The German Supply Chain Due Diligence Act

Contents

- What is The German Supply Chain Due Diligence Act?

- Which companies are obligated to comply with The German Supply Chain Due Diligence Act?

- What are the prohibited activities under The German Supply Chain Due Diligence Act?

- What are the obligations of the companies under The German Supply Chain Due Diligence Act?

- What are the fines for not complying with The German Supply Chain Due Diligence Act?

- Conclusion

What is The German Supply Chain Due Diligence Act?

The German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz) imposes obligations to companies for responsible business conduct in supply chains.

The act obligates companies to identify and address potential human rights and environmental risks in their supply chains, implement preventive and remedial measures, establish complaints mechanism, and regularly report the findings. Even if it is not possible to prevent a violation, companies must minimize or mitigate the risks.

The German government published a National Action Plan for Business and Human Rights after the release of the UN Guiding Principles on Business and Human Rights. Some of the companies implemented voluntary measures according to The National Action Plan. However, those voluntary measures were not sufficient or enough to cover the business practices which the UN Guide aims therefore The German Supply Chain Due Diligence Act came into force.

This article will define the Act, describe the obligations, and explain why it is crucial for companies.

Which companies are obligated to comply with The German Supply Chain Due Diligence Act?

The Act comes into force gradually from 1 January 2023. Companies with at least 3,000 employees that have their head office, administrative seat or statutory seat in Germany or companies that have a branch in Germany and employ at least 3,000 employees in this branch, will be obligated to comply with the Act.

After 1 January 2024, companies with at least 1,000 employees that have their head office, administrative seat or statutory seat in Germany or companies that have a branch in Germany and employ at least 1,000 employees in this branch, will be obligated to comply with the Act. It should be noted that, regardless of their legal form, all the companies that met the employee number requirement, are in the scope of the Act.

However, the Act will have international and global consequences on supply chains rather than local effects. As mentioned above, the companies in the scope of the Act are now responsible for human rights and environmental violations not only in their business premises but from all of their direct suppliers. For example, Turkish companies within the supply chain of the German Companies may also be subject to due diligence reporting and it is a must to comply with its provisions for them.

As we have seen, the German Supply Chain Due Diligence Act is part of a growing trend towards greater corporate responsibility for human rights and environmental issues. Similar legislation has been enacted in France and the UK, suggesting that this trend will continue to impact businesses in the long term. Given this development, corporations need to prioritize ethical and sustainable business practices.

What are the prohibited activities under The German Supply Chain Due Diligence Act?

The German Supply Chain Due Diligence Act imposes requirements on companies to comply regarding environmental and human rights issues. These obligations cover a wide variety of topics, such as forced labor, slavery, child labor, freedom of association, fair pay, and workplace safety. Companies must also provide a working environment to their workers which includes sufficient water and food. Regarding environmental concerns, the act covers the production and/or use of persistent organic pollutants, the illegal disposal of waste, and the destruction of essential natural resources. These illegal activites must be considered by companies in their risk assessments, and appropriate measures must be taken to avoid them.

What are the obligations of the companies under The German Supply Chain Due Diligence Act?

Companies must establish an appropriate and adequate risk management system to comply with the German Supply Chain Due Diligence Act. According to their risk analysis, companies must take preventative measures to avoid possible violations. Companies must also designate one or more responsible persons to supervise the legal compliance process according to the Act. Regular risk assessments according to Act should be conducted, and a policy statement must be published. Companies must take steps in their business premises, set up a complaints procedure, and implement due diligence obligations regarding prohibited activities and risks at direct suppliers. Companies must also conduct an ad hoc risk analysis if they have verified information about human rights or environmental violations at an indirect supplier. The company must adopt its risk management system according to the findings from the complaints procedure. To ensure accountability in the supply chain, companies must publish public effectiveness reports annually to increase transparency. It should be noted that complying with the Act is a dynamic process that involves adapting the findings of the risk analysis into preventative and remedial measures.

What are the fines for not complying with The German Supply Chain Due Diligence Act?

Depending on the nature and severity of the violation, fines for not complying with the Act, may reach up to 8 million EUR. If companies with an average annual turnover of more than EUR 400 million fail to comply with the Act about a direct supplier, they may be fined up to 2% of their average annual turnover. Additionally, companies may be excluded from participating in public tenders for up to three years.

Conclusion

The Act is a significant step in the direction of encouraging ethical and sustainable business practices. The serious fines and reputational harm that can result from violating regulations make it crucial to comply with the Act. Compliance with the Act is essential to ensure public confidence and long-term success for companies.

Autor: Senem Kathrin Güçlüer