Clifford Chance

The Modern Slavery Act 2018 (Cth) (Cth Act) commenced operation on 1 January 2019. The Cth Act applies to approximately 3000 entities that operate in Australia and have an annual consolidated revenue of more than AU$100 million (Reporting Entities).

The Cth Act requires Reporting Entities to submit an annual report on the risks of modern slavery in their business and supply chains and the actions taken to address those risks (Modern Slavery Statement). It is envisaged that the disclosure model of reporting will spur a ‘race to the top’ by Reporting Entities to find and remediate (rather than conceal) instances of slavery in their business and supply chains.

On 27 June 2018, the New South Wales parliament separately passed its own Modern Slavery Act 2018 (NSW) (NSW Act) which contains similar reporting obligations to those of the Cth Act. The NSW Act, however, only applies to entities with employees in NSW and has a lower annual revenue threshold of AU$50 million. Further, unlike the Cth Act, the NSW Act imposes penalties for non-compliance, including financial penalties of up to $1.1 million. The NSW Act was scheduled to commence on 1 July 2019, but was suspended due to its inconsistencies with the Cth Act.

Is your business affected by modern slavery?

There are an estimated 40 million modern slaves around the world today, 16 million of which are exploited in the private economy.¹ Australia is not immune from modern slavery. For example, the Australian Government estimates there were 1,567 modern slaves in Australia between 2015-16 and 2016-17.² The number of people exploited in Australia in the domestic work, hospitality, agriculture and construction industries now exceeds those exploited within the sex work industry (which has historically had the highest rates of modern slavery in Australia).³ Further, given the close link between Australian supply chains and businesses in the Asia-Pacific region, where over two-thirds of modern slaves are based, many imported products are at high risk of being produced by forced labour and child labour.⁴ As such, Australian businesses and consumers are most likely unknowingly benefiting from modern slavery.

How is your business affected by modern slavery?

Modern slavery distorts global markets and undercuts responsible business.⁵ If not addressed, modern slavery in your operations and supply chains can also pose substantial reputational and legal risks, and potentially damage your commercial relationships. It is therefore imperative that all Australian businesses are committed to addressing modern slavery within their operations - regardless of any assumption that a particular business is immune to modern slavery.

Case study: Fortescue Metals Group

Fortescue has approximately 2,000 suppliers, around 80% of which are located in Australia and supply labour hire, fuel, fixed plant components and heavy mining equipment. Fortescue began auditing its suppliers in 2012 and found that one major supplier was using forced labour. Workers had their passports confiscated, were forced to work to pay off large debts for excessive recruitment fees and interest, and were unable to return home or send money back to their families. Fortescue conducted its own full audit and verification visit and undertook a suite of remediation efforts, including the repayment of excessive recruitment fees to the foreign contract workers and the installation of safety deposit boxes for workers in the labour camps so they could hold their own passports safely.⁶

When does your business need to report?

Reporting entities must report in respect of the first full reporting period following commencement of the Cth Act, and must make a report within 6 months of that period ending. As such, the first Modern Slavery Statements for Reporting Entities with a 31 March 2020 year end are due by 30 September 2020, whilst statements for Reporting Entities with a 30 June year end are due by 31 December 2020.

What are your reporting obligations?

A Modern Slavery Statement must address the following mandatory criteria:

• The Reporting Entity’s structure, operations and supply chains;
• Modern slavery risks in the Reporting Entity’s operations and supply chains (including those of subsidiary entities);
• Actions taken (including by subsidiary entities) to assess and address those modern slavery risks, including due diligence and remediation processes;
• How the reporting entity assesses the effectiveness of actions taken; and
• The process of consultation with subsidiary entities in preparing the Modern Slavery Statement.

A Modern Slavery Statement requires Board approval and the signature of the Director before it is provided to the Minister for Home Affairs. Once approved by the Minister, the statement will be uploaded to a public online register. If your business is not classified as a Reporting Entity but is an Australian entity or a foreign entity that carries on business in Australia, it may opt into the reporting regime by voluntarily submitting a Modern Slavery Statement. Opting in offers benefits in terms of demonstrating good corporate governance and leadership, as well as assisting your business to respond to human rights related questions from customers and investors.

How does the Government's modern slavery guide assist business with reporting?

On 26 September 2019, the Department of Home Affairs (Department) released the Commonwealth Modern Slavery Act: Guidance for Reporting Entities (Guide). The Guide addresses (among others) when reporting is required; how to prepare, approve and publish statements; the preparation of joint statements with subsidiary entities; how to work with suppliers to assess modern slavery in supply chains; and how to respond to a case of modern slavery. Importantly, the Guide confirms that the Act does not set a minimum requirement for the number of tiers in a Reporting Entity's supply chain it must examine. Therefore, Reporting Entities need to consider modern slavery risks that may be present anywhere in its global and domestic operations and deep in its supply chains (for example, the mining of conflict minerals and the production of raw materials), as well as those of any entities it owns or controls.

What happens if your business doesn't report?

