Modern Slavery Risk Assessments in the Extended Enterprise: A Quick Guide

In my first post, A Quick Guide to ESG and Risk Management in the Extended Enterprise, I outlined what ESG (environmental, social and governance) is and how it impacts third-party risk management. Next, we looked deeper into a specific aspect of Governance in ESG: anti-bribery and corruption (ABAC). This post discusses a social aspect: how modern slavery can impact your extended enterprise.

Modern slavery risk assessments can enable your organization to determine whether vendors in your supply chain adhere to corporate policies and government regulations regarding forced labor and human trafficking.

What Is Modern Slavery and How Does It Apply to Modern Supply Chains?

Modern slavery exists when people are subjugated by companies and controlled by threats of harm or debts they cannot repay. Human trafficking is a related term used to describe when people are moved between countries (e.g., the slave trade). Slavery is found in the supply chains of corporations producing materials and products, as well as in the forced compulsion of children to make products in factories. In fact, 40 million people are estimated to be enslaved around the world today, resulting in $150 billion in ill-gained profits every year.

The good news is the world has been taking action. Governments in several countries have passed legislation requiring organizations to report on modern slavery in their supply chains. A few examples of legislation include:

Recent Modern Slavery Legislation

• Uyghur Forced Labor Prevention Act (2022): This Act prohibits any products with raw materials or supply chains linked to Xinjiang, China from entering the United States. Goods with suspected connections to Xinjiang can be detained at the U.S. border until the importer provides evidence that they are not violating the law.
• Australia Slavery Act (2018): This Act requires organizations headquartered or operating in Australia to report annually on the risks of modern slavery in their operations and supply chains, and what actions they are taking to address those risks.
• United Kingdom’s Modern Slavery Act (2015): This Act requires companies to define and publish their efforts to eliminate human trafficking and slavery from their organization and its extended enterprise relationships.
• California Transparency in Supply Chains Act (2012): Organizations have to report on what they are doing to eradicate human trafficking and slavery by publishing what the company is doing to address these issues in their supply chains.
• Conflict Minerals in the Dodd Frank Act (2010): Organizations have to track 3TG (tin, tantalum, tungsten, and gold) down to the source smelter and mine to determine if they come from the Democratic Republic of the Congo or nine surrounding countries known for crimes against humanity. Companies have to report this to the US Securities & Exchange Commission (SEC) annually.

Conducting Modern Slavery Risk Assessments of Supply Chain Partners

Modern slavery laws have largely only required reporting and lacked the teeth of significant fines and enforcement actions. But this is about to change with the world’s focus on ESG (environmental, social and governance). The “S” in ESG has a dominant focus on human trafficking and modern slavery.

Organizations need to start by clearly defining what they are doing to address modern slavery across their extended enterprise of third-party relationships due to pending directives and legislation with an expansive, global scope, including the EU Directive on Mandatory Human Rights, Environmental, and Good Governance Due Diligence and Germany’s corresponding Corporate Due Diligence Act.

Consider that the governing EU directive, which is to become country law in each EU member country, is projected to impact any organization with operations in Europe with more than 250 employees and/or more than €50 million in annual revenue. So, if an organization has any presence in Europe – regardless of where it is headquartered – then it will have to address the requirements coming from this directive. Germany’s legislation is the first EU country legislation to support this directive and is expected to become law in the same timeframe that the EU directive gets finalized.

These new laws are NOT like the UK Modern Slavery Act and California’s Transparency in Supply Chains Act, which are mere reporting requirements. Instead, they are expected to have significant enforcement penalties, sanctions and large administrative fines (similar to anti-trust or GDPR fines). Compliance with these laws will require thorough and continuous due diligence of third-party relationships in the context of environmental practices, social and human rights, and governance to address corruption.

Apply Due Diligence Practices to Modern Slavery Issues

This new legislation provides some directives on what vendor due diligence should be conducted. For the purposes of the upcoming EU Directive, due diligence should be understood as the obligation of an undertaking to take all proportionate and commensurate measures and make efforts within their means to prevent adverse impacts on human rights, the environment, or good governance from occurring in their supply chains, and to address such impacts when they occur.

In practice, due diligence is meant to identify, assess, prevent, mitigate, cease, monitor, communicate, account for, address, and remedy the potential and/or actual adverse impacts on human rights. Due diligence examines social, trade union and labor policies; environmental impacts such as pollution and greenhouse gas emissions; and governance practices over a company’s operations and its business relationships in the supply chain.

Due diligence should not be a “box-ticking” exercise. Instead, it should consist of an ongoing process and assessment of risks and impacts, which are dynamic and may change on account of new business relationships or contextual developments.