The UK Independent Anti-Slavery Commissioner’s January 2021 report—entitled “Preventing Modern Slavery & Human Trafficking: An Agenda for Action across the Financial Services Sector” (the “report”)—has concluded that there is a significant lack of awareness of modern slavery risks within the financial services sector (the “sector”).

The Commissioner, Dame Sara Thornton, notes that “modern slavery has been estimated to generate $150 billion in profits annually” constituting “one of the top three international crimes alongside drug trafficking and trade in counterfeit goods.”  The report accordingly calls on the sector to “detect and disrupt this serious organised criminality” and to take proactive steps to mitigate the various risks associated with modern slavery, including financial, regulatory, legal, governance and reputational risks.

Key Findings

Worryingly, the report notes that 45% of board level managers and directors, and 30% of financial services employees polled, agreed with the statement that “modern slavery is not something which occurs in the UK”.  A further 43% of board level managers and director level employees either have no knowledge as to whether their organisations publish a modern slavery statement, or have confirmed that their organisation does not have one. Rather overwhelmingly, 71% of employees working in the sector have not participated in any form of modern slavery training with their current employer.

These findings are especially pronounced against the backdrop of the UK’s promulgation of the Senior Managers and Certification Regime (“SMCR”) in December 2019.  Although the aim of the SMCR is to reduce systemic risks and strengthen market integrity by increasing senior managers’ individual accountability, it also “provides an opportunity to establish healthy cultures and effective governance in firms”, including by encouraging firms to develop practices and policies geared towards a firm-wide culture of compliance.

It remains to be seen whether legislative amendments to the UK Modern Slavery Act 2015  (“MSA 2015”) proposed in September 2020 will bolster corporate governance to help mitigate the risks connected with modern slavery. At present, the MSA 2015 requires all companies (including financial institutions) with a turnover of more than £36 million to produce an annual transparency statement on the steps they have taken (or not) to tackle modern slavery in their operations and supply chains.  Specifically, section 54(4) of the MSA 2015 lists six areas of optional reporting for businesses, spanning an organisation’s business structure and supply chains, policies and due diligence programmes, risk assessment, effectiveness and training. The Government will now make reporting against each of these areas mandatory to ensure greater supply chain transparency.  In the event that organisations take no steps in relation to any of these six areas, they must state this clearly and provide a reason for this.

Financial institutions have a key role in detecting modern slavery within the supply chains they service; particular weight should be attributed to trading in commodities tainted by modern slavery; and any project finance investments and capital lending activities, which may, directly or indirectly, contribute to modern slavery and human trafficking.

Key Risks

In light of its key findings, the report identifies a panoply of modern slavery-related risks prevalent across the sector, spanning:

  • Legal risks flowing from the MSA 2015;
  • Reputational risks, particularly in respect of exposing investors and lenders to reputational damage “if the companies they invest in are found to employ poor labour practices or modern slavery”;
  • Regulatory risks, given that modern slavery is a predicate crime to money laundering;
  • Customer risks, with “customers wanting to know that the financial institutions that they are dealing with are protecting the most vulnerable in society”;
  • Governance risks, since the management or mismanagement of modern slavery issues may indicate poor corporate governance standards across the business; and
  • Financial risks associated with the aforementioned risks, which “are likely to have a material business impact”.

Key Recommendations

The Commissioner’s key recommendations:

  • Call on senior management to set the tone at the top by taking a stand against abusive practices in their supply chains and business activities; for example, by prioritising and addressing modern slavery risks across business decisions, and ensuring disclosures under the UK MSA 2015;
  • Urge financial institutions to undertake regular due diligence to check for abusive practices in their supply chains and investments; for example, by performing risk assessments pertinent to staff, suppliers, and third parties, specifically in relation to high-risk jurisdictions; and
  • Request that financial institutions integrate modern slavery red flags into their existing money laundering control frameworks to mitigate sectoral risks.

The Commissioner also recommends that financial institutions should seek anti-modern slavery assurances as a pre-condition of any investment or lending with investors, lenders and other stakeholders.

Practical Steps

The report details that over three quarters of those surveyed believe that their organisations can do more to address the risks of modern slavery within the sector.  In particular, regular monitoring can enable financial institutions to detect and manage potential linkages cases of modern slavery from the onset.

Global efforts to promulgate mandatory human rights and environmental due diligence legislation may go some way to address the various challenges accompanying modern slavery in financial services.  In January 2021, the European Union Parliament’s Legal Affairs Committee approved a report recommending a legally binding human rights due diligence obligation for European Union (“EU”) companies.  Organisations with a presence in the EU or who trade with EU-based entities will owe a ‘legal standard of care’ obliging them to take reasonable steps to address human rights risks, including modern slavery risks, in their particular circumstances.

As part of preparatory steps, financial institutions should begin to more closely incorporate modern slavery due diligence into existing financial crime controls and screening processes that identify other types of risks (such as third party risk).  Senior management should also be cognisant of investing in modern slavery training.  In a rapidly evolving regulatory environment, the roll-out of training programmes to educate employees on modern slavery detection within existing anti-money laundering, bribery, and corruption control frameworks, will prove to be paramount in managing modern slavery risks.

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Summreen Mahween

Having completed a two-year training contract at the firm’s London office, Summreen Mahween is an associate in the Corporate Practice Group.

She works on a range of transactional and commercial matters, predominantly advising public and private companies on mergers and acquisitions, corporate restructurings…

Having completed a two-year training contract at the firm’s London office, Summreen Mahween is an associate in the Corporate Practice Group.

She works on a range of transactional and commercial matters, predominantly advising public and private companies on mergers and acquisitions, corporate restructurings, commercial advisory work, and general corporate governance. Her practice also focuses on capital markets transactions. Whilst her clients are wide-ranging, Summreen has a particular focus on the life sciences and technology industries.

She also has significant experience in financial services and regularly writes about, and advises on, ESG-related developments in the banking sector. Her pro bono work principally consists of advising non-profit organisations on various Business and Human Rights matters.