Tackling Modern Slavery and Human Trafficking risks
Why organisations in the Energy & Commodities sector must take action to meet their obligations
As the world’s economy seeks to recover the losses brought about and exacerbated by the global pandemic, we have seen a rise in media scandals exposing unethical business practices. The International Labour Organisation estimates that globally c.40 million people are entrapped in some form of Modern Slavery and Human Trafficking (“MSHT”), with instigators and facilitators generating c.$150billion in criminal proceeds. In response, governments around the world are increasingly imposing disclosure requirements on organisations concerning transparency in their supply chains and operations, with the ambition to identify and address MSHT risks.
For example, under Section 54 of the UK Modern Slavery Act 2015, companies registered and/or operating in the UK with a turnover exceeding £36million are obliged to issue an annual Board-approved statement, outlining their efforts to address MSHT in their supply chains. Understanding the supply chain and capturing the controls in place to mitigate MSHT risk takes a concerted effort across business units, business functions and jurisdictions; one which can pose a significant challenge to Energy and Commodities firms, given the multifaceted nature of their organisational structure.
Where should organisations look to understand and identify their risk?
1. Higher risk jurisdictions and sourcing raw materials
Research shows that natural resources used in the energy sector are often found in countries already considered to be at a higher risk from a money laundering, terrorist financing, fraud and bribery and corruption perspective. For example, in recent years there has been significant media attention on states in the Arab Gulf1 and South East Asia2, regarding the exploitation of migrant workers through unpaid wages, dangerous working and living conditions, and debt bondage. These states are integral to the energy industry as they are often the source of oil and other raw materials that are required for refined products.
Biodiesel, for example, is heavily dependent on the importation of palm oil. In 2018, the EU used 53% of all imported palm oil for biodiesel.3 Interviews by Amnesty International, with palm oil plantation workers in Indonesia, exposed a wide range of abuses, including:
- “Women forced to work long hours under the threat of having their pay cut, paid below minimum wage – earning as little as US$2.50 a day in extreme cases – and kept in insecure employment without pensions or health insurance”; and
- “Children as young as eight doing hazardous, hard physical work, sometimes dropping out of school to help their parents on the plantation."4
It is challenging and somewhat commercially difficult to avoid establishing business relationships with organisations operating in these regions. By not having a clear understanding and transparent view of their supply chains, organisations may be unknowingly facilitating or exposing themselves to potential MSHT risk, and thus failing to adhere to MSHT legislation.
2. Transportation
The different methods of transportation used for the movement of oil, gas and other raw materials is susceptible to MSHT. The shipping business in particular can be vulnerable to the maltreatment of seafarers, many of whom come from nations with poor human and labour rights records5. Breaches can include excessive working hours, limited rest periods and substandard living conditions, withholding wages and not granting shore leave. More is needed to ensure adherence to industry regulation and, for shipping and maritime business areas, the Maritime Labour Convention 2006.
3. Project and deal structure
The complex nature of energy deals often permits multiple levels of contracting and subcontracting, blurring the visibility on recruitment and working practices across the layers of the supply chain. Companies regularly look to outsourcing to optimise projects and reduce costs, which can have consequences as they start to lose more direct control over the parties in the supply chain. In a sector where joint ventures and partnerships are commonplace, conflicting requirements and standards on labour protection, personnel safety and security can further expose organisations to potential MSHT risk.
As MSHT risk permeates the supply chain, what specific challenges are Energy and Commodities trading organisations facing?
1. Limited understanding of MSHT and associated Financial Crime risk:
Organisations not only have a limited understanding of MSHT indicators and scenarios, but also may not understand the financial crime risk within MSHT. For example, as a predicate offence to money laundering, any products or services derived from modern slavery practices would be considered illicit funds under the Proceeds of Crime Act 2002 (“POCA”).
2. Difficulty in identifying MSHT within an organisation:
Companies face additional challenges in identifying the signs of MSHT in their business and supply chains. There is both a lack of understanding of the different types of MSHT which could occur across the supply chain, alongside where and how these offences materialise. Trying to demonstrate the mitigating actions taken to address MSHT risk in the supply chain is increasingly challenging for energy trading organisations due to their organisational complexity and global reach.
3. Understanding the legislative requirements:
Current MSHT legislation poses difficulties for organisations with subsidiaries and operations across multiple jurisdictions. They must interpret which entities in which locations are subject to MSHT requirements, alongside assessing the overarching scope of application. Often intertwined with environmental and social agendas and human rights initiatives, the question of what is legal and what is ethical comes to the fore. Translating MSHT risk into effective risk mitigation frameworks and implementing commensurate controls can be a minefield when companies are ill-equipped to do so.
In summary, the complexities of product origination and processing, combined with transportation and distribution activities, can lead to increased MSHT risk exposure for Energy and Commodities trading entities. A competitive global market driving for the best deal, when coupled with a lack of accountability across the product lifecycle, creates an ideal environment for MSHT activity to go unnoticed and remain unmitigated. Given that MSHT legislation is growing, the potential consequences are also heightened. More jurisdictions are looking to implement MSHT legislation, meaning this challenge will only become increasingly complex in the coming years.
Here at Deloitte, we are working with our clients to help them understand exposure in their business activities, and implement controls to proactively identify, manage and mitigate MSHT risk.
In our next blog post, we will explore how organisations can address these challenges to improve understanding and mitigate against MSHT risks. If you would like to discuss anything above in more detail, please contact Katie Jackson, Stacey Toder Feldman, or Rawad Halawi.
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