Large retailers will soon be required to prepare an annual statement identifying the steps they have taken to ensure their supply chains are free from forced labour.

An issue of increasing importance to western retailers is the reputational damage that can be suffered by the exposure of the exploitation of labour, particularly child labour, by overseas suppliers. The 2013 fire at Rana Plaza in Dhaka, Bangladesh, which killed 1,100 people, caused considerable harm to the reputation of those Western retailers whose supply chain employed workers at the site. The Pope described conditions at the site as "slave labour". Many retailers already operate procedures intended to ensure, so far as possible, ethical practices by their suppliers. This has assumed a new urgency with the coming into force of the Modern Slavery Act (the Act) earlier this year.

Section 54 of the Act includes a provision requiring large businesses to state publicly each year the action they have taken to ensure their supply chains are slavery free. "Slavery" includes forced or compulsory labour. This provision is not yet in force – October 2015 is the likely start date. Although the Government has not yet adopted the associated Regulations, it has confirmed that the reporting requirement will apply to companies with a global turnover of £36 million or above.

The annual statement may include information about:

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

The statement must be approved by the board and signed by a director. The statement must be published on the website with a link to the statement from the homepage.

It will not be an offence to fail to publish the statement. The only legal sanction for failure to do so is that the Secretary of State may apply for an injunction to require the company to publish a statement. However, the Government clearly believes that the reputational consequences of failing to publish a statement will be sufficient incentive to comply and, indeed, it is more likely that retailers will use the reporting requirement as an opportunity to showcase that they are taking their social and ethical responsibilities seriously.

Quoted companies are already obliged to disclose in their strategic reports information about social, community and human rights issues, including the details and effectiveness of any company policy on these issues, to the extent that it is necessary for understanding of the development, performance or position of the company's business. The new statement builds on this but goes further, notably with its insistence upon reporting on due diligence. The Secretary of State will be publishing guidelines to assist companies in the preparation of the annual statement.

The Act provides another reason why retailers should undertake rigorous due diligence of their supply chain. Others include:

  • ensuring compliance with the UK Bribery Act, by which UK companies may be liable for bribery perpetrated on their behalf by intermediaries, including overseas intermediaries
  • ensuring the security of personal data and other sensitive information maintained by suppliers
  • ensuring that suppliers are not selling to, buying from or otherwise dealing with embargoed countries or restricted parties
  • ensuring that the local economy (and political climate) is stable (so that there are not likely to be unforeseen glitches in supply)
  • ensuring that the local geography is stable (the Icelandic Volcano and the Japanese Tsunami are recent illustrations of how "Mother Nature" can impact supply chains)
  • guaranteeing provenance. The "horsemeat scandal" from 2013 and the reputational damage suffered by food retailers as a consequence is a clear illustration of why it is important to audit suppliers.

At this stage we do not know when retailers subject to the reporting obligation will be required to make their first statement – there will be transitional provisions – but in the meantime, such retailers should review how they audit their supply chain to ensure they will be able to comply with the new reporting requirement.