German Supply Chain Act
Introduction
On Jan. 1, 2023, the law on due diligence obligations in supply chains (the “Supply Chain Act”) went into effect in Germany. Many German companies will be required to address obligations related to human rights and environmental issues in their supply chain, in accordance with BAFTA requirements. This will also apply to foreign companies with German subsidiaries. And also interesting for Dutch companies in light of the future EU CS3D and is an important topic for the Human Rights Officer.
Applicability
Companies that have their headquarters or registered office in Germany must comply. This is subject to the due diligence obligations outlined in the Supply Chain Act. The condition is that they have at least 3,000 employees in Germany.
For Non-German companies, this also applies when one has German subsidiary. From Jan. 1, 2024, the requirements will apply as early as 1,000 employees in Germany.
Obligations
The Supply Chain Act imposes due-diligence requirements to prevent human rights or environmental violations. Or on offense to terminate. This includes all the steps, both in Germany and elsewhere, required to produce and deliver a company’s products and services. This applies from raw material extraction to final delivery to the end customer. The duties also apply to (in)direct suppliers.
Protection
Basis of the Supply Chain Act is forms 11 conventions to protect human rights.
Human rights provisions include various forms of child labor, forced labor, slavery, occupational health and safety obligations, freedom of association, unequal treatment in employment, failure to pay a living wage, negative environmental impacts affecting people, unlawful eviction and the hiring of security forces.
Environmental protection includes a ban on the use of mercury and persistent organic pollutants (POPs). It also sets conditions for import and export of hazardous waste.
Requirements
The Supply Chain Act describes due diligence obligations that companies must meet:
- Risk management: A company should establish an appropriate and effective risk management system.
- Human Rights Officer: Appoint an officer who is responsible.
- Risk analysis and assessment: Conduct an annual risk analysis. Conduct additional risk assessments on an ad hoc basis if necessary as the company. Evaluate and prioritize identified risks as part of each risk analysis.
- Policy Statement: Draft a policy statement signed by the company’s senior management that describes the procedure for fulfilling due diligence obligations. The statement should state the risks identified in the course of the risk analysis, as well as the human rights and environmental expectations the company has of its employees and suppliers.
- Preventive and remedial measures: Take appropriate preventive measures in your own business area and in the supply chain if a risk has been identified. And take action to end violations on human rights or environment.
- Process complaints: Establish an appropriate complaint procedure.
- Record keeping and reporting: Document compliance with your due diligence obligations and prepare an annual report. The report must be publicly available and submitted to BAFA (Federal Bureau of Economic Affairs and Export Control).
Enforcement
BAFA is the competent authority responsible for monitoring compliance. They take a risk-based approach. They can subpoena individuals, conduct on-site audits and require the company to take specific actions. BAFA can impose a fine of up to EUR 50,000 if the company fails to comply. In cases of intent, this can amount to EUR 8 million or up to 2% of turnover for companies with more than 400 million in turnover.
An online complaint form has been set up for whistleblowers. Through this form available in 4 languages (in German, English, French and Spanish), you can report anonymously. The form is available to you at this link.
Support
EU CS3D
Recently, the European Commission proposed the Corporate Sustainability Due Diligence Directive (CS3D). It is itself more demanding in some areas than the Supply Chain Act. These include the size of the company (as small as 250 employees), the scope of requirements and how liability is handled.
If the CS3D is passed, it will apply to every company in the Union, complying with the Supply Chain Act now may prove to be a great advantage.
Conclusion
The Supply Chain Act imposes strict duties on companies with the goal of improving standards in international supply chains. Failure to comply with due diligence obligations can result in significant fines. The upcoming EU CS3D may further tighten legal requirements and make them applicable across the Union.
Given this, it is crucial for multinational companies to determine the extent to which the obligations apply to them. Companies should also consider practical ways to meet these obligations, starting with their business activities in high-risk countries.
Multinational companies should consider implementing a risk management system that complies. They must appoint a human rights officer, conduct an annual risk analysis and assessment, and prepare a policy statement outlining procedures for compliance.
In addition, companies must take preventive and corrective measures to address any risks identified in their supply chains, establish a grievance procedure, and document and report compliance with due-diligence obligations annually.
It is important that companies take these challenges seriously. Relying solely on certification processes to verify compliance with their supply chains will prove insufficient. Companies that fail to comply with due diligence requirements under the Supply Chain Act can face significant fines.
Given the upcoming EU CS3D, even non-Supply Chain Act obligated companies, like many Dutch companies, need to start preparing. Not only do you avoid fines, you can enjoy a competitive advantage in the marketplace.
