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Legal and Constitutional Affairs Legislation Committee

MICHAEL, Mr Heath, Director, Policy, Government and Corporate Relations, Australian Retailers Association

CHAIR: I declare reopened the Legal and Constitutional Affairs Legislation Committee's inquiry into the Modern Slavery Bill 2018. I welcome Heath Michael from the Australian Retailers Association. I thank you for your written submission, which we have numbered as No. 35 for our purposes. I think we've given you information on the protection of witnesses and parliamentary privilege. We ask you to make an opening statement for as long as you wish. We have your submission, but we ask you to make an opening statement.

Mr Michael : I'll give a brief opening statement and then move on to feedback we've been getting from the retail sector. To give you some idea of the scope of the ARA, we represent around 7,500 members or around 50,000 shopfronts around the country. This is from the country's largest department stores, supermarkets, specialty retailers, electronics, fashion, food and convenience store chains right down to mum-and-dad operators.

With the specific recommendations regarding the Modern Slavery Bill, we do want to ensure that this bill is carefully worked through. As a significant player in the supply chain, retailers have attended several government consultations, as have we. We have also hosted a number of our own industry consultations and have sought expert advice from various consultants to work with retailers when giving input into the development of this legislation. I've also made a effort to discuss this with many parliamentarians, including the minister and shadow ministers responsible for this particular bill, to make sure that we can work through an effective piece of law as it progresses through the parliament.

Large Australian retailers, in the vast majority of cases, already apply ethical sourcing audits and programs to ensure their produce and products are ethically sourced and reported. Should this bill be passed, the ARA would be supportive and work with current measures that retailers follow to ensure that any new measures in the bill are reasonably applied to businesses. We've already started working on holding additional forums and briefings, for if and when the bill is passed, to enable retailers to enact what they need to to comply with the legislation.

We note that special care does need to be taken regarding overregulation and the impact on businesses. We have noted in our submission the turnover figure. I have discussed this with several representatives of governments. At least anecdotally, from our own experience, we've found—as we've gone out to find the right sourcing individuals within businesses to talk to about this legislation—there does tend to be a figure of rough turnover that is at least in the low hundreds of millions before you find that businesses have that capability. I think this bill recognises that to a large degree.

CHAIR: Can you just elaborate on that?

Mr Michael : With the scale of the membership we've got, you don't know who's looking after the various pieces within businesses. Quite often, yes, we might know who is dealing with sourcing in a business. I'll ask, 'Do you have someone who is dealing with ethical sourcing in the business?' Sometimes I'll have to phone up the HR manager and ask, 'Do you or don't you?' We did fairly consistently find that they were businesses of scale who had ethical sourcing people within the businesses. Pretty much to a T, no-one was turning over less than a hundred million dollars. We weren't really seeking out true small businesses, but we did start to discover there was a point where they just didn't have that expertise within the business. I think there's a reason why that figure has been reached overall, and it became fairly clear to us as we were phoning around.

CHAIR: What was the reason?

Mr Michael : That you need a certain amount of turnover to be able to afford to have—

CHAIR: So it's simply the cost. For smaller big businesses, it is the cost of doing it.

Mr Michael : Yes. One point that needs to be made with this legislation is that—whether they're international retailers operating in Australia and based at the large end, probably close to half of the market, of international operators or Australian operations overseas—many, many of these businesses are already exposed to these legislative frameworks, whether it's in the UK or California, et cetera. We found a real consistency of already complying and wanting to comply by the retail sector. I'm now skipping through my notes to some extent. I'm just double-checking if there was anything in particular that I needed to pick up on the way through.

Some of our members have indicated that they are supportive of an independent statutory body to provide an overview and oversight of the legislation. That has very much comes from discussions with those who aren't in the billions of dollars but the hundreds of millions of dollars. It's about: 'What will we need to be supplying? What if we do find that there is an issue with a supplier? We don't have the capability or the knowledge internally to be able to escalate the particular issue.' Therefore, there has been some discussion around how we do need a guidance piece with this legislation.

