It is estimated that 7% of the global workforce works in the construction industry. According to the International Labour Organization, around US$150 billion profit is generated annually by forced labour across the world. Of that, 23% (US$34 billion) is generated in construction, manufacturing, mining and utilities. Complex supply chains, the scale of infrastructure projects and competitive procurement procedures are just some of the reasons why corruption and ethical challenges have become a significant feature in the construction industry.
In an effort to combat these issues, various legislative measures have been passed and groups and coalitions set up. Here we consider a few of the main tools to tackle the ethical issues in construction.
Modern Slavery Act 2015
The Modern Slavery Act 2015 (2015 Act) came into force on 29 October 2015 and applies to UK businesses as well as foreign companies which are carrying on business in the UK. Not all of the 2015 Act relates to businesses, but it does create obligations for companies to promote transparency in their supply chains. This also means companies will be accountable for slavery and labour abuses in their whole supply chain. That said, there is no obligation for companies to actually police or investigate their supply chain.
The 2015 Act also creates an obligation on businesses with a global turnover of £36 million or more to prepare an annual slavery and trafficking statement. This statement must set out the steps taken by the business to ensure that there is no slavery within the business or its supply chain. It can also state that no steps have been taken however, there are reputational issues to consider in taking this approach. The statement must be published in a prominent place on the company's website and failure to do so can result in an injunction against the company for require compliance with the obligation and/or an unlimited fine.
The implications of the 2015 Act are particularly relevant to the construction industry as supply chains are often long and complex and can span across numerous countries. This, coupled with the high demand for low-skilled, low-paid work and the use of temporary agency workers makes the construction sector one of the most vulnerable industries when it comes to slavery. This was considered in the Lexis BIS report "Hidden in Plain Site: Modern Slavery in the Construction Industry"
In an effort combat slavery in supply chains, the Building Research Establishment and the British Standards Institution Supply Chain Services and Solutions have initiated the Construction Coalition Charter. The Charter is supported by the Chartered Institute of Building (CIOB), Build UK, Constructing Excellence, the Royal Institution of Chartered Surveyors (RICS), the Royal Institute of British Architects (RIBA), the Chartered Institute of Procurement & Supply (CIPS) and the Supply Chain Sustainability School amongst others. The principle behind the Charter is quite simply that slavery has no place in business. Signatories to the Charter commit to uphold, preserve and promote the right of freedom in the UK's construction industry and signatories are asked to:
- Act in accordance with the laws and regulations to which they are subject
- Develop tools, materials and training that support the development of best practice approaches to the issue of business and human rights
- Support best practice through partnerships and research
- Use their influence, and working with relevant authorities, to support the abolition of illegal and unethical practices whenever they are found.
Bribery Act 2010
Another key piece of legislation is the Bribery Act 2010 (2010 Act), which came into force on 1 June 2011. This legislation is among the most stringent anti-corruption legislation globally and covers offences anywhere in the world by UK companies as well as overseas companies carrying out business in the UK.
The 2010 Act created 4 prime offences including the strict liability offence of failure to prevent bribery. The only defence to this is to show that the company had "adequate procedures" in place to prevent a person associated with the company from undertaking bribery and the onus is on companies to demonstrate that they have such procedures in place. The 2010 Act itself does not provide a definition of "adequate procedures" however Transparency International UK has published guidance which recommends that companies have strong, up to date anti-bribery policies and systems.
As the 2010 Act is not restricted to business within the UK, companies should also consider undertaking additional due diligence when dealing with companies in foreign jurisdictions. Transparency International's Corruption Perception Index is a guide on jurisdictional risks and it ranks countries and territories on how corrupt their public sector is perceived to be. In the 2016 Index, the UK was ranked as the 10th least corrupt country alongside Germany and Luxembourg. The Index is a useful tool when considering whether additional checks are required before entering into a contract with a foreign company.
On 19 February 2016 the Serious Fraud Office (SFO) secured its first corporate conviction under the 2010 Act against the former construction consultancy firm Sweett Group PLC (Sweett). The conviction followed an investigation into payments made by Sweett's subsidiary, Cyril Sweett International Limited, to the Vice Chairman of the Board and the Chairman of the Real Estate and Investment Committee of Al Ain Ahlia Insurance Company in the United Arab Emirates. These payments were found to have been intended to "secure and retain a contract" for the construction of a hotel in Abu Dhabi contrary to section 7 (1) (b) of the 2010 Act. As a result, Sweett were ordered to pay a total of £2.25 million in respect of a fine, confiscation and costs awarded to the SFO.
This conviction comes after the SFO's first application for a Deferred Prosecution Agreement with Standard Bank PLC in November 2015 which resulted in payments of over US$26 million in financial orders, compensation and costs. The second application for a Deferred Prosecution Agreement came in July 2016 against a company, who cannot be named due to ongoing legal proceedings but is known as XYZ. This resulted in the company paying over £13 million in financial orders, penalties and disgorgement of gross profits.
