Key issues and what you need to know 7 min read
Australia's Modern Slavery Act 2018 (Cth) (the MSA) aims to tackle the issue of modern slavery through promoting corporate transparency. The reporting regime requires large Australian businesses to report on the modern slavery risks in their operations and supply chains, and on the actions taken to assess and address these risks.
Globally, expectations that businesses will respect human rights and manage their human rights risks continue to increase. In Australia, the statutory review of the MSA was conducted in 2023, and the Federal Government's subsequent response to it has broadly indicated support for strengthening the MSA. Similarly, ongoing advocacy by civil society organisations and strategic litigants continues to draw attention to the ways in which businesses may be connected to modern slavery. In this context, it remains important for companies to ensure that they are adequately discharging their statutory modern slavery reporting obligations, together with any relevant public commitments they have made.
The MSA reporting regime has been in place for more than five years, and most reporting entities have therefore been through numerous rounds of reporting, supported by various pieces of guidance published by the Government. Nevertheless, in our experience, technical issues do arise for reporting entities each year, and this Insight discusses some of those.
Who in your organisation needs to know about this?
Legal, compliance and sustainability teams.
Practical issues with modern slavery reporting
Reporting on owned and controlled entities
The MSA requires reporting entities to report on the modern slavery risks of their owned or controlled entities, as well as the actions taken by their owned or controlled entities to assess and address those risks.
The meaning of 'owned' is not defined in the MSA. One interpretation of 'owns' under the MSA is ownership of more than 50% of an entity. However, alternative interpretations may include minority ownership, or indirect ownership (eg where an owned entity owns other entities), depending on the relevant corporate structure.
'Control' is defined in the MSA by reference to the Australian Accounting Standards. Standard 10 defines 'control' with regard to factors including the existence of power over another entity, exposure or rights to variable returns from the reporting entity's involvement with the other entity, and the ability to affect those returns through that power.
Reporting entities often report on their owned or controlled entities by capturing them through disclosures made about the corporate group as a whole. This approach works where it is known that the modern slavery risks of the owned or controlled entity, and their approach to managing those risks, are broadly aligned with the corporate group's.
However, it can sometimes be difficult to identify precisely which entities are owned or controlled by a reporting entity, particularly in the context of complex corporate structures involving investment vehicles and multiple layers of ownership. This issue was brought into focus in May 2023, when the Government's Guidance for Reporting Entities was updated to clarify that the MSA requires modern slavery statements to specify that a reporting entity does not own or control any other entities, if that is the case. In light of that clarification, it is technically unlikely that reporting entities can avoid the task of assessing whether they own or control other entities simply by reporting on behalf of the corporate group as a whole.
Mapping out a reporting entity's owned or controlled entities at the early stages of modern slavery statement drafting can assist in resolving this issue. Doing so enables the statement to identify:
- first, any reporting entities that do not own or control any other entities, while also allowing reporting entities to flush out where they do own or control other entities; and
- if so, any material differences between the modern slavery risks or program of the reporting entity compared with their owned/controlled entities for reporting purposes.
Consultation with owned and controlled entities
The MSA requires the reporting entity to describe:
- consultation with any entities it owns or controls; and
- in the case of a joint statement, consultation between each reporting entity covered by the statement and the entity giving the statement.
The purpose of these requirements is to ensure entities take a collaborative approach to reporting on modern slavery; and to encourage all reporting entities, and their owned or controlled entities, to participate in the management of modern slavery risks and reporting on those risks.
In some larger and more complex corporate groups, it may be difficult and resource intensive for a reporting entity to consult with all owned or controlled entities. This might be because eg an owned or controlled entity has no independent operation of its own (such as where it is an investment vehicle or holding company), or because there are many owned or controlled entities. Reporting entities should consider what steps to consult will work for them in practice to ensure that this consultation requirement is met, and explain the approach taken, and why, in their reporting.