As with all these measures, a reasonable approach needs to be taken on this journey. We've experienced many stories on how devious suppliers can be with slipping non-approved or inauthentic product into the supply chain. I should mention that the ARA is actually the secretariat for a body called Australians Against Counterfeit and Contraband Products, which I actually chair. That has been set up by a number of brands and retailers over the last few years. Originally, it was to specifically deal with counterfeit issues, but then there were contraband issues. We released a report about a month ago into the market. We worked with The Economist. This came off some of the black economy work we were doing around unethical trade. In that report, it partially covered modern slavery pieces that do slip into the supply chain. That particular organisation is looking at track-and-trace technology and what we can do with regulators in that space. A number of brands also sit down with both the opposition and the government at the end of this month to discuss some of these issues and what retailers and suppliers can more effectively do to protect their supply chains. I'd like to thank the committee for having us. That's my opening statement.

CHAIR: Thanks very much for that, and thank you for your advice on the turnover issue, which is particularly useful. Just to put it in perspective, off the top of your head could you indicate to me—I should have asked Woolworths, who gave evidence here before—what Woolworths' turnover would be Australia wide.

Mr Michael : I think around the $20 billion or $30 billion mark. I can't remember off the top of my head. They're very well resourced.

CHAIR: That's close enough. They have a proper set-up to look at it. With turnover of $30 billion, you can appreciate why. Someone on $100 million is going to struggle.

Mr Michael : That is true. What we do know is that a lot of the smaller businesses—they're not that small when you're talking hundreds of millions—can quite often be boutique in nature. There was an instance yesterday morning. I sit on the RMIT School of Fashion and Textiles advisory board with a number of retailers. One of my members chairs that board. Many of those fashion brands would have turnover in the low hundreds of millions. I've got to say every brand around that table was completely committed to undertaking everything they could to ethically source. A member raised concerns about cotton from Azerbaijan slipping into the supply chain and what they have to do to try to address those issues. While they have smaller turnover, they have buyers that have to make those ethical sourcing arrangements within those businesses. But there is deep concern from those businesses around brand protection and that these activities aren't being undertaken.

CHAIR: Does your association have an official position on the independent ombudsman, commissioner or whatever it might be called?

Mr Michael : There have been varying views. I've got to say that, with 7,500 members, we have had varying views. My CEO is Russell Zimmerman. We have a board meeting today, so he is an apology for today. When he made the public statement that he and the retail sector welcomed the legislation, some smaller members phoned up and expressed concern that this would be extreme and they couldn't comply. We had to reassure them that we weren't talking about smaller members. There was some expression of concern that a commissioner as such could unnecessarily pursue brands as opposed to assisting brands. The overall position at the moment from talking to larger retailers is assistance in complying and in what you need to report. I'm not going to get hung up on a title. I'll let you guys argue about that.

CHAIR: So it would depend on what the role of the 'commissioner' is and what his terms of reference are.

Mr Michael : And advice: 'If I do find a breach, what do I do? Is this a matter that I should go to the Federal Police on? How do I report something through to Interpol that might be happening with tomato pickers in Italy?' They won't know what they should be doing, and that's not their role, but they will need someone to advise them.

CHAIR: There have been a lot of calls by NGOs and academia for penalties to be imposed from day one. Do you or your association have a comment on that?

Mr Michael : Yes. If there's been one consistent theme from every retailer and business I've met in this space, it is no penalties. I appeared directly after Twiggy Forrest at the original hearings on this issue, and I think I was in very firm agreement at the time with Twiggy that the brand harm alone is punishment enough for brands. I've also had it put to me that brands who are doing the right thing want those who are doing the wrong thing removed from the marketplace. They have a competitive disadvantage, and any brand harm done to those doing the wrong thing should be enough to—

Senator PRATT: What do you mean by 'brand harm is enough punishment for slavery'? You need to be careful with your statements. I'm sure that's not what you actually mean. There might be brand harm in failing to report. There might be brand harm in not addressing instances of slavery in the supply chain and working to lift standards. If you're seen to be engaging in slavery, surely brand harm is not enough.