These matters demonstrate that the 2010 Act should not be taken lightly and that it is imperative that companies maintain adequate procedures for preventing bribery.
During 2008/09 the Information Commissioner's Office (ICO) carried out an investigation into employment blacklisting in the construction industry. As part of the investigation, the ICO seized information from a company called The Consulting Association, some of which amounted to a "blacklist" of individuals, mainly trade union officials, who were considered to pose a risk to employers if employed within the construction industry.
The list also included details about individuals such as their political views, trade union activities and competence. The list was then used by a large number of construction companies when considering workers who had applied for work on building sites. It is believed that the list had been maintained and used for over 30 years and recorded over 3,000 workers. As a result of the blacklisting, over 1,000 affected workers brought two class actions in the High Court which resulted in out of court settlements totalling about £85 million.
Following the ICO's discovery, the Employment Relations Act 1999 (Blacklists) Regulations 2010 were introduced. The Regulations make it unlawful to compile, use, sell or supply "prohibited lists".
Prohibited lists are those which contain details of people who are members of trade unions or have taken part in official trade union activities, although it does not extend to unofficial industrial action. The list must also have been compiled to be used by employers or agencies for the purpose of discrimination. The actual form the list takes is irrelevant.
There are certain exceptions to this, such as where the list is justified as being in the public interest or where the purpose of the list is to assess the suitability for a job requiring knowledge or membership of trade unions, or where the list will be used in connection with legal proceedings.
If the main reason for a person's dismissal relates to a prohibited list it is automatically deemed to be unfair. Complaints of unfair dismissal can give rise to compensation in an employment tribunal of up to £65,300, including an award for injury to feelings, with the usual minimum award under the Regulations being £5,000.
Companies should also be wary of subscribing to or making use of blacklists as new powers will soon be available to the ICO to impose fines of up to £500,000 where the ICO believes the blacklisting to be likely to cause substantial damage or distress and that the organisation either deliberately flouted the Data Protection Act or should have known of the risk and did nothing to prevent it.
Illegal working in construction
One of the biggest challenges faced by the construction industry, and once which has been recognised by the Home Office, is illegal working. In an effort to tackle this problem, the Considerate Constructors Scheme (Scheme) has collaborated with the Home Office on their "Spotlight on… illegal workers" campaign. The campaign aims to increase awareness of the risks caused by illegal workers in construction and provides a resource on how this challenge can be addressed. It also provides guidance on how to conduct right to work checks on workers.
In addition to the guidance provided, the Scheme have also added new questions in their 2017 checklist on the topic of illegal workers. The Scheme makes 18,000 monitoring visits each year to ensure that companies are meeting the expectations of the Scheme.
Tax fraud is also a significant issue within the construction sector. HMRC has detected targeted criminal activity involving the creation of bogus supply chains to carry out fraud within the construction sector.
On 20 March 2017 HMRC published a consultation on the prevention of supply chain tax fraud within the construction industry. The main areas for consideration are the VAT reverse charge to suppliers and amendments to Construction Industry Scheme in relation to gross payment status.
Under the Construction Industry Scheme, contractors must deduct tax at 30% from payments made to sub-contractors who are not registered with HMRC. Registered sub-contractors are entitled to receive payments either gross (if registered to do so) or with a deduction at 20%. Contractors account monthly to HMRC for amounts deducted. The deducted amounts are offset against the sub-contractor’s tax liability and any additional tax is paid under the sub-contractor’s normal self-assessment tax return.
The VAT reverse charge was introduced in relation to certain telecoms and energy transactions to combat "missing trader fraud" and essentially means that sums charged by a supplier to the customer will not include VAT. Instead customer calculates the VAT on the amount charged and pays the VAT directly to HMRC through their own VAT return. This has been effective in relation to the sectors which it currently applies to however, given the size of the construction industry, there is some concern about the impact that this regime would have on smaller, legitimate businesses. The deadline for responses to the consultation is 9 June 2017.
Coalitions and groups
In 2003 the Society of Construction Law set up the SCL Ethics Group. The Group prepared a statement of 7 ethical principles to comply with to achieve ethical conduct, including fairness, integrity and accountability. It is now considering how to present guidance on the application of these principles.
The International Ethics Standards Coalition is a global coalition of real estate and related professional organisations and is the first of its kind. This applies to land, property and infrastructure as well as construction and sets out global ethical framework. The purpose of the coalition is to assert and sustain the critical role of ethics to meet the needs of the global market and to maintain public trust and confidence in the sector. More than 60 bodies are signed up to the coalition, 10 of which are UK organisations, including the CIOB, RIBA and RICS.
There is a wide range of ethical issues which the construction industry must deal with on a daily basis and awareness of these issues is a large part of the solution. Bond Dickinson will be hosting a partnered seminar with the CIOB to consider these issues further on 14 June 2017. If you would like to attend, please contact Zoe Popple at: firstname.lastname@example.org
If you need any further advice about the topics covered above, please contact us to discuss how we can help.