Overview of Government’s proposals to combat modern slavery with disclosure reporting
Numerous developments are pulling issues around the social impacts of business activity firmly into the mainstream, whether due to upcoming regulatory requirements, increased consumer and trading partner expectations, or both. On the horizon for New Zealand is a modern slavery legislative regime, to bring New Zealand businesses up to the standards required in Australia and the United Kingdom and expected of modern business and our trading partners. The draft legislation is around 6 months away, so will be shepherded through Parliament post-election but is expected to have cross-party support.
Sam Williamson has prepared a comprehensive article below for those interested in learning more.
At a high level, the legislation will likely require businesses to disclose risks around modern slavery in their operations and supply chains on a new public register. At a practical level, this will likely mean gathering and analysing data through careful supply chain mapping to produce annual reports for inclusion in the public register. At this stage, it is not anticipated that businesses will have to conduct due diligence, although this requirement was raised as a possibility for larger organisations in the future.
Of core interest to SHIFT clients will be:
- The size of entity that is likely to be caught by the regime – which is anticipated to be all entities with annual revenue greater than $20 million; and
- The scope of the reporting requirements. The definitions of “supply chain” and “operations” will be critical to determining the breadth of data gathering and reporting required, and SHIFT’s financial institutions clients will be very interested in whether they are required to report on modern slavery risks within their international and domestic investment and lending activities.
Modern slavery is one of many “ESG”-related areas that are here to stay and SHIFT consultants are developing knowledge for how to support client needs.
Government announces its intention to combat modern slavery with disclosure reporting
By Sam Williamson
In July the Minister for Workplace Relations and Safety, announced that the Government will look to introduce new legislation to combat modern slavery. The proposed legislation will create a disclosure regime requiring organisations with over $20 million in revenue to report and outline the actions they are taking to address exploitation risks in their operations and supply chains. [1] These reports will then be published on a new public register.
According to the announcement the legislation will aim to:
- take action to address modern slavery and eliminate exploitation in business supply chains;
- level the playing field for businesses which are already taking steps to ensure that their supply chains are free of modern slavery;
- allow conscious New Zealand consumers to have more transparency about the products and services they consume, to avoid spending money on goods and services that may be implicated in modern slavery; and
- bolster New Zealand’s transparent and ethical reputation within our export markets and on the global stage.
Rob Fyfe, Chair of the Modern Slavery Leadership Advisory Group, hailed the proposal as “a positive step forward for kiwi business and our international trading reputation.”
Other jurisdictions already have disclosure-based regimes in place
According to the International Labour Organisation, as of 2021 an estimated 50 million people worldwide are subject to modern slavery including 28 million people in forced labour. [2] To combat this, many of our closest trading partners including the UK, Australia, the USA, and the EU have implemented disclosure-based regimes within the last decade.
In Australia, commercial entities that have an annual revenue of more than AU $100 million are required to produce Modern Slavery Statements which are published on a government register. The Australian regime specifies the required content of disclosures, including requiring a risk assessment across the entity’s supply chain. In the UK, organisations with a total annual turnover of over £36 million are required to prepare and publish annual Slavery and Human Trafficking Statements which must set out the steps the organisation has taken to ensure that modern slavery is not taking place in any of its supply chains or in any part of its business. However, unlike in Australia, the UK regime does not require specific topics to be reported on.
While it is likely that the New Zealand regime will draw elements from similar international jurisdictions, the Government has said that it intends for our legislation and public register to be “among the world’s strongest reporting systems for tackling modern slavery.”
This announcement builds on previous work by this Government to combat modern slavery
Last year MBIE released its discussion document A Legislative Response to Modern Slavery and Exploitation (the discussion paper) for public consultation.[3] The discussion paper defined Modern Slavery as “broadly reflect[ing] exploitative situations that a person cannot leave due to threats, violence, coercion, deception, and/or abuse of power […] including the legal concepts of forced labour, debt bondage, forced marriage, slavery and slavery like practices, and human trafficking.”
