The past few years have seen rapid development in legislation targeting modern slavery and forced labor in various developed economies. This trend will only accelerate as multinationals increasingly focus on their sustainability and ESG goals. Understanding and effectively managing modern slavery risk is, therefore, of particular importance for global businesses.
Multinational companies will increasingly need to:
- understand the international conventions and commitments of a business;
- review the obligations a business imposes on its business partners;
- prepare for the burdens of compliance; and
- consider the comparative compliance cost in different countries when diversifying supply chains.
The past few years have seen rapid development in legislation targeting modern slavery and forced labor. This trend will only accelerate as multinationals increasingly focus on their sustainability and ESG goals.
The term “modern slavery” isn’t limited to human trafficking and people (adults or children) who work under restrictions to their freedom of movement or physical or debt bondage labor.
It also includes other exploitive and abusive situations, such as any work or services people are forced to do against their will under threat of punishment.
In Germany, the Supply Chain Law that requires mandatory human rights due diligence on global supply chains was passed in June 2021 and will become effective from 2023. Large companies (initially those with more than 3,000 employees but from 2024, those more than 1,000 employees) in Germany will face a fine of up to 2% of their global turnover for violation.
Similar rules have been in place in France since 2017, and the UK since 2015.
In the US, requirements for corporations to report on measures to prevent modern slavery in the supply chain have been in place for several years – for example, the California Transparency in Supply Chains Act in 2012. More recently, the Trump administration used forced labor and other human rights abuses as a reason to impose sanctions against other countries, an approach the Biden administration has continued so far.
There were similar calls in the UK and Australia earlier this year to tighten enforcement of modern slavery laws to target alleged forced labor of minorities and under-represented groups in global supply chains.
Understanding and effectively managing modern slavery risk is, therefore, of particular importance for global businesses.
United Nations Guiding Principles on Business and Human Rights (UNGP)
The 2011 adoption of the UNGP was a key development in the movement to use corporations to enforce human rights. Under the UNGP, it’s not enough for companies to provide enhanced wages and working conditions for their own workers.
Today, in addition to their own workforces, multinationals must consider the impact of their operations on all related businesses (the supply chain, broadly defined) and the impact on the communities where they operate.
Developments in the UK and Europe
Section 54 of the UK Modern Slavery Act 2015 requires companies with a turnover of more than GBP36 million to prepare an annual statement with the steps they have taken to address modern slavery and human trafficking in their supply chains and in any part of their own business.
On 22 September 2020, the UK government proposed new measures to strengthen those transparency provisions in its response to the transparency in supply chains consultation. These measures include extending the application of section 54 to public bodies with annual budgets over GBP36 million and mandating topics that modern slavery statements must cover. But the proposals have not yet been implemented.
The European Parliament has sent a proposal to the Commission regarding a new Directive on Corporate Due Diligence and Corporate Accountability, which is expected to set out a draft law later this year. This Directive would aim to create a level playing field where supply chain due diligence requirements will apply to both EU entities and non-EU entities operating in the EU.
The Directive would also call for complementary measures, such as the prohibition of the importation of products related to forced labor or child labor.
Developments in Australia
In January 2019, the Commonwealth Modern Slavery Act 2018 came into force. Under the Act, an Australian entity, or a foreign entity carrying on business in Australia, with a consolidated annual revenue of at least AUD100 million must submit an annual modern slavery statement with the Department of Home Affairs.
This statement must be filed within six months after the end of the entity’s relevant reporting period.
Unlike the current requirements of the UK Act, the Australian Act sets out key criteria that must be reported on in each annual statement, including the risks of modern slavery practices in the entity’s supply chains, and actions taken to assess and address those risks.
The Act is considered the gold standard of modern slavery legislation, and most of the changes proposed by the UK government follow its approach – for example, establishing mandatory reporting criteria.
In 2018, the New South Wales state government passed its own modern slavery legislation, the Modern Slavery Act 2018, though there’s no date set for when it will come into force.
It will require commercial organizations with employees in NSW and a consolidated revenue of at least AUD50 million to prepare an annual statement similar to that required by the Commonwealth Modern Slavery Act.
At the time of writing, we understand that, the NSW government intends to amend its Act in line with certain recommendations made to it by a parliamentary committee, and to lobby the federal government to reduce the reporting threshold under the Commonwealth Modern Slavery Act to AUD50 million.
Tasmania has also started the process of introducing its own modern slavery laws. In April 2020, the Supply Chain (Modern Slavery) Bill 2020 was tabled in Tasmania’s lower house, though it has not progressed further. The bill is similar in operation to the NSW Act, but has an even lower revenue threshold of AUD30 million.
Developments in the US
For US companies, the concept of corporate social responsibility, rather than statutory law, is the primary vehicle for extending human rights obligations throughout supply chains and communities.
However, in the last few years, the US has also been active in using sanctions against forced labor and other human rights abuses by foreign companies and governments. This includes invoking the Global Magnitsky Human Rights Accountability Act to impose sanctions on foreign companies and governments, including police bureaus and political persons, and other specific legislation targeting such alleged human rights abuses.
Sanctions are a political problem and usually have a political solution, but the overall development of supply chain legislation in various major developed economies above may compel businesses with global footprint and supply chains, especially in developing or emerging economies to take more far-reaching action.
What this means for multinationals
As politics in the above countries increasingly focus on human rights issues, pressure rises on corporates to increase their human rights diligence. Human rights activism led by some private actors, NGOs, unions, and competitors continues to shape the political landscape.
The reputational problems of noncompliance with UNGP commitments and the compliance costs of doing business in particularly troubled geographic locations may make investment less attractive. Businesses are increasingly looking to diversify their supply chains, but should keep in mind similar issues that may exist in other parts of the world.
Multinationals can be criticized throughout the world for failing to use their power and resources to address human rights violations, or simply for continuing to do related business.
Guidance for multinationals
Four general principles may help multinationals deal with the growing number of human rights obligations:
- Understand the international conventions and commitments of a business.
These commitments usually are found online in various company policies. Most often, the commitments are stated in a summary reference to external documents, which also must be understood.
- Review the obligations a business imposes on its business partners.
These may reach further than one might assume due to recent developments. The UNGP reaches far into any supply chain, meaning each business must have some responsibility for those other businesses it does business with, and not merely its own operations. Also, it’s no longer is safe to assume that broad statements merely are agreed objectives. Today, statements of principle must be followed with concrete action.
- Be prepared for the burdens of compliance.
Under the UNGP and various conventions, businesses have extensive obligations to conduct wide-ranging investigations to identify even “potential” human rights violations, investigations that may require business partners to provide unprecedented access and transparency. When found, such matters must be remediated. And a grievance mechanism must exist through which third parties can file complaints. These burdens are significant and can affect the profitability of many unsuspecting enterprises.
- Consider the comparative compliance cost in different countries when diversifying supply chains.
There may be increasing headwinds and risks with supply chains in particularly countries or geographic locations, but other costs and compliance issues may be involved when setting up and diversifying into other countries.