Mr Michael : I can think of at least one IT company at the moment that's had some commercial harm done to it. Commercial harm is a better way of putting it. There would be significant commercial harm to any brand who was seen to be actively participating in that.

Senator PRATT: You're saying it's enough to change behaviour, not that it's enough moral recompense for such activity.

Mr Michael : Absolutely. With the retailers we've been dealing with on this issue, I don't believe that morally anyone would undertake this activity at all. I've dealt with enough CEOs. I think back to yesterday when there was a very genuine—

Senator PRATT: They don't want to find this in their supply chains.

Mr Michael : They ethically don't want it. They don't want to see people in these situations. There are some senior executives and CEOs who are very passionate about that.

Senator PRATT: I'm glad to see your clarity around the appointment of an antislavery commissioner or advocate if their role is to support industry make reports and seek support for their internal supply chain issues. You spoke about some of the reporting issues. In terms of the nature of the retailing industry and a company like Woolworths or Coles or a range of others that are dealing across a multiplicity of brands that supply to a multiplicity of businesses, do you think that capturing the bigger businesses is going to help address issues in delis and IGAs and other small businesses? It'll mean that if a product is seen to have a problem then the larger businesses should lift those issues.

Mr Michael : We do raise this to some degree when it comes to smaller retailers supplying larger retailers, whether they're a concession in a department store chain or a reseller, which happens very consistently. You'd be surprised how often it happens. Smaller retailers are ultimately going to be captured by this legislation because, even now, there are quite complex supply agreements you need to go through to prove your sourcing. I've had the example of how hard it is to become a contractor for a mining company. From our perspective, when we do contracts with large international businesses, it can take three or four months to finalise all the details in the contract.

Senator PRATT: Yes, I can see that it's only logical that, if a retailer is dealing with an importer then the big business needs to make the inquiries down the chain to the smaller importer, who's ultimately going to have to do the work to check the supply chain. Is that kind of what you mean?

Mr Michael : Yes. If you are supplying to a bigger business, they're going to require you to check your supply chain and give guarantees around your supply chain. There will ultimately be pressure if smaller businesses aren't checking at all where they're sourcing product from. If they are found to have had unethically sourced product then no doubt there will be questions raised. This legislation has been set up with a three-year review to see how effective its implementation around large business is, but the smaller end of the market will be far more difficult to capture.

Senator PRATT: But, given there's a three-year implementation, are there going to be gaps in the information that those larger businesses are going to be able to provide within that three-year time period? It will take time, so a small supplier might say: 'I don't actually know; it's going to take me a few months to drill down into our supply chain to work that out; I don't have the resources to go overseas yet to look at it'? What kinds of issues are going to come up?

Mr Michael : You'd actually be surprised how many small businesses do buying trips and go overseas.

Senator PRATT: Yes, I know they do.

Mr Michael : But there will be implementation difficulties. There's no question about that. That's why there's this period of time to ask for that assistance from an oversight body. I'm having difficulty here.

I have to say, some of the examples we've been given are actually on the very, very large scale. There is a very large electronics company who is well-known for not talking about its supply chain at all to its retailers, and its retailers have said, 'We can't not supply their products because they're so significant.' That business will be required to report under this legislation, but they are still going to be very reluctant to supply any information to the retailers they supply around their sourcing methods.

Senator PRATT: I'm assuming that business in and of itself, the product you're talking about—I don't want to name names.

Mr Michael : It's a very complex product.

Senator PRATT: I'm assuming they will be liable to report in their own right.

Mr Michael : Yes, they will be.

Senator PRATT: And some of that information will have to flow through across to other retailers to substantiate that.

Mr Michael : That's been one of the discussions we've been having with retailers—'How will I do this?' Well, they're going to have to utilise the reporting requirements of that business, and that's why we have been working with consultants working through some of these pieces with retailers.

