Compliance risk in 'modern slavery' reporting

The 'business and human rights' phenomenon is about much more than just 'modern slavery' in corporate supply chains.

The potential for modern slavery practices to 'taint' the supply chains of formal, regular business is one form of 'business and human rights' problem.

This post makes a brief point about a form of 'compliance risk' that may not be fully appreciated as we move, in Australia, into the process of legislative enactment and implementation of reporting requirements for larger firms around the risks of modern slavery within their operations or supply chains.

By 'compliance risk' I do not mean familiar ideas such as the reputational, regulatory, legal or other risks possibly associated with non-reporting, poor or inadequate reporting, misleading or deceptive reporting (e.g. relative to internal processes of due diligence on the reportable risk).

I mean a risk that might emerge even if a firm has very commendable due diligence and reporting practices relating to the potential for modern slavery in its business and business relationships.

The 'compliance risk' I mean is a form of unintended blindness to human rights risks in the business's sphere even though these may not be modern slavery risks.

Thus the potential problem is that once firms are actively reporting on the risks of modern slavery within their operations or supply chains (since that is what legislative requirements relate to), those firms might pay less attention to other forms of human rights risk in their business models, forms that may have nothing to do with supply chains, or with forced labour or human trafficking.

Firms (and policy-makers, and civil society) will need to keep framing these overall issues more broadly than just the current 'hot topic' of modern slavery in supply chains, and principally by reference to the 2011 UN Guiding Principles on Business and Human Rights.

The 'business and human rights' phenomenon is about much more than just 'modern slavery' in corporate supply chains. In Australia, a focus on a possible Modern Slavery Act has obscured or may come to obscure (including in business's perspectives) the whole range of ways in which business might unwittingly or otherwise cause, contribute to or be linked to human rights problems.

I made this point in a March 2017 post on this blog, here, shortly after the Australian government announced its consultation towards a possible Act. 

Jo

@fordthought

See a recent post (May 2018) here on defining 'supply chain' in the Modern Slavery Act reporting context, and general comments in this post from October 2017 and this one from August 2017.

Modern slavery in supply chains: definitions?

What are ideal viable regulatory models for public authorities to address the serious human rights risks that might exist in a business’s operations or supply chains, especially abroad?

This post simply pastes in the summary of a paper I've produced (here).

The paper isolates one regulatory design issue on prevailing models of statutory requirements for certain firms to report on human rights risks in their supply chain: how, if at all, should such legislation seek to define ‘supply chain’? This paper argues that this is not a narrow or merely technical question:

-          First, it affects the scope of commercial activity to which any ‘compliance’ notion will relate, and associated issues of regulatory clarity, certainty and coherence.

-          Second, the approach to defining (or not) ‘supply chain’ can be seen a metaphor for more general design philosophies or approaches. These how questions of design go to more profound questions about what ‘transparency models’ (or, more accurately, reporting models) seek to achieve. The wider public policy objective is eradicating modern slavery by engaging business and civil society in cooperative pursuit of this grand challenge. This goal ought to guide and inform all design decisions.

Some firms argue that any reporting obligations should be limited to ‘first tier’ suppliers only (direct payment relationships); many activists argue that peak firms atop particular supply chains should be obliged to report more comprehensively, i.e., full traceability reporting, on suppliers’ suppliers too. This paper argues that a future Australian Modern Slavery Act should not seek to define ‘supply chain’ at all in legislative form, nor in ancillary regulations:

·       Consistent with Pillar II of the 2011 UN Guiding Principles on Human Rights, firms have a responsibility to respect human rights by (among other things) identifying and address priority human rights risks in their business operations and relationships: leaving ‘supply chain’ undefined helps avoid artificial categorisations that might obscure this ongoing exercise of self-analysis and prioritisation. The ‘how many tiers’ debate misses the point: from risk management, reputational and other perspectives too, the focus of enquiry should be the severity (scale, seriousness, etc.) of human rights risks across business relationships. Instead of responding to prescribed compliance indicators, as might happen with a defined approach, the internal corporate process of needing to self-define what one’s ‘supply chain’ will include for reporting purposes might hold value: it may help to trigger important corporate self-reflection on the extent of one’s influence or responsibility as a firm.

·       Prevailing reporting models are premised at least in part on external market, consumer and civic stakeholders ‘regulating’ corporate performance on human rights issues. In a model that does not define ‘supply chain’, these actors can always signal that a firm’s framing of its ‘supply chain’ is too narrow or otherwise misconceived. Legal, audit or assurance entities advising larger firms might be key agents in a conceivable ‘race to the top’ (at least within market leaders in some consumer-facing / reputation-exposed sectors) in terms of the quality of reporting, including the scope of a firm’s choice of what its ‘supply chain’ comprises.  

·       Reporting requirements may not actually be appropriate and adapted to the wider objective of preventing and addressing modern slavery. Nor do they necessarily produce transparency. Nevertheless, they are the model under consideration. This being so, the legislation should attempt to encourage fulsome business cooperation from a premise of trusting large Australian businesses to do the right thing in the first instance. An overall tone and message that the legislation is not unduly prescriptive on such issues as what constitutes ‘supply chain’ will probably help to generate proactive business engagement. Such cooperation is vital to the ‘bigger picture’ objective. Even the most capable regulatory state cannot ‘fix’ modern slavery in supply chains without the cooperation of the businesses that use these systems:

-          Supply chains, like business sectors, are hugely diverse, not static, and often very complex, but firms are also typically far better-placed than regulators to see or know issues within their supply chains. In a scheme premised on business uptake and cooperation, these facts suggests that legislation avoid being unduly prescriptive.

-          The point of this legislation is to help identify, prevent and resolve human rights problems in supply chains. It is not, as some activists would appear to frame it, an opportunity to target larger businesses with highly prescriptive statutory duties accompanied by punitive sanctions out of a belief (for example) that such firms, as a species, are insufficiently transparent or accountable in our society generally. The legislation is one element in a broader policy approach around finding ways to incentivise and support Australian firms to systematically identify and so prevent or address the underlying human rights risks. All design questions should turn on ‘what will best help solve the problem of modern slavery in globalised supply chains?’ and ‘how can we best involve business itself in solving these problems?’

-          Yet this cooperative dialogic approach is only justifiable if a clear signal is given that regulation will become more demanding in future if reporting compliance is perfunctory or not improving modern slavery patterns in (Australian) supply chains.

Non-binding formal policy products produced in parallel to this legislation should provide guidance to firms on the considerations involved in how they seek to define the scope of their due diligence (and so reporting) on these issues. This needs to go a lot further than the UK guidance that ‘supply chains’ under the 2015 Act has its ‘ordinary meaning’. Government should engage civil society and consultancy / assurance / audit firms in helping to produce and progressively refine such guidance.

[This is a summary from my May 2018 paper]

Jo

See a recent post on this blog on this topic here.