3: The Modern Slavery Act and charities
The Modern Slavery Act 2015 aims to take an expanded approach to tackling crimes of slavery and human trafficking by introducing, among other things, new provisions requiring transparency in business supply chains. The idea is that organisations with “significant resources and purchasing power” can influence global supply chains with a view to eliminating abuse of individuals and driving up standards along the chain.
Aimed at significant commercial operations, it may not be immediately apparent that the supply chain transparency obligations would apply to charities and not for profit organisations (NFPs). However, a review of the legislative provisions (in Part 6 of the Act) and the accompanying Home Office statutory guidance indicates that some charities and NFPs, and/or their subsidiaries, will fall within the provisions.
What does an organisation have to do if the supply chain transparency provisions apply?
If the provisions apply, the obligation is not on the face of it especially onerous. The Act requires disclosure on an annual basis of a slavery and human trafficking statement, setting out what activity the organisation is undertaking to eliminate slavery and human trafficking from their supply chains and from their own business, or a statement that the organisation has taken no such steps.
The Act does not mandate the content of such a statement, but sets out certain provisions which are seen as a “clear indication” of what such statements “could” contain – so they will likely be seen as best practice. Examples are information about the organisation’s structure, business and its supply chains, about its policies in relation to slavery and human trafficking, about its due diligence processes in relation to slavery and human trafficking in its business and supply chains and about the training about slavery and human trafficking available to its staff.
It is apparent, therefore, that organisations falling within the supply chain transparency requirements would need to give careful thought to the statement and to how they would research its accuracy.
The statement would need to be published on the organisation’s website, if it has one, and would need to be signed off by a director (or equivalent).
When are the supply chain transparency provisions in force?
The provisions were brought into force at the end of October 2015 and will apply from financial years ending after 31 March 2016.
How do I know if my organisation is subject to the supply chain transparency requirements?
The provisions apply to a “commercial organisation” which supplies goods or services and which has a turnover (including that of any subsidiaries) of more than £36 million. (This sum is set by regulations, with a view to its being amended from time to time).
A “commercial organisation” for this purpose is a body corporate (which would include a CIO, a company limited by guarantee or a corporation established by Royal Charter or by statute) or partnership, which carries on a business, or part of a business, in any part of the United Kingdom. “Business” is not defined, save that it “includes a trade or profession”.
It seems, therefore, that charities and NFPs can be confident that they fall outside the scope of the provision if they:
- have an annual turnover (including their subsidiaries) of less than £36 million;
- are constituted as an unincorporated association or trust (even if they have a corporate trustee); or
- have no activities in the UK.
Beyond that, if an incorporated charity, NFP and/or its subsidiaries are over the turnover amount, they will need to consider whether they fall within the provisions.
Commercial organisations falling within the supply chain transparency provisions
The statutory guidance states that the important issue of whether a business is being carried on will be answered by “applying a common sense approach”. It is clear, however, that it cannot be assumed that non-profit organisations are excluded from the definition, as it states that, “So long as the organisation in question is incorporated… it does not matter if it pursues primarily charitable or educational aims or purely public functions. The organisation will be caught if it engages in commercial activities and has a total turnover of £36m – irrespective of the purpose for which profits are made”.
This is not particularly enlightening. The usual principles of statutory interpretation will be applied to the Act. The ordinary meaning of the words will be used and the courts are likely to adopt an approach of examining the substance over the form of an organisation’s activities. An analogy may perhaps be drawn with VAT legislation where, in establishing whether or not there is a “business”, the key question is likely to be whether the activities include any element of barter or transaction. On this basis, large fee-charging charities may be caught by the provisions.
There is no guidance in relation to what “part of a business” means. It is unclear, for example, whether the phrase covers a UK-based HQ or other support functions where all the trading activity is in overseas subsidiaries. Similarly, while IT or HR support functions would probably be “part of a business” within the ordinary meaning of those words, the statutory guidance refers to “commercial activities”, which would exclude typical support functions.
If an organisation supplies any goods or services and carries on any business (or part of any business) in the UK, then it does not matter that most of its turnover relates to grants or overseas matters – the legislation aims to impose the obligation on any significant corporation or partnership with some UK “business” connection. For example, a charity or NFP could be a “commercial organisation” if it carries on part of a business in the UK even if its only supplies of goods or services are overseas or without charge.
Trading subsidiaries, charitable subsidiaries and other entities controlled by charities and NFPs can themselves fall within the scope of the provisions regardless of whether their parent is caught. The turnover test can apply to each entity, each time taking into account any subsidiaries of that entity (rather than of the whole corporate group). If the turnover test is satisfied then there will need to be a consideration of whether the entity in question supplies goods or services and whether it carries on business in the UK.
Some large trading subsidiaries of charities may fall within the provisions – it will be necessary to consider the turnover and activities and to make a judgment in each case.
What if my organisation is within the supply chain transparency requirements but does not comply?
If an organisation is within the supply chain transparency requirements, there are no direct penalties for non-compliance (which is one reason why the drafting of the legislation has not been subject to particular scrutiny). The Secretary of State can bring an injunction in the courts to enforce compliance, but this is perhaps unlikely, especially in relation to most charities and NFPs. However, trustees or directors who allow their organisation to be non-compliant will probably be in breach of their personal duties to the organisation.
The greatest impact on a non-compliant organisation (and perhaps for organisations which make a statement that they have taken no steps against slavery or human trafficking in their supply chain) is likely to be reputational risk, especially for charities.
The likely impact of the supply chain transparency provisions?
The Modern Slavery Act is unfortunately not very clear, especially in relation to its application to charities and NFPs. Whether or not it will apply depends partly on arbitrary factors such as whether a charity is constituted as a trust or a CIO. However, the legislation is well intentioned and in some ways the question of whether or not it applies is the wrong question. If a charity or NFP has a supply chain to which slavery and trafficking considerations may apply, then it is likely that it will wish to be seen to be actively reporting so that it is leading the way against such practices. If a charity or NFP falls within the legislation but does not wish to take action, then it may find itself being shamed into action.
21 December 2015