Rooting out forced labour from supply chains

No one wants to imagine that the food ingredients their company has built an empire on may have been processed or picked by those getting no pay and having little choice in what they do. Nor does a retail chain executive want to find out shirts destined for stores for the autumn collection were sewn by children too young to legally work.

However, the reality is that many multinationals probably are taking part in forced, or slave, labour — especially those with long, complex supply chains, according to Katherine Christ, Ph.D., a lecturer in accounting at the School of Commerce at the University of South Australia in Adelaide who is an expert on the issue.

"Modern slavery is everywhere," said Christ. "It's in every continent and every industry. If every multinational looks deep enough, they will find it, and we want them to find it and to deal with it and to tell us what they have done."

Forced labour is a big problem for companies all over the world. According to recent estimates by the International Labour Organization, there are more than 152 million children performing child labour, and 25 million people trapped in forced labour — some of them in supply chains feeding into big companies.

But with more jurisdictions getting serious about rooting out the practices, companies are growing increasingly serious about addressing forced labour in their supply chains.

Accountants and CFOs, with their access to detailed financial information and the influence to make it a top corporate concern, have major roles to play, according to Duncan Jepson, head of Liberty Shared.

"Failing to address slavery is an activity that most people increasingly agree should be criminal, not just unethical, and in the case of banks it's actually a predicate offence to money laundering," he said. "So there's no choice but to care about this issue. And CFOs and management accountants need to be a part of that conversation."

The first step

Uncovering forced labour in a complex supply chain can be tricky — and preventing it, even more so. The first step that a CFO serious about addressing the issue of forced labour in supply chains should take is to have the company map out its supply chain in as much detail as possible, according to Justine Nolan, a professor in the Faculty of Law at the University of New South Wales in Sydney.

"To map the supply chain completely, you need to understand it from origin to distribution," she said. "So a transparent supply chain would be able to start to trace products from where the retailer is selling something, to the origin of all the components that went into those goods."

While this sounds deceptively simple, mapping supply chains completely can be difficult for large companies. Until the past decade, few large corporations mapped or engaged with their supply chain beyond the first tier of suppliers, without which detecting and auditing for forced labour is almost impossible, according to Jessica McGoverne, director of corporate affairs at Sedex, a membership organisation that offers ethical trade tools and services that support businesses to map their supply chain and understand risks. That means looking not just at the conduct of a company's immediate suppliers, but also any factories (in the case of garments), farms (in the case of food), or labour recruiters that contracted suppliers subcontract. A thorough supply chain map for something like a cotton shirt should ideally trace the supply chain for each component of the item from the farm where the cotton was grown, to the factory where the fabric is sewn, all the way to market, according to McGoverne.

"During supply chain mapping, it's really important to create visibility past the first tier because that's where the inherent risks are more likely," she said. "This can be much more difficult to do than it sounds, because some organisations may have thousands of suppliers within their supply chains and may lack the resources, time, understanding, or right tools to map properly."

A number of tools are available to help: Some global membership organisations, like Sedex, provide external supply chain mapping consultancy services. Other companies — such as Sourcemap, Tradeshift, and FRDM — offer supply chain mapping platforms.

Once the supply chain has been mapped in detail, it becomes possible to focus on conducting increased due diligence. This can include more-frequent audits or tighter internal controls, on suppliers in the higher-risk areas — for example, places where it's known that slave labour is more likely for specific industries, such as South Asia for clothing production or West Africa for cocoa farmers. (See the sidebar, "What Is Modern Slavery?")

Involve compliance

That's when it's important to bring in input from compliance departments, according to Markus Funk, J.D., Ph.D., a Denver-based lawyer at Perkins Coie, who in 2010 established the first supply chain compliance practice among the 100 largest US law firms and co-authored a book on the subject with Chicago-based US District Judge Virginia M. Kendall.

To start, CFOs and other company executives should work closely with the compliance and procurement departments to ensure that all of the company's suppliers sign a clearly worded code of conduct that outlines anti-trafficking expectations and gives the company the right to audit, according to Funk.

"It's important to use this new contract language both with new suppliers and also for renewals," he said.

Compliance should also take the lead on any mandatory forced labour reporting requirements and disclosure statements, according to Funk.

