Labour exploitation and financial crime in the textile industry

Lockstitch to Lockdown

When the rest of England emerged from its Coronavirus-related lockdown on 4th July 2020, one city that remained locked down was Leicester and it was the only one to do so.  The city was said to be experiencing an unexpectedly higher number of infections, purportedly originating from workers in the city’s textile industry.  What transpired were reports of labour exploitation, slave-like working conditions and a financial crime nexus.

Whilst much attention was focused on the London Stock Exchange listed company Boohoo Group PLC, which is said to account for almost 75-80% Leicester’s garment production, much less attention was turned to the third-party factories Boohoo outsourced clothing production to, and the financial crime these factories are suspected of being involved in.

VAT fraud

It is not the first time exploitative practices in Leicester’s textile industry have come to light. Previous media reports, (The Guardian, FT) a recent undercover investigation by The Times and even a study by the University of Leicester have all raised concerns of labour exploitation in the last five years.

A June 2020 report by NPO Labour Behind the Label detailed how labour exploitation continued with factories remaining open despite England’s lockdown. Low wages of £3-£4 per hour were being paid to workers, a rate that is illegal and way below the the minimum wage in the UK.  The report also highlighted that one factory was charged with ‘Phoenixing’, a practice in which business owners shut one company down and open a new one “on paper” to avoid paying VAT while continuing operations.

Furlough fraud, theft of employee funds

Further findings in the Labour Behind the Label report are of equal of concern in relation to financial crime and raise questions of what isn’t being reported as of yet.  The findings detail factory owners making excess fraudulent furlough claims and workers’ furlough pay being withheld unless they came into work.

Some workers were told they were not “on the books” and therefore would not be receiving any furlough funds,  When these workers found new employment, the old employer rang the new employer requesting them not to pay the workers via bank transfer as they had in fact been on the books and the old employer was claiming furlough funds.

The report goes on to highlight how some employers had been bragging of getting rich from claiming furlough funds from the government and some factories had even been rumoured to have been advised to claim furlough money for only the period in lockdown, in order to avoid inspections that would uncover practices such as the illegally low wages paid to workers.

Insights from a former textile factory worker

A former factory worker from Leicester who left the textile industry many years ago, and who was not willing to give their name or confirm which factory they had worked for, spoke to me and shared their experiences.

They explained that everyone was always paid in cash and not into a bank account.  They went on to explain that if anyone didn’t like the rate they could go elsewhere, but all the factories would have similar rates so there really was no choice, especially if anyone was an illegal immigrant.

No one was said to be forced to work, though the former worker did describe slave-like exploitation.

Asked to confirm the hourly rate, they said it was definitely 50p per hour for this poor worker. When talking about working conditions, they went on to say, “we were not allowed to talk to any of the other workers. No one was allowed to even look up and we had to keep our heads down. It was strict”. 

The reason for this was that any talking or looking up at all would mean a slowdown of work. Asked if there were any inspections of the factory, the former worker referred to what appear to be external staff compliance described as “auditors”.

“Before the auditors came, the manager would tell the workers exactly what to say… We were told to say we were paid minimum wage, only worked 37.5 hours and only from Monday to Friday… We were told not to talk more than this to the auditors.”

‘Phoenixing’, highlighted in the Labour Behind the Label report, also appears to have occurred. “The name on the building changed, but there was no change of owners, no change in work we did or the money we were paid… I heard it was something to do with tax.”

NCA action and considerations for banks

Earlier this month, the National Crime Agency (NCA) confirmed that it had received information regarding allegations of modern slavery and exploitation in Leicester’s textile industry.  The agency also confirmed that it is working in tandem with local law enforcement, HMRC and Home Office Immigration Enforcement, with the primary focus on the protection of vulnerable people.

Labour exploitation often intertwines with illegal immigration, human trafficking and people smuggling and dirty money.  Compounded with allegations of fraud and tax offences in factories, the NCA may be considering financial crime related investigations into those operating them.  Registered factories would likely have used accountants as well as transacted through UK banks, and investigators could may ultimately shine more light on such financial flows.

With over 1,000 known sites involved in the textile trade in Leicester alone and the potential scale of the issue, UK banks should be considering thematic reviews of their textile client base.  Considerations may include how well the banks know their textile clients beyond regular KYC checks and a deeper dive into transactional activity.

Whilst much attention has been turned to the damage to Boohoo Group PLC’s share value and reputation, as well as the damage to Leicester’s economic recovery, the scandal is also a stark reminder that criminal activity and financial crime have an effect on all of society, even those not directly involved or affected by it.

In this case, it has taken a global pandemic to show this.

Dev Odedra is an independent anti-money laundering and financial crime expert.  He has over a decade of experience in managing financial crime risk in the retail, corporate and investment banking sectors.  His expertise covers investigations, advisory and controls implementation and improvement.

This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.