Sometimes, legislation can have a wide reaching impact affecting operations in many different jurisdictions. The implications of the UK's Modern Slavery Act, which requires companies to declare policies on stamping out slavery and human trafficking, will be felt in the Middle East.
The Act will directly capture many companies here which carry on business in the UK, and will have implications for many more. The effects of the Act are profound on the construction industry in particular, given its labour intensive nature and the network of supply contractual arrangements.
Ultimately, regardless of whether a business in the Middle East is itself caught by the Act, the risk of reputational damage and loss of contracts is a key driver behind all companies taking steps to assess their own supply chains and ensuring compliance.
1. Implications for GCC companies in the construction industry
The Modern Slavery Act 2015 applies to commercial organisations which supply goods or services and carry out any part of their business in the UK, as long as they have a global gross annual turnover in excess of GBP 36 million (approximately AED 170 million). The Act does not distinguish between foreign companies and companies incorporated in the UK and, importantly, the Act extends to subsidiaries and joint ventures.
Accordingly, the Act applies to many businesses with a UK presence, which carry out business activities in the Middle East. If you are acting as a contractor or supplier to a company carrying out business in the UK, you are likely to see increased scrutiny and the imposition of contractual warranties and representations driven by the introduction of the Act.
2. What does the Act require?
Section 54 of the Act requires organisations caught by the Act to produce an "annual slavery and human trafficking statement" for each financial year (the "Statement"). 2017 marks the first year in which all organisations to which the Act applies are obliged to publish a Statement.
The Statement must be approved by the board of directors, signed by a director (or equivalent), published on the company's website and be accessible by link in a prominent place on the homepage. If the business does not have a website, it must provide a copy to anyone who makes a written request for the Statement within 30 days of receipt of the request. The Statement should be published as soon as practicable after the end of the financial year, ideally within 6 months. In practice, it is likely that most organisations will publish their Statement at the same time as their annual financial accounts.
The Statement must disclose either: (1) the steps which the organisation has taken during the financial year, to ensure that slavery and human trafficking is not taking place in any of its supply chains or in any part of its own business; or (2) that the organisation has taken no such steps.
The Act does not specifically prescribe the format or content of the Statement, providing an organisation with the flexibility to tailor its Statement depending on the nature of its business and the complexity of its supply chains, although the recommended disclosure topics include:
- The organisation’s structure, its business model and its supply chain relationships
- Policies which the business has implemented in relation to slavery and human trafficking
- Due diligence and auditing 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 are not taking place in its business or supply chains, measured against such key performance indicators as it considers appropriate
- The training regarding slavery and human trafficking available to its employees and its suppliers' employees
Consequences of non-compliance
Failure to produce the Statement may result in the business being injuncted to do so, and if its failure to comply persists then it could be imposed with an unlimited fine. However, although the Act does not impose any direct liability on corporates which take no steps to prevent trafficking or slavery, the Act is viewed by many as potentially landmark legislation due to its potential impact on mainstream business considerations. Despite the Act being 'soft law', it gives rise to risks well beyond the legislative force of the Act itself. Simply put, no company wants to submit a Statement saying they are not doing anything and where companies do not act in line with their published Statements they face potential reputational damage, liabilities to stakeholders (including shareholders, customers and financiers), and damage to the business through delayed or lost contracts. Further, major lenders will scrutinise the supply chains of projects to ensure that they meet basic human rights standards, therefore affecting the bankability of such projects.
3. Key risks in the GCC construction industry – a regional focus
Although many companies have robust policies and systems in place to monitor slavery and human trafficking, there are extensive challenges in tackling the issues lower down the supply chain, at commodity level and in respect of suppliers and subcontractors.
The key areas of risk on construction projects in the GCC are as follows:
- Accommodation and living conditions of workers;
- Living wages and salaries of workers (including overtime fees);
- Recruitment fees paid by workers to secure employment in the GCC; and
- Retention of workers' passports.
4. How to mitigate the risks
With reputational damage and potential enforcement action at stake, the following measures could be taken to mitigate the risks:
- Organisations should carry out due diligence on their own business practices, and those of their suppliers. In the GCC it is important to investigate not only local practices, but also to monitor practices in the home countries from which labour workers predominantly come (particularly in respect of unfair recruitment practices). Such due diligence forms part of a wider framework around ethical trade, corporate social responsibility and human rights.
- Implement policies and codes of practices supported by senior management to demonstrate the organisation's commitment to the issue and to ensure co-ordinated action throughout the business. Such policies could include a recruitment policy, an employee code of conduct and policies relating to staff training and to encourage internal reporting and whistleblowing on site.
- Modern slavery risk assessments should be carried out and seen as part of the organisation's wider approach to risk management. These policies and procedures should be proportionate to the organisation's size, structure, the location of its activities and supply chains and the nature of its business.
- Ensure that contractual warranties and indemnities are drafted into supply and sub-contract agreements, to ensure counterparties are obliged to comply with best practice and applicable labour laws.
- Provide training both internally and to suppliers to highlight policies and obligations in respect of slavery and human trafficking to ensure consistent practice. Training may be targeted at different groups of employees to maximise its effect (for example HR and procurement teams).
Companies which can show that they have policies and procedures in place to tackle trafficking and slavery will be at a competitive advantage. Those who do not may lose out on contracts, particularly where international lenders are involved.
5. Looking forward
There are a number of new developments in the pipeline to increase the effectiveness of the Act, and recent bills have been put before the UK Parliament to extend the requirements of the Act to public bodies, as well as increasing sanctions on private commercial businesses which fail to produce sufficiently transparent Statements.
Further afield, other countries are beginning to follow the UK's lead, with the Australian Government most recently holding an inquiry as to whether it should adopt similar legislation to tackle modern slavery in global supply chains.
With the issue gathering momentum globally, and the potential catastrophic reputational risks, it is prudent for all companies, including in the Middle East, to ensure that they put policies in place to take sufficient and meaningful steps to address modern slavery within its business and supply network. Even if none of the legislation applies to you, companies which tackle the issue will be much better placed to do business with those companies which are covered. This makes it the smart thing to do, as well as the right one.