of Parliamentary time. However, a private members bill has recently been introduced that would radically increase enforcement risk for companies in this area and may kick start further developments.

The Modern Slavery (Amendments) Bill

The Modern Slavery (Amendments) Bill (the Bill) was introduced before the House of Lords on 15 June 2021. It is a private members bill, and so is unlikely to be enacted unless picked up by the Government, but if it is enacted as drafted, or - perhaps more likely - influences the ultimate Government position in this area, its impact will be very significant.

Penalties and offences

Currently, section 54 of the MSA 2015 requires large businesses to produce a statement each year setting out the steps they have taken to ensure that their business and supply chains are slavery free, or a statement that they have taken no steps to do this. However, the penalty for failure to do so is limited to the Secretary of State being empowered to bring proceedings for specific performance. There are no monetary penalties for non-compliance. As such, due diligence around these statements has a relatively more limited ability to drive expensive changes in corporate governance. Their effect is outweighed by the growing reputational impact of supply chain failure - as vividly illustrated by the allegations faced by the fashion retailer Boohoo last year - and perhaps the growing threat of human rights and other ESG-related litigation on the basis of corporate liability for the actions of subsidiaries and other third parties.

By contrast, the Bill would make it a criminal offence for a person responsible for a modern slavery statement, which would include all Directors, to knowingly or recklessly supply a false or materially incomplete statement. The penalty would be up to two years imprisonment for individuals and a fine amounting to 4% of annual global turnover, capped at £20m, for the company. The only defence would be that a person was not guilty if they took all reasonable steps to ensure that the statement was corrected, and informed the Independent Anti-slavery Commissioner (the Commissioner) as soon as practicable after becoming aware that it contained information that was false or materially incomplete.

The Bill also proposes to give the Commissioner the power to issue formal warnings to commercial organisations who fail to meet the requirements of the MSA 2015. Having been issued such a warning, an organisation would commit an offence if it continued to source from suppliers or sub-suppliers that failed to demonstrate minimum standards of transparency (see Disclosure below).

It is no exaggeration to say that if this Bill became law the impact would be dramatic. In the past many companies have perceived Modern Slavery Statements to be a tick box exercise. Custodial sentences and GDPR level fines would rapidly change that approach.

Disclosure

The Bill also proposes minimum standards of disclosure, including requirements to publish and verify information about the country of origin of inputs in the supply chain; to arrange for credible external inspections and external audits; and to report the use of employment agents acting on behalf of an overseas government.

What will happen next?

In the context of very limited Parliamentary time as a result of the ongoing Covid crisis, it is relatively unlikely that the Bill will progress to become law. However, it is suggestive of where the debate is heading.

The UK was a world leader in the development of transparency around human rights failings in supply chains: the MSA 2015 made the UK the first country in the world to require large businesses to report on how they work to prevent and address risks of modern slavery in their operations and supply chains. The Government wants to reclaim that world leading position. As part of that pursuit, last year it published the world’s first Government Modern Slavery Statement, setting out the steps taken to eradicate modern slavery from its own supply chains.

Accordingly, and in conjunction with the Bill, the legislative developments in mandatory human rights and environmental due diligence requirements across the world and the continuing focus on corporate accountability for ESG issues, it would be very surprising if modern slavery reform did not, in the medium term, take place in the UK. Any reform is very likely to bring with it much more onerous disclosure obligations and increasingly stiff penalties for non-compliance – even if these did not stretch to the financial levels and criminal culpability envisaged in the Bill. Notably the UK Government’s response to last year’s consultation accepted most of its recommendations and committed to making a number of specific key changes. These included matters that have been taken up in the Bill, including enhancing the scope and utility of modern slavery statements by mandating the specific reporting topics they must cover and introducing financial penalties for organisations that fail to meet their obligations.

What should companies do?

Companies need to ensure they are compliant with the existing provisions of the MSA 2015. We’ve published some guidance here. However, legal teams and corporate governance professionals should also be aware of the growing risk of scrutiny (by regulators, shareholders, consumers, employees and other stakeholders) as to conditions in corporate supply chains and take steps to ensure they comply with the increasingly onerous due diligence and disclosure obligations in jurisdictions relevant to them, which – in the medium term – are likely to include the UK.

Mitigating ESG risks is a rapidly changing and significant new focus for corporate governance. See our Microsite for further details.