"One of the problems we've seen over the past ten years is that this issue has been handled by human resources, or corporate social responsibility — which meant that lawyers had either no or very limited involvement in draft disclosures, and that's a huge problem," he said. "You want compliance to handle this issue because the last thing a company wants is a letter from an anti-trafficking advocacy group saying, 'We've reviewed your disclosure and see they are noncompliant, and we are going to start a campaign against you.'"

Educate

One way that management accountants can get involved in the fight against slavery is by raising awareness in their company about the issue, according to Elrich Linde, ACMA, CGMA, support manager at AMOSCA, a management consultancy firm based in London.

"Look at your company, and ask yourself, 'Is there an awareness of modern-day slavery?'" he said. "If not, you can be the driving force in educating people and influencing the company's culture."

Additionally, everyone in the company should receive training about the risks and red flags of forced labour in supply chains, according to Funk — and they should take steps to ensure their suppliers are educated about the issue, too. However, merely getting suppliers to sign a smartly worded code of conduct isn't likely to make a dent in this issue, according to Christ. In addition to educating suppliers about anti-forced-labour expectations, it's vital to build trust with them so they feel comfortable working with the customer to address any issues that may be leading to conditions that create forced labour. This requires a level of transparency and openness that can take time to cultivate.

For example, Christ remembers speaking to a supply chain manager for a major camera manufacturer at a breakfast event aimed at providing corporates with tools to combat modern-day slavery. The supply chain manager had already ensured that all the organisation's suppliers had signed a code of conduct, and regularly checked in with them to ensure they understood the expectations. Years later, after numerous conversations, she finally learned that some of the suppliers were struggling to comply with expectations.

"It took two years of saying, 'If you can't comply, how can we help you?' for the supplier to feel comfortable telling her what was really going on," said Christ. "A lot of suppliers are afraid of being cut, so they may take a 'tick the box' approach to compliance rather than taking it seriously."

Accountants working in management accounting should also look critically at the numbers and ask questions if they seem too low, according to Linde.

"You need to ask, 'Why are we getting such a good deal from this supplier, when all the competitors are giving you prices above that range?'" he said. "Or if you have workers actually in your operation abroad, you could do a headcount and ask why the operating numbers are so low. It's about asking the right questions."

Build in some flexibility

Finally, the finance department needs to be careful about the demands they put on suppliers and ensure that they aren't unintentionally creating pressures that may lead to the abuse of workers. For example, pushing for extremely short lead times and below-market prices can put suppliers in the position where they are forced to cut costs, which they pass on to factories that they are subcontracting, which, in turn, also need to find ways to cut costs, Christ said.

"They put people in the supply chain in the position where they don't have much of a choice — everyone has to cut costs," she said. "And then the person at the end of those demands may resort to slave labour."

Leveraging audits

Many companies opt to outsource the auditing of high-risk factories to third parties that specialise in "ethical audits". Outsourcing audits can give companies the extra assurance that the auditors are specialists in spotting the red flags for modern slavery, in addition to auditing for health and safety, among other things.

When audits are conducted in-house, it's vital that everyone involved with the auditing process receive specialised training on how to detect slave labour. This may require creating specialised checklists or bringing in experts like management accountants with supply chain expertise, nongovernmental organisations, or lawyers to conduct training, according to Funk.

"One of the problems is a lot of companies have a beautifully worded code of conduct which they don't even try to enforce," he said. "Companies need to look at the reality. Once you understand and map out your supply chain, you need to focus on the high-risk areas — and make this a part of your audit plan."

As a part of that plan, auditors should be educated about common trafficking scenarios specific to their industry and how to look for red flags that indicate a heightened risk for human trafficking (which may differ, depending on the geography or sector).

Consider this example: A factory that employs workers from another country who don't speak the language where the factory is located requires additional due diligence on the part of the auditor to ensure that trafficking isn't taking place. Paying workers in cash — particularly in an industry where cash payments are unusual — can also be a red flag for forced labour, and this would warrant additional scrutiny.

"When we train up the auditors, we give them written materials and checklists," Funk said. "You want part of their audit to include a module on trafficking so they know what to look for and they do it every time."

