Overview

• The Department of Home Affairs has issued its draft guidance “Modern Slavery Act 2018: Draft Guidance for Reporting Entities” (Draft Guidance) for the new Modern Slavery Act 2018 (Cth) (the Act).  The Draft Guidance is intended to assist entities in complying with the Act by providing explanatory information and further clarity around the requirements of the Act.  The Government is accepting submissions on the Draft Guidance until 19 May 2019.

• Of particular note is that the Draft Guidance purports to give the Act much wider reach than many originally anticipated, particularly in relation to the financial services sector.

The Act, which commenced on 1 January this year, requires certain Commonwealth government and large private sector entities to report on the risks of modern slavery in their operations and supply chains and how they manage these risks.  On 29 March 2019, the Department of Home Affairs released the Draft Guidance for public consultation. 

This article considers what the Draft Guidance reveals about the Department’s view of key concepts in the Act, with a particular focus on the implications for the financial services sector. 

Draft Guidance in brief

The Draft Guidance provides greater detail on how entities can comply with their obligations under the Act, including whether an entity is required to comply, when and how to report, and how to address the mandatory reporting criteria in a statement. 

Reporting on “operations and supply chains”

The core obligation under the Act is for entities subject to the Act to report on risks of modern slavery practices in their operations and supply chains and the operations and supply chains of any entities the reporting entity owns or controls.

The language in the Act turns on the words “operations and supply chains” to describe what is required of reporting entities in relation to the mandatory criteria for modern slavery statements.  Neither “operations” nor “supply chains” is defined by the Act. 

The Draft Guidance adopts the following definitions for these terms:

OPERATIONS: any activity or business relationship undertaken by the entity to pursue its business objectives and strategy, including research and development, construction, production, arrangements with suppliers, distribution, purchasing, marketing, sales, provision and delivery of products or services, and financial lending and investments. This includes activities in Australia and overseas.

SUPPLY CHAINS: the products and services (including labour) that contribute to the entity’s own products and services. This includes products and services sourced in Australia or overseas and extends beyond direct suppliers.

Whilst the meaning of “supply chains” is largely consistent between the Modern Slavery Bill 2018 Explanatory Memorandum (EM) and Draft Guidance, the meaning of “operations” is extended in the Draft Guidance to include the phrases “business relationships”, “arrangements with suppliers”, “marketing” and “provision and delivery of products or services”.  The addition of these phrases suggests a broadening of the intention of what constitutes an entity’s “operations”, with a deeper focus on an entity’s business relationships generally (not limited to supply chains).  In this respect, the Draft Guidance signals that the Department of Home Affairs intends that the Act will have a much wider application than many initially anticipated, particularly in relation to what is captured in the meaning of “operations”. 

Relevance to the financial sector

Sections of the Draft Guidance appear to apply directly to the financial services industry. 

(a) “Business relationships”

The Draft Guidance posits that a key part of an entity’s operations is its “business relationships”, which include ‘business partners and customers, including entities you provide with financial products or services’. 

The Draft Guidance specifically isolates financial products and services for attention here.  It highlights that an entity may be linked to modern slavery through its indirect business relationships, such as through its lending or investment activities, which would constitute a reportable risk under the Act.  As such, entities that lend to or invest money in others are expected to ensure that their lending or investment activities do not contribute to modern slavery. 

(b) Assessing risk in investment portfolios

To this end, the Draft Guidance suggests entities map their investment and financial lending relationships to identify potential modern slavery risks in their operations.  The Draft Guidance gives the example of an entity financing a client that, unbeknownst to the funding entity, uses those funds in respect of a project, in which subcontractors are engaged who use forced labour practices overseas.  Despite there being only an indirect link between the funding entity and the subcontractor, it is suggested that this situation constitutes a reportable risk under the Act.  The Draft Guidance indicates that these obligations also apply to superannuation funds, who ought to understand how the entities they invest in identify and counteract modern slavery risks. 

(c) What does this mean for reporting entities in the financial sector?

The overarching practical implication of the Draft Guidance is that entities operating in financial services must implement practices to identify and manage modern slavery risks deep in their investment and lending portfolios. 

On the customer side, entities will need to consider how they engage with their customers in the provision and delivery of financial products and services.  This may involve due diligence, as well as conducting compliance assessments. It may also include inserting provisions dealing with modern slavery risks into customer contracts. 

Entities in the financial services sector are already subject to other regulations that require due diligence exercises to be conducted on the new customers and investments.   For example, superannuation funds are already required to have a governance framework in place under the Investment Governance Framework Policy, which includes requirements for robust due diligence processes and reviewing strategies. 

Parallels may also be drawn with risk assessment exercises required under Australia’s Autonomous Sanctions Regulations 2011 (sanctions regulations) and, to a lesser extent, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CRF).  The Draft Guidance would appear to suggest that a due diligence-type regime ought to be considered by banks, and other providers of funds, in order to manage their modern slavery risk.  However, whereas the sanctions regulations and AML/CRF apply generally across industry, we note that the Act only applies to those entities that meet the $100 million consolidated revenue threshold.

Is this reflected in the Act?

Of note is that, in direct contrast to the Draft Guidance, the Act itself does not specifically mention the financial services sector, lending activities, or investments.

The Draft Guidance gives the legislative word “operations” a lot of work to do, and it is by no means clear whether a court would take a similar approach (noting that the framework of the Act means it is unlikely that this matter will be tested in the courts any time soon). 

However, if the Draft Guidance sets out the correct approach to the word “operations”, and the application of the Act to the financial services sector, then this will have implications on how entities outside of the financial services sector may comply with the Act. 

Reporting entities in other sectors

For entities operating in other industries, it is unclear how the government defines their “operations”.

However, reasoning by analogy, if entities in the financial services sector are required to consider and manage the risks of modern slavery in their customer and investment relationships, then it is not a great leap to draw the implication that reporting entities in other industries must also report on modern slavery in their customer and other business relationships. 

That is, do reporting entities have to manage risks of modern slavery in their customer relationships?  And in the same way that “supply chain” is not limited to tier-one suppliers, when considering customer and business relationships, what steps are require to “trace” how a reporting entity’s products and services are ultimately used? 

This could represent a dramatic widening in scope of how many have viewed the operation of the Act, the prevailing view being that the Act focused primarily on supply chains.  It would require entities to undertake a more wide-ranging review of their practices and policies concerning modern slavery than originally anticipated.

Next steps

At this stage, the Draft Guidance is still in draft form.  The Government has committed to work with business and civil society to inform and develop the guidance information.  As such, there is an opportunity for the public to provide submissions to the Government on the Draft Guidance until 19 May 2019.  This may be an occasion to seek clarity from the Government regarding the application of some of the concepts outlined in the Draft Guidance, particularly in the areas mentioned in this article.

Article authors: Andrew Hii and Isobel O’Brien

Read our previous articles on modern slavery:
Eradicating Modern Slavery: How the new Modern Slavery Act affects your organisation
Modern Slavery Bill introduced into Federal Parliament
NSW acts against Modern Slavery
A Modern Slavery Act for Australia: Updates from the May 2018 announcement