Senator PRATT: Those companies have started to have those discussions.

Mr Michael : Yes.

Senator PRATT: So a big tech company supplying phones, for example, that's present in its own right in Australia and that has stalls all around as well as a range of other telecommunications retailers selling their product—are the discussions happening across that product band about how they will start to report?

Mr Michael : Yes, they are.

Senator PRATT: Okay. What does that look like in terms of the level of detail they'll be able to give us about that supply chain?

Mr Michael : At the moment it's more about how we do this. Once we've got the legislation up and running, we'll need advice on what the requirements will be. That has been a consistent piece with these discussions—what sort of detail is going to be required. I know the department has put out some additional information recently. I only got to look at it yesterday, but we will continue to cycle that out to retailers. The ultimate answer is: we don't know exactly what we will have to report on and what that will look like.

Senator PRATT: So what kinds of products are going to be the most difficult for large retailers with diverse—

Mr Michael : Electronics, without a question. You can have discussions with some of the electronics brands, and I'm sure you will be. Even from the componentry counterfeit perspective, we've been told all sorts of weird and wonderful stories about recycled chips that slip into the supply chain, despite the brand's best efforts to try to stop that happening.

Senator PRATT: Does it become more difficult where, for example, we've got brands that are present as products in Australia but don't have their own business head here? How are retailers going to deal with that?

Mr Michael : If a manufacturer is purely established overseas and doesn't have an Australian presence, that's when the burden of reporting would be more on the retailer. I think that's been one of the pieces about how we regionally target and how we product target, because there are items brought into the country from companies that have zero presence here.

Senator PRATT: I think that captures the majority of my questions, thank you.

Mr Michael : Don't worry; this is complex for retailers as well.

Senator PRATT: Yes!

Senator MOLAN: MrMichael, you spoke about the big electronic company that was reluctant to release its supply chain to its retailers. With no penalty, why in the world would it change? It might have more than $100 million turnover, but why would it change?

Mr Michael : As I mentioned, I can think of another very large IT company that's being punished by the market at the moment because of data breaches that have occurred. That company is trying to change. I think there's been enough evidence through history, and even if I think of some of the big sporting brands—some of them are our members these days—and the brand harm that was done to them back in the 1970s and 1980s when it came to child labour issues and the efforts that those businesses go to today to make sure that their factories meet particular wage standards to make sure that there is no question about how their products are produced. That harm to their brands back in those days has caused them to be some of the most ethical companies in the world today.

Senator MOLAN: I think I know the one you are talking about. But who is going to go back through their supply chain to find the chips or whatever it is deep down—

Mr Michael : The brands do. The brands don't want consumers finding illegitimate, fake product, cheap componentry that wasn't approved as part of the product. They want the consumers buying reliable products.

Senator MOLAN: We would all love that. That's the whole point of this bill. But in the example you gave us, that company is not even telling its retailers. I assume it's doing that because it gives them a financial and commercial advantage.

Mr Michael : They don't want the competition to know their supply chains so they can undercut them, effectively.

Senator MOLAN: So you're saying it's got nothing to do with the fact that the chips are being made by children who are picking bananas or something. Do you have a suspicion that that might be occurring?

Mr Michael : We know that reused chips fall into products. We know that fake or unapproved chips fall into products.

Senator MOLAN: I thought you were saying that somewhere down in their supply chain they know they've got a slavery or misuse or underpayment problem.

Mr Michael : They could. They’re continually looking for that. You're talking about very, very complex products. These brands are doing their best to try and make sure that every component is correctly sourced.

Senator MOLAN: You're saying that that example you gave—you have confidence that they are working to improve themselves.

Mr Michael : We would hope that they are, and we would hope that under this legislation that requirement to report at an Australian level will give retailers more confidence.

Senator MOLAN: I go back to my first question. What's in this bill to make them do it? If they have a financial advantage, why would they give away that financial advantage when there is no significant penalty in this bill?

Mr Michael : From a retailer perspective, we've always thought the naming and shaming will be enough.

