Germany’s Supply Chain Due Diligence Act
In June 2021, the German Parliament passed the German Supply Chain Due Diligence Act. The new Act requires large companies to identify, prevent and address human rights issues such as forced labor, child labor, and unsafe working conditions, as well as environmental risks such as deforestation and related environmental degradation.
The Act provides companies a comprehensive list of obligations including the establishment of a risk management system for compliance. The Act also requires companies to set up processes to identify and present human rights and environmental risks and impacts in their supply chains, and requires they publish an annual report outlining the steps they have taken to address these risks.
Businesses that become aware of violations and take no remedial action face a financial penalty of up to €50,000 and administrative fines of up to 2% of their average annual revenue, if it is greater than €400 million. If in violation, companies can also be excluded from the award process for winning public contracts for up to three years.
The law goes into effect January 1, 2023, and will apply to companies based in Germany with more than 3,000 employees or German-registered branches of foreign companies with more than 3,000 employees. By 2024, the law will apply to companies with more than 1,000 employees.
FAQs
What are the most important rules and regulations?
The requirements that companies must meet are tiered, based on the different stages within the supply chain:
the company’s own business operations,
direct suppliers,
indirect suppliers.
and based on:
– the kind and extent of the business activity,
– the degree of influence the company has on the one committing the violation,
– the typically expected severity of the violation,
– the way in which the company has contributed to the violation.
2. External monitoring by a government authority:
An established government authority, the Federal Office for Economics and Export Control, is tasked with monitoring compliance with the law.
It checks company reports, investigates any grievances made and imposes sanctions, if needed.
3. More rights for injured parties:
Not only can people whose human rights have been violated use the German courts to get their rights upheld, they can now also report their grievances to the Federal Office for Economics and Export Control.
German trade unions and non-governmental organizations may also support injured parties from other countries by defending their rights before a German court (representative action).
What must a company do in the context of its own business operations and in the context of a direct supplier’s business operations?
Companies have to put the following measures in place both in their own and in their direct suppliers’ business operations:
Draft and adopt a policy statement on respecting human rights.
Risk analysis: Implement procedures for identifying negative impacts on human rights.
Engage in risk management (incl. prevention and remedial measures) to avoid potential negative impacts on human rights.
Establish a grievance mechanism.
Implement transparent public reporting.
In the event of a violation of rights, the company must, in its own area of business, take steps immediately that will necessarily cause the violation to cease.
In the case of direct suppliers, the company must draft a concrete plan for minimizing and preventing violations when it is unable to end the violation in the foreseeable future.
What must a company do in the case of an indirect supplier?
Here, the due diligence obligations apply only as warranted by the circumstances and as soon as the company learns about potential violations.
In this case, the company has to act immediately and:
Conduct a risk analysis,
Implement a strategy to minimize and avoid the problem,
Firmly establish appropriate prevention measures vis-à-vis the one committing the violation. The implementation of industry-wide initiatives is a good option in this context.