Modern slavery laws and their impact on the financial services industry
Readers may be forgiven for thinking that the practice of slavery is now only of historical interest – having been largely abolished in the 19th century.
While that is true of what is called chattel slavery, the reality is that the practice never really disappeared and survives today in its modern forms of human trafficking, debt bondage, forced labour and forced marriages.
By some estimates, up to 40 million people are affected by these forms of “modern” slavery. Even in countries such as the United States, United Kingdom and Australia, up to 400,000, 136,000 and 4,000 individuals are respectively caught up in these practices.
What are the modern slavery laws?
It is estimated that, worldwide, around 16 million people are subject to modern slavery as part of global supply chains in the private economy.
Modern slavery can occur in any sector and at any point within the supply chain. At an international level, high-risk industries include agriculture, construction, electronics, mining, fashion and hospitality. In Australia, there is a high risk that Australian businesses are indirectly exposed to modern day slavery. This risk may be heightened for larger organisations with extensive, complex and/or global supply chains.
One response of Governments to the continuance of these practices has been to require large commercial organisations to publish a slavery and human trafficking statement in regard to their supply chains. Australia introduced such legislation in 2018, with the first reports to apply to the 2019-20 financial year.
Who do the laws apply to?
The legislation presently applies to entities that carry on business in Australia with a minimum annual consolidated revenue of $100 million.
Accordingly, any financial services provider carrying on business in Australia that has annual revenue of over $100 million will need to make a report.
What are the new reporting requirements?
The legislation requires that eligible businesses make annual public reports (“Modern Slavery Statements”) in their accounts to report publicly on the actions they have taken to address modern slavery risks in their operations and supply chains.
At the end of each financial year, reporting entities must submit a Modern Slavery Statement to the Minister for Home Affairs. The statement must address:
- the identity of the reporting entity;
- the structure, operations and supply chains of the reporting entity;
- the risks of modern slavery practices in the operations and supply chain of the reporting entity, and any entities that the reporting entity owns or controls;
- the actions taken by the reporting entity and any entity that the reporting entity owns or controls, to asses and address those risks;
- how the reporting entity assesses the effectiveness of such actions;
- the process of consultation with any entities the reporting entity owns or controls or with which it is issuing a joint Modern Slavery Statement; and
- any other relevant information that the reporting entity, or the entity giving the Statement, considers relevant.
A register of Modern Slavery Statements must be kept and must be made available for public inspection, without charge and on the internet.
When are the reports required?
Modern Slavery Statements must be made annually and within six months of the end of each financial year. The first Modern Slavery Statements for Australian businesses will, therefore, be due before the end of 2020.
What are the consequences of non-compliance?
The legislation will initially operate solely on a “name and shame” basis – by empowering the Minister to publicly identify entities that do not comply with the legislation.
The consequence behind public identity is that it may cause reputational damage which will provide an incentive to comply with the Modern Slavery Reporting requirement.
What are the implications for the financial services sector?
The new rules only apply to businesses with annual revenues of over $100 million so that the laws will initially only apply to the larger financial services providers.
Financial services providers do not, by their nature, tend to have global supply chains and the risk of a financial services provider being directly involved with modern slavery would likely be low.
However, outsourcing “back office” operations (such as help centres or document processing) overseas carries the risk of modern slavery impacts and appropriate due diligence, provision of warranties and monitoring should occur when contracting these services.
What if I have a socially responsible investment mandate?
In addition to these specific requirements, it is noted that many investment managers operate socially responsible investment mandates. These mandates will often exclude investments in companies with poor modern slavery records – something that should become more visible once companies start reporting.
Other financial services providers will have their own internal policies on how they conduct their businesses from a moral and ethical perspective and this may lead to them to cease to be involved with businesses that have a poor modern slavery record.
Author: David Court (Partner)