Modern slavery: what the new guidance means for business

Jenna: Welcome to the Insight in 15. My name is Jenna Glass with KPMG, and I'm joined today with Michael Pollitt, senior manager with our forensics team at KPMG UK.  

The EU recently released guidelines on the forced labour regulations, and today Michael and I are going to discuss what the guidelines and what the regulations mean for business. We only have 15 minutes, so let's dive right in. Welcome to the podcast, Michael. 

Michael: Thank you very much for having me. 

Jenna: So, we have new EU modern slavery regulation guidance that just came out. What is the impact that board members and CEOs should be aware of with respect to these regulations? 

Michael: So, before we get to the guidance, let's talk about the fact that this regulation has been around for a little while now. And yes, the guidance was very hotly anticipated, but that's because so many of our clients and so many commercial organisations were trying to get their head around what the regulation itself was saying.  

I think this step by the European Union is a really interesting one because we're essentially banning the import of products that are potentially made with forced labour onto the EU market or banning the export of products made potentially with forced labour from the EU market. So, it's quite a blanket way of looking at human rights, modern slavery, and forced labour.  

I think overall we should view this in the context of the European Union and the United Nations Sustainable Development Goal 8.7, which is to eradicate modern slavery completely by 2030. So that's our starting point here. That's what we're aiming for. That's why this has happened. In terms of what boards and CEOs need to be thinking about, what the C-suite should be discussing, it's the fact that this could now have an impact on the bottom line, right? So, this was talked about in the regulation, more recently in the guidance, the fact that member states of the European Union now have to get their head around the fact that they're going to have to implement financial sanctions where organisations fall foul of the new regulation.  

That impact on the bottom line is the kind of thing that will put this towards the top now of the C-suite and the board agenda. 

The regulation applies to all products that are placed on the EU market or exported from the EU market, which are made in whole or in part with forced labour. And that will apply to products which are made in this way as of December 2027, regardless of whether they were made before or after that date.  

Interestingly, this will also apply to products that are sold online if the people selling these products are targeting end consumers in the EU. So overall, the scope of the regulation is vast. And I think it's deliberately vast in order to capture as many commercial organisations as possible. 

Michael: The regulation applies to all products that are placed on the EU market or exported from the EU market, which are made in whole or in part with forced labour. And that will apply to products which are made in this way as of December 2027, regardless of whether they were made before or after that date. Interestingly, this will also apply to products that are sold online if the people selling these products are targeting end consumers in the EU.  

So overall, the scope of the regulation is vast. And I think it's deliberately vast in order to capture as many commercial organisations as possible. 

Jenna: So, for our listeners, how is forced labour defined? 

Michael: So, we get asked this all the time. I mean, the concept of modern slavery is one that's been around for a while now, but we still get asked what do we mean by modern slavery, what do we mean by forced labour? Modern slavery is a harder one, but you've given me an easier question, which is the forced labour definition.  

Now that is simply work that is exacted from a person under coercion, or for which that person has not offered themselves voluntarily. Of course, that's a very academic way of looking at it, and in practice, there will be a lot of different ways of identifying that on the ground, which I'm sure we'll talk about. But one of the interesting things that the guidance does is it links potential indicators of forced labour back to other potential work-related human rights abuses, such as violence or sexual violence, for example. 

Jenna: So, we have this impact on the bottom line. But what about the, let's say, day-to-day impact on companies and organisations? What are we looking at there? 

Michael: A lot of it is quite validating of good practice that we already administer. For example, it's still good practice to engage stakeholders when you conduct your human rights due diligence in the supply chain. It's still good practice to incorporate human rights risk into your overall broad human rights and broad risk management practices.  

More specifically, I think this sets a direction of travel that organisations need to be aware of. And so, the best ones will not be seeing it just as something we need to comply with over the next 18 months. They'll be seeing it as something that sets a broader tone that we will need to comply with over the next five years. 

Jenna: Got it. OK. What is the impact of non-compliance? So, I'm sure there's operational, financial, reputational. Can you talk a little bit about that? 

Michael: Yeah, I mean, we talked a little bit about financial already, and that's going to be one that everybody is looking at as member states decide how to implement it at their own discretion over the next few months. The other parts of your question on reputational and operational are really interesting because we've been on a bit of a journey with human rights and forced labour and modern slavery over the last 10 years since I've been working on this. 

This is now a concept which more and more people understand. And it's a very emotive concept. Everybody can get their head around the fact that they do not want the products on the table, the products in their wardrobe, to be made at the expense of somebody's personal liberty. And consumers, we've seen over the past 10 years, tend to vote with their feet on this, not only from a sort of everyday supermarket perspective, but also from a shareholder action perspective.  

And so reputationally, the impacts here are absolutely massive if you get this wrong. What the regulation does is it doesn't make it any more illegal than it already was, but it does provide us with a way of shining a light on organisations who are permitting this kind of activity in a way that we didn't have quite so sharply before. Then on the operational impact, again, I think this is a really interesting way of looking at it, because once we've got our head around the basics of financial loss and reputational loss, operationally this could be really very consequential as well.  

