The war in Ukraine raises the risk of modern slavery

The Russian military invasion of Ukraine has had multiple impacts for businesses. One that has not been at the forefront but is looming is the heightened risk of modern slavery resulting from the conflict.

Modern slavery is the extreme exploitation of other people for personal or commercial gain. Victims are forced into working for little or no pay and with no choice in how, where, or when they work. Modern slavery can take many forms, including child labour, human trafficking, forced labour, and bonded labour.

The UN and other bodies are already warning of modern slavery risks associated with the war in Ukraine, and initial reports from within and outside Ukraine indicate human traffickers have begun exploiting people displaced by the war, the UN's International Organization for Migration reported.

Accountants and finance professionals may not directly encounter modern slavery, but they play a key role in stopping and preventing modern slavery within their organisation and supply chains. They are well placed to identify the risks and red flags associated with this crime.

How to fortify against risk in the supply chain

Having the right processes in place and asking the right questions are crucial in managing the risk of modern slavery in the supply chain.

One of the first risk management steps is to ensure you know your supply chain from origin to distribution. Establish a detailed map that looks at every component and organisation involved in the supply chain and conduct increased due diligence in spots where greater risk resides.

Another step is to ensure your company has a code of conduct for suppliers that covers modern slavery and establishes clear expectations of how to comply with it.

Thirdly, internal controls to spot money laundering can inform measures a business can take to check for human trafficking and modern slavery. These internal controls can include ensuring good risk assessment processes are in place to spot this activity or suspicions of this activity; ensuring staff —particularly the finance team — are trained in this area to spot the risks and how to report suspicions; and ensuring there are clear responsibility lines for compliance and good records are kept when this activity is found or suspected.

Red flags of modern slavery risk

Many previous wars and conflicts have led to a rise in human trafficking. For example, a few years after the war in Syria started, the number of identified human trafficking victims from Syria located in Turkey, the Middle East, and Europe rapidly increased, according to data from the United Nations Office on Drugs and Crime.

The UK's National Crime Agency investigates crime in the UK and across borders, including organised crime, cybercrime, and economic crime. It warns in its guidelines for the accountancy sector to look out for red flags when interacting with clients, other businesses, or their supply chains. These include:

• Cash-based businesses. These include car washes, cleaning companies, nail bars, and agriculture businesses, which are easier for criminals to exploit because cash is harder to trace.

• Where business output is not proportionate to size and staffing. Exploitation may be taking place within a business's labour force when the volume of production does not seem right given the size of the business.

• A business on the brink of insolvency. Companies at financial risk are vulnerable to manipulation by traffickers.

• A lack of investment in the business. Investors tend to have controls and processes in place to detect criminal activity during due diligence.

• Unnecessary use of an accountant or use of an accountant not registered with a professional body. A business that uses an unregistered accountant or insists on using an accountant for a transaction or activity that does not normally require one could be trying to use the accountant's knowledge to hide criminal activity.

• Diverse business portfolio in high-risk industries. Be wary of client companies or suppliers with a portfolio of businesses or business interests in industries that are typically cash-based and therefore at high risk of modern slavery, such as construction, agriculture, high-cash generating personal services (for example, spas, massage parlours, and restaurants), cleaning, maintenance, and transportation.

• Unclear ownership and source of wealth. Beware when it is unclear who the owner of the business is and where money comes from or is directly going to, and when unusually complex business structures are in place. It must be clear whom you are doing business with to do adequate due diligence.

• Lack of audit and anti-money-laundering compliance. Businesses that do not claim an audit exemption even though they appear to meet the criteria may be trying to avoid having to provide misleading financial information to hide criminal activity. If found out later, the false reporting could lead to severe repercussions.

• Unusual payment systems and flows. These include cash transfers to high-risk countries, payments and income received at times of the day that are unusual for the sector, and payments diverted through different countries before reaching their destination.

A high-risk workforce profile. Risk factors for modern slavery include low-paid manual labour, irregular hours of work with all staff getting paid the same, lower national insurance contributions than expected, and unexplained lack of staff costs. 

Disclosure efforts to counter modern slavery

Lawmakers worldwide have begun to ask businesses to report on efforts they are taking to help prevent and stop modern slavery in their supply chains.

Among the disclosure laws that have taken effect are the UK Modern Slavery Act, the California Transparency in Supply Chains Act and the Dodd-Frank conflict mineral rule in the US, and the Australian Modern Slavery Act.

Companies with annual revenue exceeding a certain threshold (£36 million in the UK, $100 million in California, and AUD 100 million in Australia) are affected, but compliance can be patchy. For example, only one-third of statements filed under the UK Modern Slavery Act mandate were clear and easy to read and 12% of companies failed to provide a statement, according to a 2022 UK regulatory report.

Also, the UN Guiding Principles on Business and Human Rights set guidelines for businesses and UN member countries to prevent and address human rights abuses committed in business operations.

The EU does not yet have disclosure legislation, but in February 2022, the European Commission published its long-awaited proposal for a Directive on Corporate Sustainability Due Diligence. The directive sets mandatory human rights' supply chain due diligence rules for large companies headquartered or operating in the EU.

— Ross Archer is director–Public Policy at the Association of International Certified Professional Accountants, representing AICPA & CIMA, and based in the UK. To comment on this article or to suggest an idea for another article, email fm-magazine@aicpa-cima.com.

Resources

"UK's FRC Highlights Reporting Obligations on Modern Slavery", FM magazine, 26 April 2022

"Creating Effective Forced-Labour Mitigation Programmes", FM magazine, 1 June 2021

"4 Ways Management Accountants Can Help Prevent Modern Slavery", 2020 CIMA Insights

"Rooting Out Forced Labour From Supply Chains", FM magazine, 1 April 2020

"Modern Slavery: Hidden Risks to Look for in Your Supply Chain", FM magazine, 28 February 2017

Ways to report suspected modern slavery in the UK can be found on the National Crime Agency website, including contacting the Modern Slavery Helpline, run by the charity Unseen, on 0800 0121 700.