As we approach the end of the financial year, the task of preparing a fourth Modern Slavery Statement creeps onto the horizon for many large Australian companies. This year however, in light of the recent landmark review of the Modern Slavery Act 2018 (Cth) (Act), there may be a few significant upcoming changes to the legislative landscape to consider, which will raise the bar for compliance with, and expand the scope of, the Act. The Australian Federal Government has already shown its commitment to establishing an independent office of Anti-Slavery Commissioner, with the most recent federal budget committing $8 million over 4 years to establish the office. It therefore seems likely that many of the recommendations contained in the McMillan review may well be implemented.
The McMillan Review
The Act commenced operation on 1 January 2019 with a view to combating ‘modern slavery’ in the global economy. Broadly, the term ‘modern slavery’ includes slavery, servitude, forced labour, forced marriage, human trafficking and the worst forms of child labour. Drafted into the Act was a requirement that a review be undertaken three years after its commencement, and this review was announced on 31 March 2022 with Professor McMillan AO called to lead it. The purpose of the review was to consider the operation of the Act over its first three years, and to look at options for improved operation and compliance. The key questions it sought to explore were whether the Act could be effective in combating modern slavery, whether it could be more effective if changes were made to how the Act is framed and administered, and whether the law is being taken seriously.
After extensive public consultation, Professor McMillan’s report on the review (the Report) was tabled in Parliament on 25 May 2023, and made no less than 30 recommendations for changes to the Act and its administration. The most significant recommendations are outlined below.
Reduced reporting threshold: The first significant recommendation in the Report proposes reducing the reporting threshold, to capture Australian entities with a consolidated annual revenue of at least $50 million for the reporting period, rather than the current $100 million threshold. This recommendation, while significant, is unsurprising. The lower threshold would bring Australia into line with reporting laws in force or proposed in other countries, and recognise that small and medium-sized entities are a significant part of the Australian economy and therefore a legitimate focus for the evaluation of the risk of modern slavery. The loudest criticism of a lower reporting threshold is that it will place a disproportionate burden on smaller entities which lack the administrative resources and expertise possessed by larger organisations, to report in the same meaningful way. The Report recommends that smaller entities ought not be subject to penalties or due diligence requirements until their third reporting cycle, to help manage this burden.
Obligation to implement due diligence systems: The Report proposes that the Act place an affirmative obligation on entities to implement and utilise a due diligence process or system. That is, it would no longer be sufficient to simply report on any due diligence processes already in place. Rather, entities would be required to take effective action to identify and assess modern slavery risks in their operations and supply chains, actively mitigate those risks, and track the entity’s performance in doing so. While some reporting entities are likely to have some form of due diligence system in place already if they have been reporting for multiple cycles, others will need to invest resources into developing these processes.
Full Modern Slavery Statements vs update reports: Recommendation 12 of the Report may be welcome relief for many reporting entities concerned about the burden these proposed amendments will place on their resources. It suggests providing the option of submitting a full statement every 3 years, which addresses all requirements of the Act, with simplified update reports for the interim 2 years which explain any changes to operations and supply chains, critical incidents, and other risk management developments. In our experience, 12 months is not always long enough to design, implement and report on risk management measures in a way that meaningfully complies with the Act. Oftentimes entities have only just finalised the current year’s statement when they are halfway through the following year’s reporting period already. This amendment would encourage entities to commit to longer term projects and analysis aligned with the purpose of the Act, even if they are unlikely to pay off within a single reporting cycle.
Penalties for non-compliance: The Report proposes that offences be prescribed for reporting entities which fail to file a Modern Slavery Statement, knowingly include materially misleading information, fail to develop a due diligence system, or fail to comply with a request from the Minister to take specific remedial action. In the absence of these penalties, the Act contains no robust procedure by which the reporting obligations can be enforced, and many are of the view that the principal of voluntary compliance is no longer sufficient. At this stage, the recommended penalties only relate to breaches of objective standards, and do not extend to subjective assessments of whether or not a modern Slavery Statement is effective or adequate. As such, this recommendation, if implemented, is unlikely to affect companies that are using best efforts to comply with their obligations under the Act, but may impact companies that have been attempting to skirt around them.
High risk declarations: The Report calls for amendments to the Act to allow the Minister or Anti-Slavery Commissioner to make a written declaration of a region, location, industry, product, supplier or supply chain carrying a high modern slavery risk, and to prescribe the extent to which reporting entities should have regard to that declaration in preparing their Modern Slavery Statements. Presently, it is left to reporting entities to identify these high risk matters for themselves, leaving them uncertain of where to focus their risk management efforts and the extent to which they should be reporting on the issues they identify. In our experience, the more prescriptive mechanism proposed would provide useful direction for these reporting entities and improve the quality of their due diligence, and ultimately, their reporting.
New mandatory reporting criteria: The Report also proposes amending s 16 of the Act to add new mandatory reporting criteria, requiring reporting entities to report on modern slavery incidents or risks identified by the entity during the reporting year, grievance and complaint mechanisms made available by the entity to staff members and others, and internal and external consultation undertaken by the entity during the reporting year on modern slavery risk management. In our experience, many reporting entities are already addressing these matters, as they are mentioned in the Guidance for Reporting Entities previously published. However, review participants felt there should be more explicit pressure on entities to address them as mandatory reporting criteria.
Where to from here?
While the Report has been tabled in Parliament, and the Australian Federal Government has previously expressed an election promise to introduce additional measures to address modern slavery in Australia, we are yet to see which of the Report’s more significant recommendations will be adopted.
Companies who fall within the $50m-$100m revenue band, and have previously avoided reporting obligations under the Act, should be alert (but not alarmed) to the fact that they may soon become ‘Reporting Entities’. They should be seriously considering the resources and investment necessary to comply with the Act, and any specific risks that they may like to address or mitigate privately before they must be reported on publicly. However, these companies should also take comfort from the recommendation that a grace period be imposed, potentially exempting them of penalties for non-compliance over the first few reporting cycles.
Existing reporting entities should be seriously considering whether they have been objectively meeting their reporting obligations under the Act to date, or whether they need to up their game so as to avoid the risk of penalties going forward, which could be disastrous reputationally. Further, reporting entities need to start thinking now about what, if any, due diligence systems they have in place to identify modern slavery risks, the first step being to thoroughly identify and map out direct and indirect suppliers. Even if the due diligence recommendation is not adopted, an in-depth understanding of your company’s supplier network is crucial for good governance and meeting basic business objectives.
Finally, reporting entities should be considering what message the quality and substance of their reporting is sending to their increasingly ESG-conscious stakeholders. The public nature of this reporting means a Modern Slavery Statement is directly visible to investors, employees, consumers, and other stakeholders. As such, it may not be enough to simply avoid sanctions under the Act, or to technically comply with its requirements. Entities should be considering the Report’s recommendations as more than just an indicator of potential legislative reforms. They should consider them an indicator of a public sentiment that expands through business, government, civil society, unions, professional associations, and beyond.