Auditors should also spot-check employment contracts to ensure they are written in the workers' native language and that the workers can read them, and ensure that workers have control of their travel documents at all times. If an auditor sees beds or other accommodations on-site, it's a red flag that warrants further investigation. In addition to making observations, auditors should routinely talk to workers to verify that what managers tell them is actually true — with a translator, if necessary, according to Funk. As with all red flags, one indicator doesn't necessarily mean that forced labour is definitely taking place: Factories might have perfectly good reasons for certain practices (like on-site accommodations).

"Everyone in the organisation needs to be sensitised," Funk said. "This is a serious matter, with legal and reputational components that need to be treated just as you would an allegation of fraud and bribery."

Building anti-trafficking controls into management accounts

While anti-forced-labour audits are an important tool, Jepson would also like to see companies start to think about how they might develop and incorporate anti-trafficking internal controls into management accounts.

"Audits are about spotting something and rectifying it," he said. "But building ongoing controls into your business model allows your business to avoid the problem in the first place."

While internal controls around issues such as money laundering have become standard operating procedure for many businesses, the idea of anti-trafficking controls is something totally new for many companies, according to Jepson. But that shouldn't discourage companies from considering them.

"Robust compliance and robust monitoring will come from requesting that a company has the same kinds of internal controls that they have in place for anti-corruption and anti-money laundering," he said. "It's about establishing a chain of good practice."

To start, Jepson suggests that companies request information related to payments to recruitment agents, confirmation that agents are paying workers, and verification by on-site factory managers (and, if at all possible, the workers themselves) that workers are being paid.

While this level of verification isn't currently required by any of the current iterations of international anti-trafficking legislation, it's a step that companies serious about getting ahead of the issue should consider, according to Jepson.

"An audit only happens once a year — but for slave labour to disappear, you have to embed this information into the regular accounting process," he said. "You want it in management accounts."

An evolving legislative climate

Slavery is a global problem so abhorrent that any ethical company should be willing to invest whatever is necessary to ensure that the people involved with a company's core business are not working under duress. It's also an issue that consumers are becoming aware of around the world — which has led to a tightening of global legislation. While thus far the legislative environment has focused more on reporting and lacked significant financial penalties, it's likely this will change in the near future, according to Jepson.

"The forward-thinking move is to treat this not as an ethical or sustainability issue, but as a real legal risk," he said. "And that means building internal controls into your business."

In fact, over the past decade, the legislative environment has been evolving rapidly on this issue around the world.

The US state of California got the ball rolling on the issue of forced labour in 2010, when it passed the Transparency in Supply Chains Act. The act, which went into effect on 1 January 2012, requires companies that have a presence in California and work in retail or manufacturing with annual gross receipts above $100 million to disclose the extent of their efforts in five areas: verification "of product supply chains to evaluate and address risks of human trafficking and slavery", audits, certification from suppliers that goods meet anti-slavery laws, internal accountability, and training.

Five years later, the UK passed the Modern Slavery Act 2015. Currently considered the most influential anti-slave-labour legislation, the act requires companies with an annual turnover above £36 million to produce an annual slavery statement — signed by the chairman of the company — detailing the organisations' operations and what they've done to identify and manage the risk of slavery in their supply chains.

Since then, other countries — notably Australia, France, and the Netherlands — have adopted various bills requiring companies to engage in additional due diligence and reporting regarding how they manage the issue of forced labour in their supply chains.

Much of the existing legislation currently lacks large financial penalties for noncompliance, according to Christ. However, there's reason to believe that may soon change.

"Governments are regularly reviewing these acts," said Christ, adding that the UK Act has recently undergone such a review. "And these reviews are starting to suggest that as businesses become more familiar with the issue, there will be financial penalties in the near future."

As the great 18th- and 19th-century anti-slavery campaigner William Wilberforce said: "You may choose to look the other way, but you can never say again that you did not know." And for companies that fail to take effective action against modern slavery, such a policy invites not just moral hazard but increasingly severe legal and reputational consequences.

"The tide is changing, and people are becoming much more aware about issues related to forced labour," said Linde. "If you are too late, or wait too long, you might end up on the wrong side of that."

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