UK Modern Slavery Act: The Future of Transparency in Supply Chains

When the UK Modern Slavery Act 2015 (Act) came into force, it was considered a landmark legal development globally. The UK was one of the first jurisdictions to introduce a legal requirement concerning transparency in supply chains and the hope was that it would be a call to action for UK businesses to identify and eradicate modern slavery and fraud.

However, in the almost a decade that has passed since its introduction, the Act has arguably had less impact than hoped, and the trend in other jurisdictions has been to expand and enhance similar requirements. This has led to calls for reform from activists and parliamentarians in the UK (see, for example, here). Most pertinently, the then-government mandated an independent review of the Act, whose findings were published in 2019 (Review). The government responded in detail. That was followed by a public consultation (Consultation) to which the government responded (Response). However, at the time, no legislative changes were made despite much support for reform.

More recently, a House of Lords committee was created in January 2024 to consider potential legislative amendments to the Act. Its work may well spur further debate on reforming the supply chain transparency regime in the Act.

In this alert, we examine the regime in the Act in the context of related international legal developments and look at the potential for its reform. With a change of government in the UK, and a growing focus on supply chain regulation globally, reforms to expand the reporting regime in the Act appear to be a real possibility in the medium term.

The Reporting Regime Under the Act

Section 54 of the Act imposes a duty on companies supplying goods or services which have a total turnover of at least £36 million (calculated on their own or including their subsidiaries) to prepare a slavery and human trafficking statement every financial year. Companies that are in-scope include any companies (wherever incorporated) which carry on a business, or part of a business, in any part of the United Kingdom.

The purpose of the statement is to provide transparency regarding the actions taken by businesses to eliminate modern slavery from their supply chains, as well as to monitor the success of those measures. The Act sets out a non-exhaustive list of discretionary areas which the statement may cover, such as the company’s slavery and human trafficking policies, the due diligence processes in relation to modern slavery in its business and supply chains and the training available to its staff.

The Act requires that the statement prepared by the company be approved by the board of directors and signed by a director. If the company has a website, the statement must be published online and a link to it must be included in a prominent place on the homepage. The section 54 duty can be enforced by the Secretary of State seeking an injunction requiring the company’s compliance. Failure to comply with an injunction issued by the court would be contempt of court and punishable by an unlimited fine.

Potential Reforms of the s. 54 Reporting Regime

The reporting regime created by section 54 of the Act has received a number of criticisms in recent years. In particular, the Review highlighted a wide variety of issues which have made the law less effective in achieving its goals of greater transparency and embedding modern slavery reporting into the UK’s business culture.

The chief criticisms of the Act concern the quality and scope of the published modern slavery statements and the ineffective enforcement of the reporting duty. The Review’s recommendations, some of which we examine below, may suggest areas of potential legislative changes to section 54 or broader reforms to supply chain reporting under the new Labour government.

Proposed Mandatory Reporting

The Review recommended that the discretionary areas of reporting included in section 54 should be made mandatory. The majority of respondents to the Consultation supported the introduction of mandatory areas. They considered that making the statements more consistent would enable third parties to draw more meaningful comparisons between organisations and result in clearer expectations and more peer-to-peer learning opportunities for companies. In order to secure public access to the reports, companies could also be obliged to publish their statements in a central government register. This recommendation was accepted by the then government in the Response. While the Modern Slavery Statement Registry was created in March 2021, any submissions are currently voluntary.

Reporting Across the Supply Chain

The Review also recommended that the Act should be amended to require companies to consider the entirety of their supply chains in respect of modern slavery. And, where a company has not done so, that it should be required to explain why it has not and what steps it is going to take in the future. Respondents to the Consultation were not specifically asked for their views on the scope of the reporting obligation, possibly because it arguably already captures the entirety of a company’s supply chain, but were supportive of companies having to report on all areas in some capacity.

The Response confirmed that the-then government would consider adding certain topics to the mandated areas for reporting, including possibly:

• Remediation.

• Future activity.

• Disclosure of incidents of modern slavery identified.

• Disclosure of known or associated risks, and action taken in response.

• Whistleblowing and grievance mechanisms.

• External collaboration and partnerships.

• Governance and accountability.

• Data/evidence.

Enforcement of the Reporting Duty

The Review estimated that around 40% of eligible companies were not complying with the legislation and that there had been no attempts at enforcement or investigation. In order to strengthen compliance, the Review proposed the introduction of a staged enforcement approach, with escalating steps from initial warnings to fines for non-compliant companies (calculated as a percentage of a total turnover of a business), court summons and injunctions.

The Review further highlighted the importance of individual enforcement against company officers and officials for non-compliance with the reporting duty. Companies would be required to designate a board member who would be personally accountable for producing the report. Any failure to fulfil the reporting requirements under section 54 or to take actions once modern slavery is discovered within a business or its supply chains would be considered an offence that could lead to the disqualification of a designated officer from acting as a company director in the future. Finally, the Review strongly recommended that a separate body should be created and tasked with enforcing the reporting duty instead of the Secretary of State.

