Summary

The UK Government’s recent announcement emphasises a more ambitious modern slavery agenda and, specifically, the use of a “smarter mix” of measures across policy, regulation, stakeholder expectations and corporate practice to identify and combat modern slavery and human rights risks in global value chains. In this article, we examine the changes announced by the Foreign Secretary Dominic Raab in January 2021, including a focus on North Western China, and consider how businesses need to respond.

In recent months, the complex and persistent situation of human rights concern in the Xinjiang Uyghur Autonomous Region in North Western China has been widely reported. The Foreign, Commonwealth and Development Office (“FCDO”) has cited “widespread and systematic human rights violations”, including risks associated with “the extrajudicial internment of over one million Uyghurs and other ethnic minorities; severe restrictions on culture, religion, and language; pervasive surveillance and monitoring; the use of Uyghurs and other ethnic minorities in forced labour; and the enforcement of birth prevention policies”.

FCDO measures to support businesses addressing these risks

In response, on 12 January 2021, the Foreign Secretary announced a package of measures designed both to protect British organisations (whether in the public or private sector) from the human rights risks connected with Xinjiang and to clearly set out the consequences for businesses that do not consider them, as well as what appropriate action looks like.

These steps signal an expansion of the UK Government’s modern slavery agenda, and increasing alignment with the United Nations Guiding Principles on Business and Human Rights (“UNGPs”). The UNGPs require all businesses, as a matter of social responsibility and accountability, to implement a holistic approach to address salient human rights and forced labour risks (including modern slavery) that they may cause or contribute to or be directly linked to as a result of their operations and business relationships. Regardless, had the UK Government responded more decisively to the 2019 recommendations of the Independent Review into Modern Slavery, then such a holistic approach to supply chains controls to support tackling these issues may have already been in place.

The recently announced measures include:

• Significantly, the introduction of financial penalties for organisations who fail to publish an annual modern slavery statement under the Modern Slavery Act 2015 (the “MSA”) (to be introduced once the legislative agenda of the Commons permits).
• Updated FCDO and DIT Guidance on the specific risks facing companies with direct or indirect links to Xinjiang. The guidance considers the need for contextualised risk assessments and human rights due diligence that takes accounts of likely challenges to the effectiveness of such processes (such as limits on access and the likelihood that workers may be unable to speak freely).
• A review of export controls as they apply to Xinjiang to ensure that the Government is doing all it can to prevent the exports of goods that may contribute to human rights abuses in the region. This review will determine which additional specific products will be subject to export controls in future.
• Following the commitment to expand the transparency requirements under the MSA to the public sector in September 2020, a further commitment to provide guidance and support for all UK public bodies in the deployment of public procurement rules that exclude suppliers where there is sufficient evidence of human rights violations in supply chains. Compliance will be mandatory for central government, non-departmental bodies and executive agencies.
• A minister-led campaign to engage with UK businesses and reinforce the need for necessary action that sufficiently addresses the risk.

Who is affected?

Given the breadth of legal, financial and reputational consequences for failure to address human rights risks, these measures underscore the increasing need for all businesses to implement an integrated legal and social risk governance approach, including through contextualised risk assessments and due diligence, and, where appropriate, supported by specialist intelligence and advice. (Our previous discussion of developing a strategic approach to modern slavery and human rights risk management can be accessed here.)

This is a priority for any business:

• With supply-chain links in Xinjiang. The extensive, credible reports of forced labour risks associated with Uyghur and other ethnic minorities has not only led to reputational issues for all such businesses, but also contractual, operational and legal risks.
• Directly or indirectly providing goods and services to authorities in Xinjiang. Such organisations risk unintentionally facilitating human rights violations, posing a significant risk to their reputation. Businesses engaging in joint research and development activities in the fields of surveillance, biometrics, or tracking technology are at heightened risk of doing so.
• In (or with connections to) public sector supply or value chains.
• That is a public sector body such as a central government, a non-departmental body or an executive agency.

