Are you the weakest the food supply chain?

United Kingdom
One of the legacies of the 2013 Horsegate scandal was to highlight that Food Business Operators’ (FBOs) have very long, complex and international supply chains. Despite the high-profile response to Horsegate the food crime unit estimates that food fraud continues to be worth £200 billion annually. Last year we heard that 50% of Italian virgin olive oil in Italian supermarkets was neither Italian nor virgin. More recently it is being reported that the sale of sugar syrup purporting to be honey is widespread. Ensuring traceability in the supply chain is now as familiar as food safety but is the focus on food fraud putting FBOs in danger of leaving other legal risks unguarded?

The fish in fish fingers is a good illustration. Much of the fish used in frozen products for sale in the UK is caught in Norway or Russia. Typically it is sent to China for filleting. It is then frozen and shipped to giant freezers in South Korea. The frozen fish is then sold to food manufacturers. Consequently the average fish finger has travelled through at least four jurisdictions even before it is coated in bread crumbs. During this process the fish may have been associated with questionable working practices for example use of slave labour on Thai fishing boats. Other associated human rights abuses or bribes (still common in many jurisdictions) may have been used to facilitate the fish’s transit around the world.

The problem for large FBOs is that, whilst it may nevertheless, be possible to trace the supply chain of a fish finger, FBOs have thousands of complex supply chains for a wide range of different products and the legal risks are expanding as the government increasingly expects companies to take responsibility for issues in their supply chain. As a result it is crucial to develop systems and procedures (over and above HACCP and Retailer Audits) to keep these supply chains under review for existing and emerging legal and reputational risks.

A recent example is section 54 of the Modern Slavery Act 2015 which obliges certain businesses with a turnover of £36 million or more to review their business and supply chain and publish a statement of the steps taken to ensure slavery and human trafficking is not taking place in either or a statement that no such steps have been taken. Businesses with a financial year ending on or after the 31 March 2016 must publish such a statement in relation to their last financial year, ideally within six months of its end (for full details click here). Even FBOs who are not strictly caught by section 54 are likely to be asked by their customers for related information as part of their own compliance with section 54. Most FBOs are therefore likely to be indirectly impacted.

Although section 54 of the Modern Slavery Act has limited legal sanctions it does create an expectation that companies will identify issues and demonstrate positive progress year on year. The potential for reputational damage for failing to take steps to address issues of modern slavery or human trafficking could be significant. Consider the reputational damage to Jacobs Douwe Egberts as a consequence of admitting to a journalist that they could not rule out slavery in their sourcing of coffee beans. This damage will only be compounded if the FBO has made no progress the next time a journalist asks.

FBOs will ultimately need to review all stages of their business and supply chain to identify risk areas for modern slavery or human trafficking. Businesses may be tempted to focus on “high risk” jurisdictions, although, even in England there can be issues with forced labour. For example in March 2016 the police found that agricultural workers in Cambridgeshire were being subjected to forced labour and paid less than £20 a week. The perpetrators were convicted of operating without a Gangmaster’s licence. If these workers were producing food which was being sold to one of the larger FBOs this would be pertinent to any review of supply chains for the purposes of section 54 of the Modern Slavery Act.

Additional potential legal challenges are emerging. Section 54 of the UK Modern Slavery Act was modelled on the Californian Transparency in Supply Chains Act. Human rights campaigners are already using the Californian legislation as a basis for launching legal challenges against FBOs. The first cases explored the extent of the reporting requirements. FBOs will be relieved to hear that the Californian court confirmed that the obligation to report is limited and does not encompass every known instance of modern slavery.

However, Californian campaigners have become more ambitious. In the recent case of Dana v Hershey (2016) Dana argued, on behalf of the class, that the statement regarding the use of forced child labour in cocoa bean factories combined with packaging and false advertising legislation meant that Hershey should be required to declare their use of child slave labour on packaging. This claim has been rejected by the court but arguably the campaigners have already achieved their aim not only of raising the issue of child slavery but also naming and shaming Hershey. The legal cost to Hershey will be significant but the reputational damage is likely to have a greater long-term impact. If consumers reject Hershey on principled grounds the loss of income from Consumer goodwill may be irrecoverable.

Unfortunately section 54 of the Modern Slavery Act is just one example of emerging legal risks associated with food supply chains. FBOs already have reporting requirements under the Companies Act (2006) and these are going to become more extensive. BIS has just closed a consultation on the implementation of the new EU law on expanded Diversity reporting. (click here)

In addition to new legal risks the potential sanctions on FBOs for breach of their responsibilities are also increasing. Last month saw the introduction of new sentencing Guidelines specifically directed at increasing the levels of financial penalties imposed on FBOs for breach of food safety standards.

The financial implications can be particularly significant for certain types of breach. 2016 saw the first conviction of a company for the offence of “failing to prevent bribery by an associated person” under the Bribery Act 2010 (click here). The fine and order for costs reached £2.35 million. FBOs with long international supply chains are vulnerable to bribery and FBOs should be actively mitigating against this risk.

For more information on the legal risks associated with food supply chains please contact Tom Scourfield.