FRC report findings suggest overhaul needed for Modern Slavery Act

A report published April 25 by the Financial Reporting Council (FRC) in collaboration with the U.K. Independent Anti-Slavery Commissioner and Lancaster University found one in 10 companies sampled did not provide a modern slavery statement. Of those companies that did comply, only one-third of the statements were considered clear and easy to read.

The U.K. Modern Slavery Act of 2015 has often been described as “world leading.” Section 54 of the legislation requires businesses with a turnover of 36 million pounds (U.S. $45 million) or more to write an annual statement setting out the steps they are taking to address the risk of slavery in their operations and supply chains.

However, in the seven years since the law came into effect, the FRC described the level of corporate disclosure as “uneven.” Last year, following concerns revealed in its annual review of corporate governance reporting that companies were either paying the requirement lip service or ignoring it altogether, the FRC decided to extend its research.

The new report explores how 100 major companies are not only reporting on modern slavery in their annual reports but the extent to which they are measuring the impact of their initiatives and interventions under Section 172 of the U.K. Companies Act.

“Noncompliance with the Modern Slavery Act is a direct consequence of the absence of proactive enforcement and the lack of any financial penalties and other sanctions.”

Raymond Silverstein, Partner, Browne Jacobson

The FRC said most statements were “fragmented, lacking a clear focus and narrative, or were unduly complicated.” It added that “longer disclosures did not necessarily mean more informative disclosures,” while excessively long disclosures “often contained boilerplate reporting or were a sign of a poorly structured statement.”

Disclosures concerning key performance indicators (KPIs) to measure the effectiveness of steps taken to minimize modern slavery risks were particularly poor: Only a quarter of companies disclosed results against their KPIs, and just 12 percent confirmed they have made informed decisions based on them.

The report also found less than half of companies provided clear and comprehensive discussion of modern slavery concerns in the context of organizational structure, operations, and supply chains. Although most companies reported they assess modern slavery risk in their own business and supply chain, less than a third (28 percent) disclosed an action plan based on the risks identified.

Only 14 percent of annual reports provided a direct link to the corresponding modern slavery statement, making cross-referencing difficult. Just 13 companies reported on internal controls linked to the oversight of human rights and slavery in their annual report, for example, while only seven provided information about when and how frequently their modern slavery policies and governance arrangements are reviewed.

Most modern slavery statements were backward-looking, with only a minority clearly identifying emerging issues or a long-term strategy. This trend reflected companies’ largely reactive approach to the problem, the FRC noted.

FRC CEO Sir Jon Thompson said in a press release it was “unacceptable that many companies did not produce a modern slavery statement and that modern slavery considerations appear to not be a mainstream concern for many boardrooms. Looking ahead, companies must clearly set out the actions they are taking to deal with modern day slavery in all aspects of their operations.”

Dave Walsh, professor of criminal investigation at De Montfort Law School, believes the situation is probably even worse than the FRC believes. He thinks it is more likely one in four companies do not provide a modern slavery statement instead of the one in 10 figure cited by the FRC, while “around half of those who produce statements fail to meet the government’s guidelines,” which means “no confidence could be drawn from them.”

Legal experts are unsurprised by the findings, given that, under the terms of the legislation, companies can provide as little as a one-line statement and even state slavery is of no concern to the board or the business. According to the United Nations’ International Labor Organization, there are more than 40 million people in slavery globally, of whom 25 million are in forced labor. One in four victims of modern slavery are children, according to the UN’s data.

Alice Lepeuple, associate at law firm WilmerHale’s U.K. white-collar defense and investigations practice, said, given the law’s terms, it is “unsurprising that for many companies publishing a modern slavery statement has become a poorly executed box-ticking exercise.”

Raymond Silverstein, partner at Browne Jacobson and head of the firm’s London employment practice, agreed that “noncompliance with the Modern Slavery Act is a direct consequence of the absence of proactive enforcement and the lack of any financial penalties and other sanctions.”

Sophie Kemp, partner and head of the public law team at law firm Kingsley Napley, said the legislation needs to be overhauled if it is going to be effective. She suggested it should include “credible inspections, spot-checks, external audits, and making the provision of false information about slavery statements a criminal offense.”