The Act on Corporate Due Diligence Obligations in Supply Chains
Since 2023, the Act on Corporate Due Diligence Obligations in Supply Chains has required large companies to ensure compliance with human rights, labor standards, and environmental regulations throughout their own supply chains. The law lays out specific human rights and environmental due diligence obligations.
Previously, the Act on Corporate Due Diligence Obligations in Supply Chains only applied to companies in Germany with more than 3,000 employees. However, as of January 01, 2024, it has been expanded in scope to cover companies with at least 1,000 employees.
Due diligence obligations for companies
As a consequence, Section 3 of the Act on Corporate Due Diligence Obligations in Supply Chains will also require these companies to comply with and implement specific due diligence obligations within their supply chains.
These obligations include:
- implementing risk management,
- defining internal responsibilities,
- regular risk analyses,
- anchoring preventive measures,
- carrying out remedial measures,
- implementing a publicly accessible complaints procedure,
- documenting and reporting internal processes,
- diverse auditing and reporting obligations.
The Federal Office of Economics and Export Control (BAFA) monitors compliance with the due diligence obligations and has extensive powers in this regard.
For example, the BAFA is entitled to request information, enter business premises, summon or question persons, inspect documents, and issue instructions if there are grounds to suspect that the company is not fulfilling its due diligence obligations.
Complaint to BAFA and high fines
Moreover, the BAFA is responsible for complaints procedures based on the Act on Corporate Due Diligence Obligations in Supply Chains. External parties may initiate the proceedings if they suspect that due diligence obligations have been violated.
In addition, court proceedings are also an option if important protected legal positions pursuant to Section 11 of the Act on Corporate Due Diligence Obligations in Supply Chains (LkSG) have been violated. This also applies to both German trade unions and non-governmental organizations (NGOs).
It is important to note that the outcome of the complaints procedure depends on the company’s conduct. BAFA may instruct the company to remedy any breaches of duty or to fulfill obligations retrospectively. Failure to do so could result in fines of up to eight million euros or two percent of the company’s annual turnover. In fact, companies may even be excluded from public tenders as a specific consequence. A punishing measure.
First complaints in April and the numbers are rising
Complaint procedures are now no longer just theory.
Following the first complaints against Amazon and Ikea in spring, the controversial lobby organization Oxfam, which has faced accusations of sexual harassment and anti-semitism, recently filed a complaint against the supermarket giants, Rewe and Edeka. The complaint addresses the production conditions on the suppliers’ pineapple and banana plantations. The accusation asserts starvation wages and contact with potentially toxic pesticides.
In addition, vehicle manufacturers have also come under scrutiny. These complaints involve suspected human rights violations concerning occupational health and safety as well as breaches of environmental standards related to the cobalt mining by a BMW supplier in Morocco. Complaints have also been lodged against VW and Mercedes Benz. These complaints revolve around allegations of human rights violations as a consequence of forced labor at suppliers in China.
Complaints pursuant to the Act on Corporate Due Diligence Obligations in Supply Chains are more than just a hollow deterrent
Whether and to what extent complaints will have an effect in the future remains to be seen. However, a complaint is far more than an empty threat.
In view of this, companies are well advised to avoid risking any complaints to BAFA. That is why companies need to implement an exemplary complaints system and take any cases submitted through their own system seriously.
If a complaint is lodged, the best course is to cooperate with BAFA and make the best of the situation by obtaining qualified legal support.
Failing to take the Act on Corporate Due Diligence Obligations in Supply Chains seriously can have financial consequences and can also lead to enormous damage to the company’s image.
Summary of the key facts:
- As of January 1, 2024, the Act on Corporate Due Diligence Obligations in Supply Chains will also apply to companies with more than 1,000 employees.
- Companies must be aware of their due diligence obligations as imposed by the Supply Chain Act and implement the optimum solutions to avoid complaints procedures.
- Legal support enables companies to mitigate the extensive legal and reputation risks arising from a complaint.