The discussion paper proposed graduated approach of increased reporting and due diligence obligations based on the size the entity. Specifically, all entities in New Zealand (including small entities with an annual revenue of less than $20 million) would be required to take reasonable and proportionate action if they become aware of modern slavery in their international or domestic operations and supply chains, and/or worker exploitation in their domestic operations.
Medium entities (with between $20 million and $50 million in annual revenue) and large entities (with more than an $50 million in annual revenue) would be required to report annually on the due diligence they are undertaking to address modern slavery in their international and domestic operations and supply chains, and worker exploitation in their domestic operations.
Finally, large entities and all entities with control over New Zealand employers (such as parent or holding companies or franchisors with contractual control over franchisees) would be required to meet proactive due diligence obligations to prevent and mitigate modern slavery in their international and domestic operations and supply chains, and worker exploitation in their domestic operations.
It remains unclear how much of the discussion paper will be adopted into draft legislation
While the Government’s announcement is high-level it does suggest that the proposed legislation will be significantly less onerous than the approach outlined in the discussion paper.
- The discussion paper proposed a regime that would apply to both modern slavery in international and domestic supply chains and worker exploitation (defined as “non-minor breaches of New Zealand employment standards”) within New Zealand. While the term “exploitation” is used several times in the announcement, it is unclear whether domestic worker exploitation will be included in the reporting regime. This echoes some submissions on the discussion paper that modern slavery and domestic worker exploitation are distinct problems that may not fit comfortably within the same legislative framework.
- It appears that proactive due diligence requirements will not be included in the legislation. The announcement indicates that the focus of the legislation will be supply chain reporting rather than proactive due diligence, as was proposed for large entities in the discussion paper. That being said, the Minister stated that “Broader reform to progress the other more complex components that were consulted upon remains a priority for this Government, including ‘due diligence’ and ‘take action’ responsibilities.”
- It remains unclear what, if any, obligations will be imposed on the small entities operating within New Zealand. Whereas the discussion paper proposed a graduated regime of increased obligations on small, medium, and large entities, the announcement indicates that only entities with over $20 million in annual revenue will be subject to the disclosure regime. In explaining the choice of threshold, the Government said that “Our focus on larger organisations strikes an appropriate balance, by encouraging those most able to influence their more extensive supply chains, and not overburdening small businesses.” It is worth noting that although the Government may categorise businesses with over $20 million in annual revenue as large, it is comparatively small in international terms (as described below).
Much remains to be seen
There are several areas of significant interest to businesses that will need to be carefully addressed as the legislation is drafted. Two significant issues that were raised during consultation on the discussion document were the breadth of the legislation and potential enforcement provisions. These remain relevant to the proposed reporting regime anticipated by the announcement.
Breadth of the legislation and importance of defining key terms
As the legislation is drafted, the Government will need to take care to ensure that it is clear how broadly the reporting requirements will be applied. For example, whether the requirements will apply to all of a business’ operations and supply chains, and to what level of granularity. On this point, submitters raised concerns about the lack of clarity of key terms and the breadth of some of the proposed definitions in the discussion document. For example:
- Operations was defined as “all activity undertaken by an entity to pursue its objectives and strategy. […] including for example: investment and lending activity; material shareholdings; and direct and indirect contractual relationships”. Such a broad definition of operations may impose heavy regulatory burdens on entities such as financial institutions whose operations are likely to involve a large amount of domestic and international investment and lending activity. This may require such entities to analyse and report on risks relating to funding elements of modern slavery through lending operations or profiting from investment in industries that contain an element of modern slavery.
- Supply chains was defined as “the network of organisations that work together to transform raw materials into finished goods and services for consumers. [including] all activities, organisations, technology, information, resources and services involved in developing, providing, or commercialising a good or service into the final product for end consumers.” This broad definition provides little guidance on the level of granularity with which entities will be obliged to inquire into the third-party supply chains of imported ingredients or components. Broad definitions, such as the ones in the discussion document, leave open the possibility that the regime will impose a disproportionate regulatory burden on businesses with large and complex supply chains or ones that rely on importing prefabricated components.
