Banking on social responsibility: reporting on modern slavery could pay dividends

Banks and other financial institutions are exposed to several key areas of risk in relation to modern slavery. These risks arise mainly from purchasing goods and services from third parties and being associated with customers’ illegal activities.

The Australian Commonwealth Government plans to introduce a Modern Slavery Act in Australia, similar to the UK Modern Slavery Act, which will impose a new Australian regulatory requirement on large businesses, including financial institutions, to report on modern slavery risks in their operations and supply chains.

The legislation will not require financial institutions to report on risks relating to their customers. But criminal activity by customers remains a significant area of risk for financial institutions, particularly large banking groups with retail operations in multiple jurisdictions. Reflecting this concern, some banks are reporting under the UK Modern Slavery Act on what they are doing in this area, as part of an holistic approach to tackling modern slavery.

On 16 August 2017, the Minister for Justice Michael Keenan announced that the Commonwealth Government proposes to introduce legislation to require large businesses to report annually on their actions to address modern slavery. This announcement reinforces Australia’s commitment to having one of the strongest responses to modern slavery in the world.

The Commonwealth Government proposes that businesses with revenue of at least AU$100m will be required to report annually on their efforts to eradicate modern slavery in their operations and supply chains. The legislation will apply to business across all industries and sectors, including financial institutions. 

The risk of modern slavery occurring in the operations of financial institutions is generally considered low, mainly because of the use of a skilled, professional workforce. However, all financial institutions have supply chains, which carry greater risk, and financial institutions globally are also under pressure to address modern slavery risks in their lending and finance activities.¹

Increased scrutiny of customer operations and collaboration with law enforcement agencies are being strongly encouraged. In Australia, financial institutions providing designated services are already subject to reporting requirements under existing anti-money laundering and counter-terrorism legislation. The introduction of a Modern Slavery Act may renew the focus on their role in tackling slavery and human trafficking. 

Here, we outline what the reporting requirement under a Modern Slavery Act is likely to involve and how Australian banks and other financial institutions can prepare for it. First, we take a look at some facts and figures and examples of sectoral risks.

• 40.3 million people globally are estimated to be subject to some form of modern slavery;²
• over 50 per cent of slavery occurs in the Asia Pacific Region;³
• forced labour, affecting 24.9 million people worldwide, is estimated to generate illegal profits of some US$150 billion annually, of which US$51.8 billion is generated in the Asia Pacific region and US$46.9 billion is generated in developed economies and the EU;⁴
• under the UK Modern Slavery Act, Australia’s four largest banks have reported that they buy goods and services from between 1,500 and 30,000 suppliers across a range of sectors;
• between January 2004 and 30 June 2012, the Australian Federal Police carried out 346 investigations in this country into suspected cases of human trafficking, slavery and slave-like practices and referred 46 people for assessment for prosecution, resulting in 15 convictions;⁵
• Australia remains primarily a destination country for people trafficked from Asia, particularly Thailand, South Korea, the Philippines and Malaysia;⁶
• criminals continue to target Australian banks and other financial institutions to help them launder the proceeds of crime, including from slavery and human trafficking activities; and
• more than US$1.5 trillion of illegal funds is laundered worldwide each year, with around AU$4.5 billion laundered in Australia.⁷

At its broadest, the term 'modern slavery' incorporates any situations of exploitation where a person cannot refuse or leave work because of threats, violence, coercion, abuse of power or deception.  It includes slavery, servitude, forced labour, debt bondage, and deceptive recruiting for labour or services.

The Commonwealth Government proposes, for the purpose of the reporting requirement, to define modern slavery to incorporate conduct that would constitute a relevant offence under existing human trafficking, slavery and slavery-like offence provisions set out in divisions 270 and 271 of the Commonwealth Criminal Code.  However, the exact scope of “modern slavery” is still the subject of consultation and it remains unclear whether the definition of modern slavery will go beyond the Criminal Code offences.

Given bipartisan support for a Modern Slavery Act, Australia is likely to have a reporting requirement relating to modern slavery that could be in place as early as 2018. The likelihood is that the new Australian regime will be similar to, but not the same as, the UK reporting regime.

Notably, unlike the UK Modern Slavery Act which only guides commercial organisations on what they may include in their statements, the Commonwealth Government proposes to mandate businesses to address four minimum criteria in their statements:

1. the entity’s structure, its operations and its supply chains;
2. the modern slavery risks present in the entity’s operations and supply chains;
3. the entity’s policies and process to address modern slavery in its operations and supply chains and their effectiveness (such as codes of conduct, supplier contract terms and training for staff); and
4. the entity’s due diligence processes relating to modern slavery in its operations and supply chains and their effectiveness.

Statements will need to be signed off by a director (or equivalent officer) of the organisation – so potentially exposing directors to liability if the statement is wrong.

The Joint Standing Committee on Foreign Affairs, Defence and Trade, which is responsible for the ongoing Inquiry into establishing a Modern Slavery Act in Australia, has given support for the Australian Government to publish a list of businesses obliged to report and a list of businesses that fail to report. It also supports the creation of a publicly accessible central repository for published statements.

Australian businesses ought to expect significant public criticism of those businesses that do not comply with their reporting obligations. Published statements will be subject to intense public scrutiny, as has been the case in the UK.