The government at that time either rejected or did not take a stance regarding these proposals. However, the respondents to the Consultation nearly uniformly pointed to the need for greater enforcement of the existing requirements. Indeed, slightly later in 2021, echoing this theme, the House of Commons Business, Energy and Industrial Strategy Committee stated that the Act is “out of date, has no teeth, and we do not accept that businesses should be excused from doing basic due diligence to guarantee that their supply chains are fully transparent and free from forced labour and slavery.” We would expect any reforms the Act would be likely to “add teeth” to the reporting requirement.

The Act in Context: International Developments

Supply chain-related regulations have proliferated internationally in recent years and, in many cases, impose obligations considerably in excess of those under the Act. Examples include:

• The U.S. Uyghur Forced Labor Prevention Act 2021 (UFLPA), which, in effect, creates a requirement to engage in due diligence of supply chains in order to avoid the risk of goods being stopped at the U.S. border. See our 2024 article “Seven Myths About the US Law Banning Imports Made With Forced Labor”. The UFLPA is very different in scope and effect than the Act, but, in the UK the courts have recently pushed UK law in a similar direction to the UFLPA by holding that criminal conduct in a supply chain (such as forced labour) can attract liability for money laundering offences under the UK Proceeds of Crime Act 2002. See our 8 July 2024 client alert “Significant UK Court of Appeal Decision Confirms the Applicability of the UK’s Proceeds of Crime Legislation to Illegality in Supply Chains”.

• Integrate human rights and environmental due diligence into policies and risk management systems.

• Identify and assess actual and potential adverse impacts on human rights or the environment across global chains of activities.
• Prioritize identified actual and potential adverse impacts according to their severity and likelihood, where it is not possible to prevent, mitigate, end or minimize all adverse impacts simultaneously and to their full extent.
• Prevent or mitigate potential adverse impacts and bring to an end or minimize actual adverse impacts.
• Remediate actual adverse impacts.
• Engage with stakeholders during the due diligence process.
• Provide a notification mechanism and complaints procedure.
• Carry out periodic assessments.
• Communicate results.

• Importantly, the CS3D introduces monetary penalties with the maximum penalty being at least 5% of the infringing company’s net global turnover, with EU member states able to fix even higher penalties, and it creates avenues for civil redress. Clearly, the CS3D regime is significantly more developed and onerous than s. 54 of the Act and it has been widely recognized as a landmark moment globally in supply chain regulation. (The CS3D sits alongside the EU Corporate Sustainability Reporting Directive, which creates detailed reporting requirements for in-scope EU and non-EU companies that capture, amongst other things, human rights issues. See our 13 December 2023 client alert “Non-EU Companies Face Challenges Preparing for Europe’s Corporate Sustainability Reporting Directive”.)

• The EU Forced Labour Regulation, which, once in force, will prohibit products made using forced labour, including child labour, from being sold in, or exported from, the EU market. Like the UFLPA, whilst this regulation does not create a due diligence obligation per se, in order to be able to demonstrate compliance, companies will need to undertake due diligence.
• The Australian Modern Slavery Act 2018 (2018 Act), which creates a reporting obligation similar to the Act for in-scope companies. However, in contrast to the Act, the 2018 Act mandates the content of statements and requires that they be published through an on-line register. The 2018 Act was subject to an extensive review, which was published in 2023. That review recommended, amongst other things, that the enforcement framework around the 2018 Act be bolstered and reporting companies be required to have a due diligence system in place and to report on it. The Australian government is in the process of considering the recommendations and the Australian regime is likely to be enhanced in due course.
• Finally, the Canadian Fighting Against Forced Labour and Child Labour in Supply Chains Act (2024 Act), which came into force on 1 January 2024. The 2024 Act creates a reporting obligation similar to the Act, but the content of reports is mandated and broader, there are considerable penalties for non-compliance and a prohibition on importing goods into Canada that are mined, manufactured or produced wholly or in part by forced labour was also introduced. The 2024 Act therefore consolidates a number of different aspects of some of the laws considered above.
• As this brief survey of developments in a number of jurisdictions demonstrates, the Act’s reporting regime, and UK law more generally, is now out-of-step with many comparable jurisdictions’ treatment of supply chain transparency and due diligence.

Conclusion

The new Labour government in the UK has not yet pronounced an intention to expand the s. 54 reporting regime in the Act. However, given the legal developments in this area in other jurisdictions and the generally perceived inadequacy and ineffectiveness of the UK’s s. 54 reporting obligation, we would expect the new government to take a close look at this issue during the course of this Parliament, which likely will run until 2029. The on-going work of the House of Lords committee looking at the Act may well spur legislative changes in the medium term.

Companies will therefore need to ensure that they keep the UK on their radar as they scan the horizon for regulatory changes regarding supply chain transparency and due diligence, as well as ensuring that they are complying with all applicable regulatory requirements globally in this increasingly complex area of the law.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

Source : https://www.skadden.com/insights/publications/2024/09/uk-modern-slavery-act