German Supply Chain Act Enters into Force

Written By? Rory Oake , Ardea International

17 Jan 2023

As of this month (January 2023), the?new German Supply Chain Act?has entered into force. As a result, companies with more than 3,000 employees will be required to comply with due diligence obligations covering their entire supply chain. The scope will be expanded to include companies with 1,000 employees in 2024.

Due Diligence obligations under the German Supply Chain Act

The due diligence obligations for companies include:

1. Establishing a risk management system
2. Designating a responsible person or persons within the company
3. Conducting regular risk analyses and issuing a policy statement
4. Laying down preventive measures
5. Taking remedial action and establishing a complaints procedure
6. Documenting and reporting

How to conduct a human rights risk analysis

The Federal Office for Economic Affairs and Export Control (BAFA) implements the Supply Chain Act and monitors whether the companies concerned are adequately fulfilling their due diligence obligations. In order to support companies in implementing their due diligence obligations, BAFA develops and publishes Guidance on a regular basis on the core elements of the Supply Chian Act (risk analysis, proportionality, complaint procedure, appropriateness and effectiveness, and the reporting questionnaire).

The?guidance on the risk analysis?was the first to be published. Our key takeaways include:

• The Supply Chain Act distinguishes between regular and ad-hoc risk analysis:
• Regular annual risk analysis covers direct suppliers and own operations.
• they must carry out risk analyses on an ad hoc basis if they (i) either expect a significantly changed or expanded risk situation in any part of their supply chains or (ii) if they get aware of a potential violation of human rights- or environment-related obligations at indirect suppliers.
• It is irrelevant for the risk analysis whether human rights or environmental risks have an adverse impact on a company’s business success. The focus should be on the interests of employees within the business and supply chain, and any other persons whose lives may be impacted by the business activities of the company or a company within its supply chain
• Companies are entitled to a certain degree of discretion in the way they design and select their methods, provided the choice of method is reasonable.
• Companies will also be interested in the other guidelines that BAFA is preparing to deal with the other elements of the Supply Chain Law. We’ll provide an update in due course.

How will companies report on due diligence?

BAFA has now published the questionnaire with whose submission companies will comply with their reporting obligations imposed under section 10 para. 2 of the Supply Chain Law. The questionnaire contains both mandatory questions and questions that may be answered on a voluntary basis.

Based on the questionnaire, the answers are automatically used to create a report that can then be submitted to BAFA and must be published on the company’s website within four months of the financial year-end.

The report will set out:

• whether and which human rights and environment-related risks the enterprise has identified,
• what the enterprise has done to fulfil its due diligence obligations,
• how the enterprise assesses the impact and effectiveness of the measures,
• what conclusions it draws for future measures.

Penalties

If companies violate the new rules, they could face fines of up to €8 million or up to 2 percent of annual global sales. In addition, companies can be excluded from public tenders.

Looking forward

Corresponding legislation at the?EU level?is still being discussed. It will likely be stricter than the German rules, but still has to be negotiated with the European Parliament before coming into force.

Germany will then have to take a decision on enacting further legislation or adapting its own law to align with the European Union’s due diligence requirements.

Whilst your company may not meet the threshold of the legislation, the translation of best practice guidelines such as the UNGPs and OECD Guidelines into law resulted in investors, banks, insurers and consumers having higher expectations of business when it comes to being able to ‘know and show’ that they respect human rights.

How Ardea can help

Ardea International advises clients on implementing human rights and environmental due diligence to comply with legislation and best practice standards. We offer clients a comprehensive approach to addressing these subject areas drawing on an international team and harnessing our legal expertise. We have advised clients in the United States, Europe, Africa and Asia. In addition to our insights across sectors, senior members of the team have focussed on these matters for more than 30 years, enabling us to provide a long-term perspective that few advisors can match.

We offer a range of training, resources and consultancy services to provide support on addressing the requirements of the German Supply Chain Law and similar legislation for companies. Our compliance assessment checklists can be used to determine whether your organisation falls within the scope of the legislation.

If your organisation requires support on this or related matters,?get in touch.