CHAIR: Who is going to do that?

Mr Michael : If an entity has reported and there's been a discovery that they haven't thoroughly looked at their supply chain, they will be named and shamed.

Senator MOLAN: It strikes me that we've had a lot of other witnesses who have been very enthusiastic—they're not businessmen like yourselves—

Mr Michael : I did look at the witness list, and there are not that many businesses on the witness list.

Senator MOLAN: That's a comment that we've made ourselves. People have given examples of what's happened in the UK, where there have been no penalties and a commissioner who hasn't had the authority that he thinks he should have had.

Mr Michael : The legislation is still in its relatively early stages in the UK. This legislation does have a review period. I would absolutely encourage that this be looked at and, once implementation has happened, what other measures need to be changed. But let's get it up and running and give businesses the best opportunity.

Senator MOLAN: That's quite fair, but there might be something we would need to put in the bill to set us up to be able to make that decision in three years time. So if we muddle through three years and say, 'Should we have penalties?' and we don't have any information at that stage as to whether anyone is even getting vaguely close to the whole thing, do you think that would be of benefit to us?

Mr Michael : Given what I've been told by my members, no, they wouldn't—

Senator MOLAN: I understand that your members don't want to do it. I totally understand that. But this bill is supposed to impact on slavery, not design a compliance regime that allows people, quite rightly, to make the profit they were making before.

Senator PRATT: What would you think if we public a list of those who haven't reported?

Mr Michael : That in itself will be a form of naming and shaming.

Senator PRATT: Yes, but is it a penalty?

Mr Michael : It would be a very public penalty for not reporting.

Senator PRATT: If you think there'll be a high level of compliance, and 100 per cent of companies with turnover comply—that hasn't been the history in the UK.

Mr Michael : In our experience talking to the major brands, I haven't come across one of our significant members—and the bulk of major retailers would be our members—who has said to us that they aren't already doing this or they wouldn't mind taking this a step further and having what they're already doing internally publicly available. We've had no pushback from any major retailer on this. In fact, the department has spoken to dozens of them and been welcomed.

Senator MOLAN: That might be the form of penalty that we might use early on with some information gathering to see whether people are reporting and whether they're going to the board if they have board, and whether the board is signing off on the reports and all of those things, but with something—I'm not sure how you would do it—but something would indicate that in three years time we'll be in a position to make a decision on this.

Mr Michael : I think this is a piece where it's fair to say, at least from my companies' perspectives, that they're more than open to that sort of conversation.

Senator MOLAN: The other point that I had is that you accept that what's in the bill—the $100 million threshold—is the way to have the threshold. But so many of your members are much smaller than that. If you've got 50,000 members—

Mr Michael : 50,000 store fronts.

Senator MOLAN: A proportion of those will be mum and dad businesses and businesses of less than $100 million. The evidence we've been given indicates that many of them—I was down in the thriving metropolis of Tumbarumba last week, and in a street walk we went into a great store. They had only just returned from some strange place on a buying trip. Their annual holiday is a buying trip. How do we catch them? Senator Pratt has given us an example that if Woolies are doing it in all of their grocery lines, with a bit of luck they'll pick up veggie or something like that so others can look at it. There has to be a process whereby they do look at it.

Mr Michael : In the independent supermarket space—they're not our members; you'll need to get Master Grocers to talk on their behalf—if I think about them, if it's Metcash supplying them, it's a multibillion dollar company, or even some of them like Drakes Supermarkets et cetera, they're all billion-dollar turnover companies. They're all supplying the smaller retailers. I suppose that's different from the piece you're saying about an independent fashion store who are doing their buying trip to Bangladesh et cetera, which does happen.

Senator PRATT: You might even manufacture under your own brand name.

Mr Michael : In fact, I might be wearing one of my member's shirts that I know he goes and independently buys from the manufacturer. I also know he tells me the story about how he makes sure it's properly produced et cetera. There does start to be pressure on those businesses. We all know about the coffee shops that get NGO-approved beans et cetera. Yes, there is a commercial advantage to do that, but what about the store in the inner western suburbs or outer western suburbs that's selling dollar coffee. Is that ethically sourced? How do you get that compliance piece without putting an unnecessary burden on that business.

