Accountancy and modern slavery – is the industry doing enough?

Published 22 July 2022

The Modern Slavery Act 2015 (the “Act”) has long been criticised for not doing enough to ensure corporates take real steps to mitigate the risk of modern slavery taking place in their business or supply chains.  As it stands, there is little real sanction for failing to comply with the requirement to publish a Modern Slavery Statement (except, of course, the reputational risk).

We think the current widely prevalent “tick box” approach to publishing the statement needs to change to ensure firms are properly managing modern slavery risks.

The Modern Slavery Act 2015

The current Act requires that businesses in the UK that have an annual global turnover of £36 million or more, must, every financial year, prepare a statement outlining the steps an organisation has taken to ensure that slavery and human trafficking is not taking place in any of its supply chains and parts of its own business (“Modern Slavery Statement”).  Alternatively a statement that the organisation has taken no such steps. 

At the moment statements are encouraged (but not mandated) to include information on:

• The organisation’s structure, business and supply chains;
• Policies and due diligence processes in relation to slavery and human trafficking;
• 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;
• Performance indicators to measure the effectiveness of ensuring slavery and human trafficking is not taking place in the business or supply chain; and
• Staff training.

The Secretary of State can enforce the duty by bringing civil proceedings for an injunction, but in reality many companies failing to meet the requirements of the Act face few real consequences.  A report by the FRC in April this year (available here) found one in 10 companies of the 100 listed companies sampled did not provide a Modern Slavery Statement, and most of the statements that were published were fragmented, lacked focus and often included boilerplate wording.  The FRC reported that many companies appeared not to view human rights issues in their workforce and supply chains as a principal source of risk for their business, indicating that modern slavery considerations are still not a mainstream concern for many boardrooms.

Why this needs to change

1. The new Modern Slavery Bill – A new Modern Slavery Bill was announced in the Queen’s Speech on 10 May 2022. The new bill is yet to be published, but the purpose, according to the Queen’s Speech, is to “strengthen the protection and support for victims of human trafficking and modern slavery and increase the accountability of companies and other organisations to drive out modern slavery from their supply chains”.  

In September 2020 the government announced that it would make the inclusion of the points listed above mandatory, introduce civil penalties for those that did not comply, as well as make publication on the government-run registry compulsory.     

Globally we have seen some legislators take significant steps in recent years to introduce responsibilities on companies to prevent harm arising from their operations; this is part of a broader trend of formal legal obligations beginning to align with voluntary business human rights standards, in particular the UN Guiding Principles on Business and Human Rights.  

France has introduced the French Corporate Duty of Vigilance Law (adopted in 2017), and from 1 January 2023 the Supply Chain and Due Diligence Act will come into force in Germany.  Both require companies to take steps to identify and prevent risk of human rights abuses and environmental damage from their business activities and supply chains.  In February this year, the EU Commission published a proposal for a directive on corporate sustainability due diligence which will introduce a duty on companies (and a related duty on directors) to identify, bring to an end, prevent, mitigate and account for negative human rights and environmental impacts in a company’s own operations, their subsidiaries and their value chains, imposing a civil liability where there are failures to comply.  The new directive extends to non-EU companies that meet certain EU turnover thresholds, so firms are well advised to ensure they know whether or not they will fall under the scope of the new directive.

2. Parent company liability – While the UK lags behind many European countries with respect to legislative due diligence obligations, two recent cases indicate that the courts are becoming increasingly inclined to impose a common law duty on companies for acts of their subsidiaries, a principle which some see as being likely to extend to supply chains.

The first is Vedanta Resources PLC and another v Lungowe and others [2019] UKC 20 where the Supreme Court signalled that the English Courts could assume jurisdiction over claims of human rights abuse or environmental damage by an overseas subsidiary where there are concerns that claimants may not obtain justice in a foreign court and the corporate structure suggests the UK-headquartered parent managed or supervised the activities of its subsidiary (i.e. a duty of care exists between the parent company and third parties affected by the operations of its subsidiaries).  

The second is Okpabi and others v Royal Dutch Shell Plc and another [2021] UKSC 3,  where Nigerian residents argued that Royal Dutch Shell (the parent company) owed them a duty of care and breached that duty by failing to prevent or remedy pollution damage caused to local communities by its subsidiary.  It held that it was at least arguable that the parent company owed a duty of care to the claimants.  The judgment provides some guidance on this point, including that formal control by the parent was not necessarily the determining factor, and any entity that is involved in the management of a subsidiary risks being held responsible for damage flowing from those activities. 

While the focus of the application was different, in early July in Município de Mariana v BHP Group (UK) Ltd [2022] EWCA Civ 951 the court allowed an appeal by over 200,000 Brazilian claimants against the Anglo-Australian mining company BHP, the ultimate beneficial owner of BHP Billiton Brazil LTDA, relating to its role in the Fundão dam which collapsed in November 2015, causing loss to life, personal injury and huge damage to property and the environment.  Further detail is provide in our article available here. 

While cases are highly fact sensitive, companies which operate in high-risk countries where abuse is prevalent should review their group-wide approach to risk management and governance of subsidiaries and affiliates. Ignorance will not assist those at the top of the corporate chain.

3. Anti-money laundering obligations – Proceeds generated by modern slavery or human trafficking will be classified as criminal property. Under the Proceeds of Crime Act 2002 (“POCA”) any firm found to be advertently or inadvertently concealing, arranging or processing the proceeds of modern slavery will therefore be liable and could be prosecuted for money laundering offences.  Where FCA regulated companies have inadequate systems and controls to detect and disrupt modern slavery, senior managers can also be held directly to account by the FCA under the Senior Managers & Certification Regime (SM&CR).  While accountancy firms do not offer banking services where the AML risk from modern slavery is at its highest, it is worth firms bearing in mind the related AML risks and considering aligning modern slavery with AML policies and procedures, as recommended by the UK’s Anti-Slavery Commissioner’s report (see below).

Conclusion

The risk of modern slavery will depend on the nature of a company’s business operations and supply chain.  However, the above demonstrates the importance for all companies, including accountancy firms, to manage modern slavery risk throughout their business, including within their subsidiaries and supply chains. Auditors and accounting firms take note.

A joint report by the UK’s Anti-Slavery Commissioner and others (available here) found that in the financial services sector there was, amongst other things, insufficient procedures in place to monitor modern slavery and human trafficking, and modern slavery and human trafficking was not considered adequately in business decision making.  It found that producing a Modern Slavery Statement was in many cases a tick box exercise prepared by one part of the organisation with little or no reference to the wider business activities

It goes without saying that there are some great initiatives in the accountancy industry, and many firms have detailed Modern Slavery Statements and procedures, going above and beyond the current requirements of the Act.  However, with tighter regulation in the pipeline and parties increasingly looking to hold parent companies responsible for damage caused by actions elsewhere in their group or in their supply chain, policies and procedures on modern slavery should be kept under close review and integrated into everyday business practices.