The existence of a central repository of statements will facilitate the monitoring and review of statements. It is also likely to assist businesses, consumers and other stakeholders to understand the steps being taken by businesses to eradicate modern slavery in their operations and supply chains and more effectively address the underlying issues.

Every large bank and financial institution caught by the regime will need to assess its modern slavery risks in order to prepare a statement. This will need to be an ongoing process and should incorporate an assessment of geographical, sectoral and entity specific risks.

From an industry perspective, there is generally a low risk that a financial institution will have modern slavery within its own operations. But each business will need to examine its own operations and consider carefully what the risks are, depending on matters such as the nature of its operations, its size and location. 

In addition, each business will need to consider separately what risks there are in its supply chains. They may cover a broad range of products and services purchased from a large number of diverse suppliers (some examples of common types of supply are given below). Those based in emerging economies or undeveloped countries may be more exposed to modern slavery risks and require deeper investigation, but financial institutions should take care not to overlook domestic operations. As Linda Reynolds, Senator for Western Australia, recently said, modern slavery in Australia can be ‘hidden in plain sight’.⁸

In recent years, outsourcing business processes, often to offshore service providers, has become common among Australian businesses, including financial institutions and service providers.⁹ Traditionally driven by wage differentials and a desire for cost savings, ‘offshoring’ has other benefits. Nonetheless, from a risk management perspective, this practice may increase a business’s exposure to modern slavery risks. This may happen where, for example, the offshoring location has high corruption levels or a poor regulatory framework. 

The UK Modern Slavery Act does not require businesses to report on the steps they are taking to address the modern slavery risks posed by their customers and the Australian legislation is unlikely to require it.

However, some banks and financial institutions have addressed this topic in their reporting in the UK, acknowledging that they have a significant role to play in tackling modern slavery impacts arising from their customers’ activities.

These moves reflect global calls for financial institutions, particularly banks, to do more to disrupt slavery and human trafficking, by putting programs in place to raise awareness of the issues, identify red flags, carry out due diligence into customers, report suspicious transactions and work more closely with law enforcement agencies and anti-money laundering task forces.

In Australia, regulated entities that provide a designated service to their customers are already subject to anti‑money laundering and proceeds of crime provisions that require them to engage in these activities, as set out in the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) and the Proceeds of Crime Act 2002 (Cth). 

Under this legislation, Australian regulated entities are required to establish a program to identify, mitigate and manage money laundering and terrorism financing risks, carry out customer due diligence, report suspicious transactions to the relevant authority (AUSTRAC) and keep proper records of transactions. Banks and other financial institutions who do not comply with these obligations risk committing, or being found complicit in, criminal offences. 

Australia’s main law enforcement agency is the Australian Federal Police. But non-compliance with anti‑money laundering obligations may also lead to investigation and civil proceedings by ASIC. 

If they have not already done so, larger banks and financial institutions should consider taking the following steps to prepare for the introduction of a modern slavery reporting requirement in Australia:

1. map the organisation’s structure, businesses and supply chains;
2. formulate policies in relation to modern slavery – this will involve collating current policies, identifying gaps, adapting existing policies and formulating new policies, as needed;
3. carry out a risk assessment – identifying those parts of the business operations and supply chains where there is a risk of modern slavery taking place;
4. assess and manage identified risks – this may include carrying out further due diligence in the entity’s operations and supply chains, reviewing and adapting contract terms and codes of conduct with suppliers, and introducing whistleblower procedures;
5. consider and establish processes, such as regular audits, and KPIs to monitor the effectiveness of the steps taken to ensure that modern slavery is not taking place in the business or supply chains;
6. provide grievance mechanisms and take remedial steps where modern slavery is identified; and
7. develop education and training for staff on modern slavery risks and impacts.

Banks and other financial institutions should consider addressing their customer facing risks too, as part of a holistic approach to addressing the slavery and human trafficking risks associated with their business. This should include taking steps to ensure that anti-money laundering programs are adequately geared towards identifying and reporting on potential slavery and human trafficking related activity.

Apart from complying with government regulations, there are many other good reasons for taking these steps, as banks and other financial institutions face renewed criticism of their cultures and greater public pressure to operate sustainably and ethically.

By undertaking these steps, banks and financial institutions should be well placed to respond effectively to new and existing Australian regulations and to show that they are committed to eradicating modern slavery and taking concrete steps to achieve that outcome. For more detail on what businesses can do now, see our article on human rights due diligence in supply chains.

Norton Rose Fulbright is a global law firm, with offices in more than 50 cities worldwide, including cities across Europe, the USA, Canada, Latin America, Asia Pacific, the Middle East and Central Asia. We have experience in Australia and globally assisting clients with modern slavery risk management and reporting, as well as broader business and human rights advice. We made a submission to the Joint Standing Committee on Foreign Affairs, Defence and Trade’s Inquiry into a Modern Slavery Act (No. 72), provided regular pro bono assistance to the Committee and participated in the public hearing held in Sydney on 23 June 2017. Click here to download our paper. We also have been actively participating in the Attorney-General’s Department national consultation process to refine the Government’s proposed Modern Slavery in Supply Chains Reporting model.

For more information, contact Abigail McGregor, JP Wood or Greg Vickery to discuss how modern slavery legislation may impact on your business and ways to manage your supply chain risks.