Senator PRATT: But if it's a question across brands, such as, 'Where does Arnott's source its chocolate for its chocolate biscuits?' you're going to expect Arnott's is going to tell all your retailers about its own supply chain, so that you can close that off. How many products are we going to be able to cover off in that kind of way versus needing to drill down into much more complicated circumstances?

Mr Michael : And this is where it does get very difficult and complex. If I'm buying my Arnott's biscuits, I'm doing it through a supplier or directly through the brand. If I'm getting my Oreos from a third party, sometimes the Oreos mightn't even be Oreos. That's an issue that we are looking at trying to address through some technology pieces. I did flag earlier that we are meeting with both the opposition and the government at the end of the month around a data solution that's been worked through with APEC and GS1 regionally out of Hong Kong to be able to plug that into our customs system. So you start to be able to do more of your tracking and tracing. You start to be able to say, 'I know where the cotton came from. I know where this particular component came from.' Elsewhere in the retail sector, on these issues, we have had airlines and major entertainment companies come to us—because we're running this piece as the secretariat—with concerns around fake aircraft parts. If there are fake aircraft parts or non-genuine aircraft parts, what else can slip into the supply chain? You need to be able to have that authenticity and traceability piece that can fit into at-border data systems as well as the technology does exist to go right down to store level. But this is also part of how we as a sector are looking at addressing these issues moving forward. So the whole border piece is running well and truly in advance of legislation and in advance of what can be done at the moment. But, for my members, we want to address that.

Senator MOLAN: It certainly seems to me—and I wondered what your view was—that you may need a dollar threshold somewhere because we haven't got the bureaucrats to check each report if we're going to have 100 new reports a year. But, maybe, under that, you prioritise sectors. So, at the moment, we're saying everyone who turns over $100 million dollars plus has got to do the reporting. I wonder if you could choose a figure that might go up to $200 million dollars and then go for the sectors in which you think there may be a priority and take that down further—maybe go all the way down.

Mr Michael : I think that's where there's an interest around an advisory directorate, whatever it's called, that can identify at-risk areas and what can be done in those at-risk areas. We know, if you're sourcing from particular regions, you have to be far more careful and go deeper into your supply chain. If you're sourcing something from—

Senator MOLAN: And that was the other part for the next question—you're right.

Mr Michael : Yes. If you're sourcing something from Germany, you're going to be pretty right, but you can get some surprise issues. If you're sourcing something from southern Spain or southern Italy, we know there's indentured labour being used to pick fruit. That is actually an at-risk area if you're sourcing vegetables or fruit from some of those regions. But to assist businesses in sourcing, these are priority areas I have to look at. That is something that should be done.

Senator MOLAN: We could take forward a view that there may need to be some combination of sector, regional and dollar threshold. At the moment, we're just saying 'dollar threshold'.

Mr Michael : I think initially starting with a dollar threshold, but—

Senator MOLAN: Why? We can all do it. We could do it now.

Mr Michael : We could, exceptthere's going to be enough work to be done to get the majors complying, to get the information around targeting by this advisory body, whatever it looks like, through to business as it is. From that you can then start to look at what can be done to assist the smaller businesses.

Senator MOLAN: I don't dismiss the amount of work that has to be done and the real cost of that work, but in designing the questionnaire for mum-and-dad shopfronts it might just be, as someone said this morning, the first two questions, and then the next 150 questions don't apply, because you don't go to Bangladesh—

Mr Michael : You can go to Bangladesh, but this is what you need to check when you're going there.

Senator MOLAN: Correct, but then if that applies to a business that does, they go to section B, which takes them into the Bangladesh questions or something like that.

CHAIR: I think we're all done. Thanks very much, Mr Michael. You've been very useful for the committee. We appreciate your time and your submission.