Given the increased involvement of corporations in a wide array of activities and practices across the globe, the corporate overregulation through a plethora of legal obligations at both national and international levels, is but a natural result. Against this background, the introduction of the Modern Slavery Act 2018 (Cth) in Australia which imposes a new reporting regime for organisations, clearly conveys the message that such organisations can no longer be under the radar in relation to modern slavery practices. This post posits that while this legislative development is a welcome step forward in terms of ensuring transparency in supply chains, there is room for amelioration of the proposed legal framework.
The incomprehensiveness of the reporting regime
Under the Modern Slavery Act, not all entities based or operating in Australia are required to report on annual basis the risks of modern slavery in their operations and supply chains and any remedial actions taken to address those risks. Indeed, only entities, the annual revenue of which is more than $100 million, are subject to the mandatory reporting regime. In other words, entities with lesser revenue can opt-in to the reporting requirement (Modern Slavery Act: section 3). Although small businesses are generally less likely to have the leverage to influence their supply chains, the view can be taken that by reason of the fact that small businesses are not immune from modern slavery risks, the carve-out of which they benefit, is inherently problematic. Indeed, as per the register, 81 organisations which are volunteer reporters were in a position to identify modern slavery risks. Thus, it is recommended to introduce amendments to the Modern Slavery Act so as to capture companies that operate in modern-slavery-prone industries regardless of their revenue profile.
The inadequacy of enforcement actions
While the low incidence of modern slavery in Australia (only 15,000 are living in modern slavery as per the global slavery index) may be symptomatic of the minimal occurrence of modern slavery practices, it does not reflect the extent to which entities are compliant with their reporting obligations. To ensure optimal compliance, the legislative provisions need to be backed up with penalties including pecuniary penalties. However, this is not the case in relation to the reporting regime imposed by the Modern Slavery Act, under which the consequence of non-compliance for organisations seems to consist merely in a reputational risk. Indeed, if an entity fails to comply with the mandatory criteria for modern slavery statements, the Minister may request the defaulting entity to either provide an explanation for the failure to comply or take a particular remedial action (Modern Slavery Act: section 16A). However, to date, no such noncompliance information could be located on the register. If an entity fails to comply with the Minister’s request, the Minister may publish information about the failure to comply with the request on the Modern Slavery Statements Register which is electronically available for public inspection. Another accountability issue which the legislation does not address, is lack of legal repercussions for directors who have breached the requirement to prepare a modern slavery statement. Despite this, one can make the tentative suggestion that a director who fails to report modern slavery practices is likely to breach the duty of care and diligence under section 180 of the Corporations Act. This is likely to be the case especially where directors are entrusted with the approval and signature of modern slavery statements (Modern Slavery Act: sections 13 & 14). For instance, as evidence of the discharge of their duty of care, directors should inform themselves about the subject-matter of modern slavery statement and seek advice from the Modern Slavery Business Engagement Unit which is specifically established for the purpose of providing support to entities about their compliance. While loss of confidence of current and prospective consumers and investors might negatively impact defaulting entities as the current statistics demonstrate (more than 300,000 searches having been conducted on the register), this is not necessarily a sufficient deterrent for non-compliant entities. Thus, in this regard, it is of paramount importance that the liability of directors be clarified and that appropriate penalties be imposed when necessary.
The potential for misuse of joint modern slavery statements
With a view to provide as much flexibility as possible to reporting entities, the Modern Slavery Act offers such entities the option to prepare a joint modern slavery statement in relation to a consolidated corporate group. Essentially, an entity is permitted to submit a joint statement on behalf of other reporting entities within the group provided that, inter alia, evidence of consultation with the reporting entities covered by the statement, is given (Modern Slavery Act: section 14). While the use of a joint statement might be appropriate when reporting entities covered by the statement have the same policies, procedures and supply chains, this might not necessarily be the case in relation to reporting entities which might be affected by a number of discrepancies. The Modern Slavery Act does not specify the extent to which consultation should occur. However, the Official Modern Slavery Act Guidance clarifies that at a minimum, the reporting entity’s senior management must be aware of the particulars of the statement. Here, it is arguable that, despite the obligation to include evidence of consultation in the statement, there is a persisting potential for entities to minimise their reporting obligations. To circumvent the likelihood of such misuse, amendments need to be introduced to make it mandatory for entities which prepare a joint statement, to provide an evidence-based explanation of why each entity within the corporate has not submitted a statement separately. Another alternative would consist in revoking the possibility for a joint statement to be approved only by one reporting entity or a higher entity. In lieu thereof and for the purpose of ensuring that all information tendered is accurate and up-to-date, the board of directors of each reporting entity covered by the joint statement, must approve such statement.
By way of conclusion, it suffices to note that the enactment of the Modern Slavery Act is certainly a positive legislative development, albeit unideal. The problematic areas highlighted in this article call for legislative reforms to strengthen the reporting regime and to encourage corporations (including those which comply voluntarily) to foster a culture of compliance through a rating system but also a rewards system under which compliant organisations can rely on compliance with reporting obligations as a safe harbour in case of court proceedings where breach allegations are raised.
Samar Ashour is a Solicitor admitted at the Supreme Court of New South Wales, Australia.