The regulatory and legal implications of Canada’s Modern Slavery Act

The law, formerly known as Bill S-211, introduces new reporting obligations as well as financial sanctions for non-compliance.

Canada is implementing new measures to address the use of forced and child labour in global supply chains. Canada’s Modern Slavery Act (formerly known as Bill S-211, An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff) recently received royal assent. Subject entities are required to file their first report on or before May 31, 2024.

Background

The 2022 Global Estimates of Modern Slavery, published by the International Labour Organization, International Organization for Migration and international human rights group Walk Free, reported that 27.6 million people are trapped in forced labour—an increase of 2.7 million individuals since 2016^[1]. The worsening situation is attributed to the compounding effects of the pandemic, political instability and unsafe migration in recent years.

Against this backdrop, the Canadian government introduced measures that compel businesses and government institutions to take steps to prevent this exploitation of vulnerable individuals. The new Canadian legislation ranks alongside similar laws previously enacted in the United Kingdom, Australia, France, Germany and elsewhere. These laws reflect a set of different legal approaches. The two broad approaches that have emerged are greater transparency and mandatory diligence. Despite criticism from human rights advocates and others, Canada’s Modern Slavery Act aligns this country with the approach of encouraging responsible business practices through greater transparency in the form of public reporting and sanctions. In Canada, this approach has already been employed for nearly a decade to deter and detect corruption in the extractive sector.^[2]

Who’s affected?

The Modern Slavery Act establishes a new transparency framework to a broad segment of Canadian business and federal government bodies. These new reporting obligations apply to:

Any “government institution” that produces, purchases or distributes goods anywhere in the world.
Any Canadian-linked “entity” that produces, sells or distributes goods anywhere in the world, imports goods into Canada, or controls an entity engaged in any of these activities.

The term “entity” is broadly defined as a business that’s either (a) listed on a stock exchange in Canada or (b) has a place of business in Canada, does business in Canada or has assets in Canada and meets at least two of the following conditions for at least one of its two most recent financial years:

has at least $20 million in assets
has generated at least $40 million in revenue
employs an average of at least 250 employees

The meaning of an “entity” may also be prescribed by regulations.

Entities and government institutions subject to the Modern Slavery Act are required to, on or before May 31 each year, report to the minister of public safety and emergency preparedness (the “Minister”) in prescribed form on the steps the entity has taken during its previous financial year to prevent and reduce the risk that forced labour or child labour is used at any step in the production of goods made by the entity or imported into Canada by the entity. These reports are also required to include information on the entity’s supply chains and its due diligence processes in relation to forced labour and child labour.

Entities are obligated to make their reports (and any revision to a report) publicly available. In addition, entities incorporated under the Canada Business Corporations Act or another federal statute are required to provide annual reports to their shareholders together with annual financial statements. Reports must also be made available to the public by publishing them in a prominent place on an entity’s website and through a public registry accessible through the website of the Department of Public Safety and Emergency Preparedness.

Offences

Subject to a due diligence defence in the case of individuals and agents acting on behalf of an entity, every person or entity that fails to comply with requirements under the Modern Slavery Act is guilty of an offence and liable to a fine of up to $250,000. This applies, among other things, to failing to file an annual report or a revised report or failing to cooperate with or comply with any compliance order issued pursuant to the legislation.

The government has indicated its intention to hold directors and officers accountable for the disclosure. Any director, officer, agent or mandatary of an entity who directs, authorizes, assents to, acquiesces in or participates in commission of an offence under the Modern Slavery Act is a party to and guilty of the offence and liable to punishment whether or not the entity itself is also prosecuted or convicted.

Enforcement

The Modern Slavery Act includes extensive investigative powers. The Minister is empowered to designate persons to verify compliance, including searching any premises, including residential properties, on which there are reasonable grounds to believe that there’s anything to which the Modern Slavery Act applies or any document relating to administration of the law. Except in the case of residential properties, such searches would be warrantless. The Minister could also order an entity to take any measures considered to be necessary to ensure compliance with the Modern Slavery Act.

The new law also expands the prohibition on the importation of goods made with the use of forced labour in the Customs Tariff to cover the use of “child labour”.

Attestation of reports and personal liability

The reports required under the Modern Slavery Act must be approved by each respective entity’s governing body and such approval must be “evidenced by the signature of one or more members of the governing body of each entity that approved the report.” This leads to the question as to whether the individuals signing the reports can also be held personally liable for any misrepresentations in the report. While this wording requires a member of the governing body to essentially attest to the fact that the board approved the report, it doesn’t go so far as to require the member to certify that the report itself is correct.

This in and of itself would unlikely impose personal liability on a board member who simply attests to the fact that the report was approved by the board. However, as noted above, the government has indicated its intention to hold directors and officers accountable for the disclosure required under the Modern Slavery Act and, based on the current wording, if any such persons direct, authorize, assent to acquiesce in or participate in knowingly providing false or misleading information, they can be fined up to $250,000.

Takeaway

Ultimately, the greatest impact of the Modern Slavery Act may be in raising the cost of inaction. The rise of mandatory ESG reporting requirements has been accompanied by false, misleading or untrue ESG claims. This “greenwashing” has sharpened the focus of regulators, shareholders, activist investors and other stakeholders, all of whom play a role in holding companies accountable through regulatory enforcement and legal proceedings.

Publicly traded entities subject to continuous disclosure obligations under securities legislation should consider how to integrate the requirements of the Modern Slavery Act with existing reporting to avoid inconsistencies and potential greenwashing claims.

The potential costs from regulatory enforcement or litigation, including class actions, may far exceed the penalties set out in the legislation. Companies subject to the Modern Slavery Act will therefore want to review their operations to both ensure they mitigate the risk of forced or child labour entering their supply chains, as well as collect the necessary data to meet their reporting obligations.

_{1 "Global Estimates of Modern Slavery: Forced Labour and Forced Marriage,” International Labour Organization, published September 2022}

_{2 The Extractive Sector Transparency Measures Act contains reporting obligations for private entities that function similarly to those proposed in Bill S‑211 and that carry similar penalties}

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