The Cth Act does not impose a penalty regime for Reporting Entities that do not report but instead relies on public breach reporting and associated reputational damage as the primary deterrent to non-compliance. If a Reporting Entity does not report, the Minister can request an explanation for non-compliance and require remedial action (including the provision of a Modern Slavery Statement), as well as publish details of non-compliance. The Act thus relies for its efficacy on the premise that ministerial "naming and shaming" will cause sufficient detriment to the non-complying entity (such as public disapprobation, reputational damage and shareholder activism) to incentivise compliance.

What can we expect from the Modern Slavery Statements?

The Cth Act is modelled on the Modern Slavery Act 2015 (UK) (UK Act) so statements published under the UK Act provide an indication of the likely reporting trajectory in Australia. The Business and Human Rights Resource Centre (BHRC) administers the UK Modern Slavery Registry and has tracked companies’ reporting since the first reporting period. In 2018, its findings showed substantial deficiencies with reporting under the UK Act. The BHRC reported that "Three years on, most companies still publish generic statements committing to fight modern slavery, without explaining how. Sadly, only a handful of leading companies have demonstrated a genuine effort in their reporting to identify and mitigate risks." ⁷ Some of the key points gleaned from the BHRC's 2018 report⁸ are summarized below:

The good: A higher proportion of companies (as compared to previous reporting periods) reported having policies related to modern slavery; reported including modern slavery in social audits; reported having conducted a risk assessment to identify modern slavery risks in their supply chains; disclosed results from audits or assessments; and reported providing capacity building and training to employees and suppliers.

The bad: Most companies failed to provide an adequate explanation of their business model or the location of their operations and simply provided general information about their industry and the locations of some of their offices.

The ugly: The weakest (and arguably most important) reporting area was measuring effectiveness of efforts to address modern slavery - about 35% of companies provided little or no disclosure in this area.⁹ Only in rare cases was there sufficient information to allow the identification of potential risks. In most statements, the information provided appeared to be highly selective and designed to play down risk despite ample evidence that many of those companies do have significant risks of modern slavery (due to the industry in which they operate, the commodities they source or the location of operations).¹⁰

What next?

The future of the NSW Act is unclear

On 19 June 2019, the NSW Government announced that it was advised by the Department of the Premier and Cabinet that the NSW Act contained unspecified "defects requiring urgent attention" which exposed it to the risk of a constitutional challenge. The NSW Act was referred to the Standing Committee on Social Issues (Committee) to advise whether the Cth Act rendered the NSW Act inoperable or unnecessary.

The Committee concluded the Inquiry and tabled its final report to Parliament on 25 March 2020, supporting the commencement of the NSW Act on or before 1 January 2021 but with some amendments to align it with the Cth Act.¹¹ However, interestingly, the Committee supported the retention of the AU$50 million reporting threshold, instead recommending that the NSW Government work with the Australian Government to seek harmonisation of the reporting threshold, ideally at $50 million, as a key reform for a standard national approach to modern slavery. A reduction of the Commonwealth revenue threshold would capture a significant number of additional entities within the Commonwealth reporting regime.

The NSW Government has six months to consider whether it will adopt the recommendations of the Committee.

What should your business be doing to prepare?

All Reporting Entities should be preparing for their first reporting period under the Cth Act. Recent feedback from businesses that reported pursuant to UK Act indicates that the process of auditing supply chains and preparing a Modern Slavery Statement has been an extremely onerous task requiring significant time and resources, and creates significant compliance 'knock-on effects' for those entities as they incorporate ethical sourcing into their procurement practices. As such, if they have not already done so, it is crucial that Reporting Entities, now begin reviewing their supply chains in order to report on time.

Although the future of the NSW Act is still unclear, it is surprisingly very much back on the agenda as a result of the Committee's recommendations. Therefore, those potentially impacted by it should put in place steps to monitor the development of the NSW Modern Slavery Act.

Clifford Chance has advised many foreign and Australian businesses on their modern slavery reporting obligations pursuant to Australian legislation and the UK Act, and therefore has extensive experience in assisting clients with their compliance.

¹ Department of Home Affairs (Cth), Commonwealth Modern Slavery Act: Guidance for Reporting Entities (2019) para 8
² Department of Home Affairs (Cth), Commonwealth Modern Slavery Act: Guidance for Reporting Entities (2019) para 10.
³ Joint Standing Committee on Foreign Affairs, Defence and Trade, Parliament of Australia, Hidden in Plain Sight: An Inquiry into Establishing a Modern Slavery Act in Australia (2017) para 3.99
⁴ Joint Standing Committee on Foreign Affairs, Defence and Trade, Parliament of Australia, Hidden in Plain Sight: An Inquiry into Establishing a Modern Slavery Act in Australia (2017) para 3.83.
⁵ Department of Home Affairs (Cth), Commonwealth Modern Slavery Act: Guidance for Reporting Entities (2019) para 13.
⁶ Fortesque Metals Group Ltd, Submission to Inquiry into Establishing a Modern Slavery Act in Australia (2017)
⁷ Business and Human Rights Resource Centre, FTSE 100 & the UK Modern Slavery Act: From Disclosure to Action, Report (2018) page 3
⁸ Ibid., page 4.
⁹ Ibid., page 5.
¹⁰ Ibid., page 14.
¹¹ Modern Slavery Act 2018 and associated matters, Standing Committee on Social Issues. [Sydney, N.S.W.] 2020 (Report no. 56)