The regulation includes expectations on member states to seize and/or dispose of products that have made their way into the European market where there is suspicion that they might be made with forced labour. So, imagine if you're an organization that is importing everyday raw materials or goods to do its work and you think, okay, this regulation doesn't really affect me. It's all at a very high level, business as usual. Well, not business as usual anymore, because those products, those goods that allow you to implement business as usual, might be taken away. 

Jenna: Wow, that is a pretty significant impact. So, as you mentioned, these aren't new regulations necessarily, they've been around for a while. The guidance is new. What's the difference between the EU modern slavery regulations and the UK ones? 

Michael: Another great question. I began my career working on the Modern Slavery Act in the UK. At the time it was world-leading because not many people were talking about modern slavery. The concept itself was still gaining momentum. But our initial requirement was on organisations in such a way that they would be required to report on the steps they had taken within the financial year to identify and eradicate modern slavery from their supply chains.  

One of the ways we term that kind of legislation now is soft law, because it is quite soft. We are only asking them to report on what they're doing. We are not asking them to absolutely do X, Y and Z. We are not implementing these kinds of bans, threats of seizure, or disposal in the way that we now have at the European level. And I think that's a sign of the fact that the world has moved on since the Modern Slavery Act came into force in 2015. 

As a result, the UK in theory is being left behind a little bit. This sets a much more specific direction of travel, which as a prediction, I would say the UK is likely to follow. We're already seeing, for example, government bills being tabled in the House of Commons now that suggest the government is going to get a lot stricter on its reporting requirements. That is perhaps inspired by the fact that we've got legislation like this coming out in Europe, which just goes a lot further. 

Jenna: But wanting to do that and actually doing it in practice are going to be quite difficult, I would imagine, trying to dig into your supply chain and understand where these modern slavery risks reside. So, what are common areas that you're seeing clients either overlook, or how do you effectively go about evaluating your supply chain for these risks? 

Michael: One of the things the guidance does say, which I think is quite interesting, is that the risk of modern slavery and the risk of forced labour ought to be viewed in a broader context of other potential human rights abuses in the operations or the supply chains of the organisation.  

Effectively, if you know that some of your materials are coming from a country where other human rights abuses are at play, such as restrictions on freedom of expression or freedom of religion, for example, that might provide an indicator to you that forced labour could be present as well. And yes, of course, let's look more closely at these jurisdictions. 

When I was reflecting on it, I thought we could go a step further than that. My other area of specialism is anti-corruption. One of the things I've been saying to clients for a long time is that the two are linked. And the upshot of that for implementation of this guidance, and what people potentially miss, is that we could also be looking at countries where there are high indicators of corruption at a governmental level.  

If you've got a state that is willing to take bribes from the highest bidder in order to allow commercial organisations to run riot across their population, those might be the same states that are willing to turn a blind eye when it comes to forced labour, human trafficking, and modern slavery in operations on the ground.  

So, in terms of what people miss, I think that would be a really interesting one. If people could start making that connection a bit more, I think their visibility over this would be massively enhanced. 

Jenna: Yeah. In my day job, you were asking me what I do, and I'm in trade and customs. So, we're constantly evaluating the supply chain for various reasons. Historically, it's been downstream from an export controls or sanctions perspective. I think the things that we will learn will be quite surprising, I'm sure. 

Michael: It's heading that way, I'm sure. 

Jenna: So, what is the one big takeaway that you would like to leave our listeners with today as it pertains to this guidance and the regulations? 

Michael: So, if we think about the board and the C-suite again, I think we've got their attention. We got their attention within the first few minutes because we started talking about impacts on the bottom line and financial sanctions, right?  

Now that we've got their attention, I would say the best boards and the best C-suites will not be taking a short-sighted view of how can I get my head around this requirement within the next 18 months. The best boards and the best C-suites will be saying, how do I view this, as we've been talking about today, as a way marker for a broader direction of travel? And that direction of travel is going to be one in which additional bans like this will come into force, and additional sanctions, such as seizure, disposal, and financial sanctions, could come into force.  

But overall, it's one in which the United Nations and the European Union need to get their head around because Sustainable Development Goal 8.7 will not be achieved on its own by things like the European Forced Labour Regulation.  

If we're going to get there in the next few years, between now and 2030, it will be through a package of measures like the European Forced Labour Regulation, which is designed to, and will have the effect of, putting modern slavery and forced labour higher up the board agenda for years to come. The best boards and the best C-suites will see it that way and not see it as a short-term requirement. 

Jenna: Well, Michael, that's our 15 minutes. Thank you so much for joining us today. 

Don't forget, you can catch all of our episodes on Spotify, Apple Podcasts, and YouTube. And we'll see you next time on Insight in 15.