Complying with this aspect of the MSA may also be challenging where a reporting entity, and its owned or controlled entities, operate under group-wide policies with shared management. This approach may mean that individuals with responsibility over the reporting entity are technically expected to consult with themselves in relation to owned/controlled entities for which they are also responsible. Here, the reporting on the consultation processes could identify that consultation does not occur as a separate process but is undertaken, in effect, because the same individuals involved in preparing the statement do so on behalf of both the reporting entity and its owned or controlled entities.
In other circumstances, it may be appropriate for reporting entities to take additional steps to engage with their owned or controlled entities— eg where a subsidiary's risk profile is materially higher than that of the reporting entity. In these circumstances, that level of consultation could also be described in the modern slavery statement.
Inconsistent reporting periods
The MSA requires statements to cover a 'reporting period', defined as a financial year or another annual accounting period applicable to the reporting entity.
Changes to a reporting entity's reporting period may give rise to a reporting gap that could be challenging to manage. This may arise eg where a reporting entity merges with, or is acquired by, another reporting entity that has a different reporting period, and the reporting entities intend to submit a joint modern slavery statement.
Neither the MSA nor the Government's official Guidance for Reporting Entities provides a clear answer to how to report in this situation. The Attorney-General's Department's official website on modern slavery gives ancillary guidance on managing circumstances where multiple entities covered by a joint modern slavery statement have different reporting periods. It says that 'the entities involved may select a single reporting period to be used for the purposes of the joint statement'; and that 'this single reporting period does not have to align with an existing reporting period used by the entities', provided that it is not 'later than the latest reporting period for any of the reporting entities covered by the statement, or the operating financial year of the submitting entity if this entity is not a reporting entity'.
Avoiding a reporting gap in these circumstances can be challenging without using an extended reporting period that is longer than 12 months (itself inconsistent with the MSA's definition of 'reporting period', which contemplates an 'annual' accounting period only). In the context of a merger, a further challenge may arise where there is no principal governing body (ie a board) that is willing or able to approve the full modern slavery statement regarding both the pre- and post-merger parts of the reporting period.
Managing these issues requires careful consideration of the particular circumstances of the reporting entities involved.
Aligning modern slavery programs with the MSA
In addition to the issues discussed above, reporting entities may face a disconnect between their substantive modern slavery programs and the aims or requirements of the MSA. Eg:
- While the MSA does not currently require companies to undertake human rights due diligence, the practice is encouraged because the mandatory criteria require reporting entities to report on any actions taken to assess and address modern slavery risks. Businesses may be asked to describe their actions to assess and address modern slavery risks if inadequate (or no) human rights due diligence is being undertaken in relation to modern slavery. While this does not necessarily give rise to non-compliance with the MSA, it may mean that a reporting entity has nothing material to report in its modern slavery statement.
- Assessing the effectiveness of actions taken to assess and address modern slavery risk is another area that gives rise to common compliance issues, as it is not enough simply to state a reporting entity's goals or actions taken to address modern slavery risks. Rather, the MSA requires reporting entities to disclose how they determine whether their actions to assess and address modern slavery risks are working effectively. This issue can be overcome more readily if a reporting entity embeds processes for continuous improvement in its modern slavery program, rather than taking a 'set and forget' approach.
- The MSA, like all anti-slavery law, aims ultimately to improve the conditions of individuals impacted by modern slavery. However, in certain circumstances, a reporting entity's efforts to comply with the MSA may not align with those aims in a practical way. Eg some reporting entities may report on modern slavery risks based on their suppliers' registered office, rather than the locations of suppliers' operations (such as offshore factories) where more material modern slavery risks may exist. Similarly, reporting entities may disclose the use of modern slavery contract clauses that shift the burden of addressing modern slavery risks on to their own suppliers and other counterparties, rather than sharing responsibility. While disclosures relating to these matters would technically comply with the MSA, they are not necessarily aligned with its aims.