As the regime is developed into legislation these definitions will need to be tightened and/or clear guidance on how entities will be able to fulfil their reporting requirements will need to be produced. A balance must also be struck between definitions that are clear enough to be enforced but flexible enough to apply to different entities and business environments. Interestingly neither Australia or the UK have defined supply chains or organisations in their legislation, instead they appear to rely on the ‘ordinary meaning of the words’ and examples in compliance guidance. It will be interesting to see whether the Government adopts a similar approach or chooses to define these terms as it did in the discussion document.
Issues with compliance and enforcement
Many international jurisdictions that have already implemented similar disclosure regimes have struggled with promoting compliance and effective enforcement. For example, a 2022 report [4] on the first two years of the implementation of the Australian regime found that 66% of companies reviewed were still failing to comply with the basic mandatory reporting requirements. Similarly in the UK, four years after their reporting regime was introduced in 2015, an independent review [5 ]noted that “a number of companies were approaching their obligations as a mere tick-box exercise, and it was estimated around 40% of eligible companies were not complying with the legislation at all”.
This may be partly due to limited enforcement options available under the UK and Australian legislation. Specifically, the UK regime does not apply financial penalties for non-compliance with the disclosure obligations, rather enforcement for non-compliance is limited to a court order requiring the organisation to publish a statement. Similarly, in Australia enforcement is focused on moral deterrence by publishing the non-compliant entity’s details on the register.
The Government will need to consider the experience of our peer jurisdictions to ensure that New Zealand’s reporting regime is supported by robust enforcement responses to promote compliance. While the announcement is silent on the potential consequences for noncompliance, the discussion document proposed that a range of enforcement tools could be introduced, including specific offences for failing to prepare or publish an annual disclosure, infringements or improvement notices, and enforceable undertakings.
Will our regime really be “among the world’s strongest reporting systems for tackling modern slavery”?
Given that the Government appears to have resiled from including due diligence requirements in the legislation, lawmakers will have to work hard to achieve such a bold claim.
It may be that the comparatively low revenue threshold for reporting will strengthen the proposed system. The proposed $20 million threshold is significantly lower than that of Australia (AU $100 million) or the UK (£36 million) and the Government maintains that the lower threshold is proportionate to New Zealand’s economic landscape suggesting that “New Zealand’s geopolitical context as a small but highly integrated trading nation [where] firms are small, and typically export earlier in their lifecycle than firms overseas”. However, the discussion paper estimates that the $20 million threshold will only capture up to 3,650 entities – leaving 495,500 small entities potentially outside the scope of the regime. [6]
Additionally, the Government may include robust penalties which may improve compliance and effectively penalise noncompliance, thereby giving our regime ‘more teeth’ than our international counterparts. However, it is worth noting here that both Australia and the UK are currently considering recommendations to tighten mandatory reporting requirements and strengthen enforcement options, including the potential inclusion of civil and/or criminal penalties for noncompliance.
Whether or not the Government succeeds in creating a regime that is “among the world’s strongest”, it is clear that this initiative will contribute to New Zealand achieving our commitments under international law and our Free Trade Agreements and will at least put us at parity with many of our closest international trading partners.
Next steps
The legislation will now be drafted which is expected to take around six months, this will mean that it will fall to the next Government to shepherd the Bill through parliament. However, the current Government expects that the proposal will have cross-party support as well as backing from New Zealand businesses and the public.[7]
1 https://www.beehive.govt.nz/release/govt-prescribes-daylight-disinfectant-modern-slavery
2 https://www.ilo.org/wcmsp5/groups/public/—ed_norm/—ipec/documents/publication/wcms_854733.pdf
6 Numbers taken from pages 13 and 14 of the discussion document.
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