Australian Modern Slavery Act: Final Report recommends mandatory supply chain reporting with penalties for non-compliance

In brief

After a year-long inquiry, a parliamentary committee has recommended that Australia establish a Modern Slavery Act, including mandatory reporting for large businesses on modern slavery risks in their operations and supply chains. The introduction of a Modern Slavery Act is set to be a game-changer, with prescriptive reporting requirements to come in as early as next year. Partners Rachel Nicolson and Peter Haig, Associate Freya Dinshaw and Lawyers Karina Plain and Shamistha Selvaratnam report. 

Background

As we reported in February this year, the Attorney-General referred a parliamentary inquiry into establishing a Modern Slavery Act in Australia to the Foreign Affairs and Aid Sub-Committee of the Parliament's Joint Standing Committee on Foreign Affairs, Defence and Trade (the Committee). Over 200 submissions were received by the Committee and public hearings were held with stakeholders, with the vast majority of stakeholders expressing support for the introduction of an Australian Modern Slavery Act.

As we reported, in August this year:

• the Attorney-General's department released a consultation paper setting out its proposed model for corporate reporting of human trafficking and modern slavery in supply chains; and
• the Committee released an interim report recommending that the Federal Government support the development of an Australian Modern Slavery Act.

Now, the Committee has released its final report titled Hidden in Plain Sight: An inquiry into establishing a Modern Slavery Act in Australia (the Final Report). The Final Report sets out the Committee's recommendations to the Federal Government, and sets the blueprint for a Modern Slavery Act. If passed into law, the proposed corporate reporting requirements will be among the most sophisticated non-financial reporting laws in the world.

Key recommendations

Definitions

The Committee has broadened the proposed definition of 'modern slavery' to include child labour, the worst forms of child labour and child exploitation, together with servitude, forced labour, trafficking in persons, forced marriage, child trafficking, debt bondage and other slavery-like practices.

In order for the legislation to remain broad in application, the Committee has avoided specifically defining 'supply chain' and has opted instead to take the view that the term should be given a meaning that is consistent with the broad definition contained in OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. Importantly, this does not restrict the proposed reporting requirement to first tier suppliers, but instead means that the proposed Modern Slavery Act will apply to all tiers of a company's supply chain.

Will you be required to report?

The Committee has set out three recommended threshold requirements that, if met, would oblige an entity to report under an Australian Modern Slavery Act:

• Definition of 'entity': The Committee has cast the net wide and recommended that the entities that will be subject to the mandatory supply chain reporting requirement be defined broadly, including companies, businesses, organisations, Commonwealth government agencies and public bodies, the Federal Government, bodies corporate, unincorporated associations or bodies of persons, partnerships, trusts and superannuation funds, just to name a few. ¹  
• Revenue: The Committee has recommended that entities with a total revenue of $50 million or more should be required to report. While this is significantly lower than the $100 million threshold proposed by the Federal Government in its consultation paper, the recommended $50 million threshold will align with the existing requirements under the Modern Slavery Act 2015 (UK), which requires entities to report if their total annual turnover exceeds £36 million. In addition, entities below the threshold can 'opt in' to reporting under an Australian Modern Slavery Act and voluntarily submit a modern slavery statement. We anticipate that over 7000 entities will be captured by the proposed reporting requirement.²
• Geographical nexus: The Committee has stated that it supports requiring entities operating in Australia being required to report (regardless of where they are headquartered). The Committee has not recommended that the Federal Government provide guidance on what it means to be 'operating in Australia'.

What will you have to report on?

In the UK, modern slavery statements can include information on optional criteria set out in the legislation. However, the Final Report has recommended that an Australian corporate reporting requirement would contain mandatory topics for reporting, namely:

• the organisation's structure, its business and its supply chains;
• its policies in relation to modern slavery;
• its due diligence and remediation processes in relation to modern slavery in its business and supply chains;
• the parts of its business and supply chains where there is a risk of modern slavery taking place, and the steps it has taken to assess and manage that risk;
• its effectiveness in ensuring that modern slavery is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate;
• the training about modern slavery available to its management and staff; and
• any other actions taken.

The prescribed reporting areas are broader than those set out in the UK legislation, and will require entities to consider how to address modern slavery issues through policies, due diligence, remediation, risk identification and training. Given annual reporting will be required, the 'effectiveness' criteria will also encourage entities to improve on their performance year by year.

To further encourage reporting entities to take meaningful steps to combat modern slavery, the legislation will require modern slavery statements to be published on the entity's website and on a free, publicly accessible central repository maintained by the Federal Government.

Who's responsible for reporting?

If the Federal Government follows the Committee's recommendations, the Board and senior management will ultimately be responsible for publishing and ensuring the accuracy of its Modern Slavery Statement. By recommending that the Modern Slavery Statement should be approved by the Board and signed by a director before it is published, the Committee has made it abundantly clear that modern slavery issues need to be considered at a senior level within businesses.

What happens if you don't report?

In a bold move, the Committee has recommended that penalties should be introduced and apply to any entities above the threshold who fail to report under an Australian Modern Slavery Act, with such penalties entering into force from the second year of reporting onwards. With respect to financial penalties, the Committee has recommended that the appropriate level of any penalties should be determined by the Federal Government, including whether ASIC will play any role in administering penalties. Reputational pressure will also apply, with the Final Report recommending that a list of entities who are required to report, and a list of entities who have failed to do so should be published alongside the central repository of statements. Public criticism and shareholder activism in response to an entity not complying with the proposed reporting requirement may be just as costly as any financial penalties imposed on the entity.

What next?

We anticipate that legislation will be introduced in early 2018. The first Modern Slavery Statements are likely to be due shortly after, with the recommended timeframe for reporting being five months after the end of the Australian financial year. With the release of the Final Report, businesses should use the opportunity to prepare for incoming legislation by considering compliance matters such as modern slavery risk identification, supplier due diligence practices, policies and training.