Modern slavery and financial services

This blog is the first in a series on the “S” of ESG. Whilst E issues – especially climate change related – have rightly dominated the ESG landscape, there is increased interest in, and importance of, Social issues. This series will cover some of those “S” topics, what they mean, why they matter and what impact they might have on financial services companies.

The 2021 UK Annual Report on Modern Slavery declared that “slavery has not gone away.” And statistics from the police forces of England and Wales showing a 5% increase in modern slavery offences in the year to March 2021 reinforce this statement.

But how does this impact financial services businesses?

Agriculture, construction, fishing, food, manufacturing, and hospitality are among the sectors most easily associated with being at high risk of modern slavery, with financial services businesses often considered a degree removed from the problem. However, financial services businesses have a significant and multi-faceted role in combatting modern slavery. Risks to banks, insurers, investment managers and other firms include:

• supply chains for IT hardware procurement
• outsourced cleaning and catering services
• provision of project finance to higher risk industries like construction
• providing payments services to businesses which engage in modern slavery
• supply chains within an insurer’s repair network or parts manufacturing

Not only is modern slavery and trafficking a crime in and of itself, but any financial institution found to be holding the proceeds of Modern Slavery and Human Trafficking (“MSHT”) will be liable for money laundering offences. In the 2021 Preventing modern slavery and human trafficking: an agenda for action across the financial services sector report, Dame Sarah Thornton urged financial services businesses to be at the heart of the global effort to end modern slavery.

Heightened risk

Not only have incidents of modern slavery significantly increased post pandemic, legislation is also being tightened following the five-year review of the Modern Slavery Act. This is resulting in more granular information and easier comparison of what is reported, as well as a national registry for reporting. More prosecutions are being taken forward, despite a lower conviction rate in some cases (51% for offences involving child victims of modern slavery) than the overall Crown Court conviction rate (79%), signalling a determination on the part of the government, police and Crown Prosecution Service in action against modern slavery.

As is the case with so many ESG topics, it’s not just the regulatory landscape that is the driver of change. Financial services businesses are also feeling an increasing responsibility as investor concerns about social factors grow in line with their greater focus on ESG risk.

Increased awareness

Firm can take an integrated approach to combatting modern slavery, in a variety of ways, including:

• Designing products to provide access to banking services for survivors of trafficking and slavery
• Increased supply chain due diligence by motor insurers for repair networks and their suppliers
• More training for front line staff in spotting signs of modern slavery, including on suspicious transaction types and patterns
• Improving controls and escalation processes, including to law enforcement, and educating staff about the type of information law enforcement need as evidence
• Reinforcing values and a “speak up” culture
• Enhancing client due diligence processes in high-risk regions and industries

For many firms, the training, infrastructure and resources needed are significant, and the issue is increasingly being prioritised at board level, with CEOs and Chairs signing Modern Slavery Statements. Despite a progressive approach by a number of financial institutions, including some of the largest banks and insurers, continued focus is needed across the industry in prioritising the issue of modern slavery and taking the opportunity to leverage existing controls and processes to detect signs of modern slavery.

In addition, the risk of modern slavery is forecast to increase still further as high inflation and the cost-of-living crisis combine to exert more pressure on supply chains and labour shortages. For further information on identifying and understanding MSHT risk in the supply chain, read our blog on “Tackling Modern Slavery and Human Trafficking Risks” which looks at challenges in the Energy and Commodities trading sector from a financial crime perspective.

A time to report and assure activity?

As more time and resource is invested into combatting modern slavery, and greater attention is paid to the issue by investors and stakeholders, financial institutions are having to consider what information they publish and report. Much like the approach to gender pay gap reporting, the National Modern Slavery Statement Registry allows easier analysis and comparison of what companies are reporting, which is expected to lead to greater scrutiny of the statements by stakeholders.

As just as with wider ESG and non-financial information reporting, companies are starting to consider the level of assurance that’s appropriate for the modern slavery-related disclosures. With CEOs and Chairs often being signatories to modern slavery policies, and with many audit committees considering modern slavery reporting as part of their Audit & Assurance Policies, the need for assurance – either internal or external – is expected to continue to grow.

As a result, modern slavery - its identification, eradication and articulation – is not a topic for another time or another industry, it’s a topic for now and for financial services.