As highlighted by the recent study into the links between the financial services industry and modern slavery (commissioned by the UK’s Independent Anti-Slavery Commissioner), no industry, business or operating jurisdiction is immune from these risks and all businesses should ensure that:

• A robust multi-disciplinary management system and review process is in place to support the preparation and publication of their annual transparency statement pursuant to section 54 of the MSA.
• They have specifically considered whether they now may be required to publish a statement (especially for public sector entities, agencies or bodies or for private sector businesses where they have extensive and/or complex corporate group structures and the parent entity is not a UK-registered company) or whether a voluntary statement would serve to address stakeholder expectations.
• They seek necessary advice and assistance in undertaking the review and preparation of their statement, as well as the wider development of their legal and social risk governance approach that supports it.
• They work with and clearly communicate their approach to stakeholders.

It is also important to appreciate that modern slavery risks are one aspect of a dynamic and inter-connected global regulatory and risk governance ecosystem concerning human rights. As discussed below, we expect further measures will continue to be implemented in this area and in response to specific risk situations as they arise.

Businesses should ensure that their legal and social risk governance approach also proactively and meaningfully evolves and integrates regular review (horizon scanning, business operations and relationships), feedback from a range of stakeholders, and continuous improvement.

Collective global action

The measures outlined by the Foreign Secretary form part of an on-going coordinated intergovernmental approach which was agreed by the United Kingdom, Australia, New Zealand, Canada and the United States in September 2018 to commit to principles for tackling modern slavery in supply chains.

Accordingly, the Canadian government made a parallel announcement on 12 January 2021, describing similar measures to those adopted by the UK and including steps to prevent goods tainted by forced labour entering the country and to protect Canadian businesses from being “unknowingly” complicit. Canadian companies operating in, or sourcing goods from, Xinjiang are also required to sign an Integrity Declaration.

Further, the United States also took a series of related actions over the course of 2020, including enacting sanctions under the Magnitsky Act, and:

• The use of Withhold Release Orders by US Customs and Border Protection (the “CBP”) against various goods sourced from Xinjiang (and/or businesses operating there) based on information that the CBP reasonably believes indicates use of forced labour.
• The use of sanctions and entity lists by the US Department of the Treasury’s Office of Foreign Assets Controland the US Department of Commerce.
• The passing of the Uyghur Forced Labor Prevention Act through the House of Representatives (an Act which is currently pending in the Senate).

Taking such steps as part of a global effort amplifies the overall impact of the UK’s measures and underscores the significance of these issues to governments, international business operations and their stakeholders.

Investor-led initiatives also are being used to exercise collective leverage to improve modern slavery reporting. One example is the ”Votes against Slavery” investor scheme, which focuses on the reporting performance of FTSE350 companies and seeks specific engagement and support from companies that are UN Principles for Responsible Investment (PRI) members. Investors who have signed up to the scheme use their voting rights to abstain from the approval of the annual report and accounts of non-compliant companies at the time of their Annual General Meeting.

Looking ahead – stepping up ESG and human rights risk management

It is clear that the MSA, reinforced by a developing ecosystem of regulation and a “hyper transparent” business and operating environment, may now start to deliver a step-change in business action to combat modern slavery and human rights risks. Public and private sector organisations must carefully review their business structure, operating footprint and relationships and recognise that managing modern slavery and human rights risks is critical to ensuring business viability and success – namely, resilient operational performance and value chain relationships, compliance with an increasing body of specific ESG and human rights focused regulation, meeting stakeholder expectations and accountability, and creating long term value and reputation capital.

The specific regulation of the relationship between business and human rights and ESG risks continues to dynamically evolve as a number of governments (including the UK, Germany and European Union) consider further specific legislation to address human rights and environmental due diligence issues. Two key developments that businesses should monitor and plan for now in this regard are the:

• German government’s recent publication of the draft Lieferkettengesetz (“supply chain law”) that seeks to impose mandatory obligations on companies based in Germany with more than 500 employees to undertake due diligence, implement appropriate measure to prevent risks and ensure that social and environmental standards are observed through all tiers of the value chain.
• The European Commission’s commitment to table an EU-wide mandatory human rights and environmental due diligence law by June 2021 that will accelerate the need for businesses to implement legal and social risk governance approaches. Successful management of these issues will define leading businesses and their long-term success.