What’s the story here?
In recent weeks Boohoo lost more than a third of its market value after undercover reporters from the Sunday Times uncovered unsafe and exploitative working conditions in garment factories suppliers located in Leicester. Some reports even went as far as to claim that these conditions may have contributed to the resurgence of COVID infections in the area. Seeing as Boohoo has recently detailed what the focus of its independent investigation into working practices in Leicester will be, it will be beneficial to review the story again in light of the compliance issues it raises.
Compliance law: Modern Slavery and Bribery Law
Regulatory compliance is an organisations adherence to the relevant laws, regulations, guidelines, and specifications that apply to its business processes. In recent years, with the introduction of legislation such as the Modern Slavery Act and the Bribery Act, the considerations that manufacturing companies must consider concerning compliance has increased. The scope that companies must survey when it comes to compliance has also been broadened to the point that companies need to consider not only their compliance measures but suppliers’ compliance measures as well.
The Modern slavery act consolidated slavery-related offences into a single statute and increased the penalties for any infringement. Its passage was also accompanied by the creation of the office of Anti-Slavery Commissioner, which has also acted to raise the profile of slavery and trafficking. The Act expanded the responsibility for combating forms of modern-day slavery beyond the permit of the government. S54 of the act introduced an obligation for companies that have more than £36 million in annual turnover to publish an annual statement disclosing the steps it has taken to ensure that there were no instances of slavery present within their organisation’s supply chains.
In the wake of the supplier scandal, Boohoo responded by saying that it was shocked and appalled by the reports of modern slavery in its supply chain. The company went on to emphasise that the supplier implicated in the Sunday Times article, Jaswal’s Leicester, was a sub-supplier rather than a direct supplier to the business. This helps highlight the dangers posed to companies operating with complex supply chains. Boohoo manufactures most of its clothes in the UK to save on transportation and distribution costs, which is one of the reasons why it can sell its products so cheaply. The danger of this comes in the form of complex supply chains where suppliers employ large numbers of migrant workers who are paid poorly and work in unsafe working conditions to keep costs low. Due to the complexity involved in the manufacturing supply chain, these practices may be hidden from the main contractor, who will still be held liable if they are eventually discovered.
Another factor regarding supplier behaviour that companies must be aware of is regarding bribery and corruption. Section 7 of the Bribery Act provides that a commercial organisation will be liable to prosecution if a person associated with it bribes another person intending to obtain or retain business for than organisation. This is a strict liability offence in the UK, with the only defence being that the company had “adequate procedures” in place designed to prevent people from engaging in bribery. This also of concern to companies with complex supply chains, as they can also potentially be held liable for bribery offences committed by suppliers.
How do law firms respond to compliance issues?
One of the ways law firms advise clients on how to assess supply chain compliance issues is by conducting regular thorough risk assessment to help identify any suppliers that may be violating the relevant legislation. Having an internal governance policy regarding supplier conduct can also form part of the “adequate procedures” referred to above that can help a company to mount a defence to a breach of the MSA or Bribery Act. Finally, law firms may also conduct Anti Bribery and Corruption assessments on potential suppliers to identify any red flags.
An ABC red flag indicates a cause for concern but does not by itself constitute impropriety. The presence of an ABC red flag means that the company needs to make further inquiries to understand the nature and extent of the ABC risk indicated by that red flag to determine what mitigating steps (if any) would be appropriate to manage that risk. In some cases, the facts and circumstances of a set of ABC red flags may present too great a risk for the company to engage (or continue to deal with) a Business Partner – whether for legal, ethical, and/or reputational reasons. Ultimately, it will be up to the client as to whether to continue with or terminate the business relationship considering the guidance provided by the firm.
The reputation of a firm can take decades to build but destroyed in one day, and a failure to adhere to responsible governance and ethical hiring practices is a sure-fire method for tarnishing the good-standing of a corporation, perhaps irreparably. The fallout from Boohoo’s debacle has already resulted in the abdication of several investors who felt the company no longer aligned with their ESG criteria. It has also opened the potential for more stringent regulation in the fast fashion sector in the UK.
Considering business desires to keep costs low and efficiencies high, increasingly complex supply chains are likely to remain a facet of the manufacturing industry for the foreseeable future. An ability to read stories like Boohoo’s and appreciate the risks that go with minimising supply chain costs is an important part of understanding how different compromises may affect businesses in the long term. An ability to also identify when law firms can step in to mitigate these risks goes a long way in being able to contextualise how this news can represent opportunities to law firms in the future.