German Supply Chain Due Diligence Act Entered Into Force

Target Companies

As of 1 January 2023, the Act will apply to all companies whose head office, main branch or statutory seat is located in Germany, and which employ at least 3,000 employees. As of 2024, the minimum number of employees will be decreased to 1,000, which will expand the Act’s scope and include more companies. Based on these calculations, the Act will be applied to approximately 900 companies as of 1 January 2023 and to 4,800 companies as of 1 January 2024.^[1]

The Act also covers the supply chains of these entities. The supply chain covered by the Act mainly includes (i) the actions of an enterprise in its own business area, (ii) the actions of direct suppliers and (iii) the actions of indirect suppliers. The “business area” under the Act covers every activity of that an enterprise pursues to achieve its business objectives. The term "business area" must be separately examined for each case as the conditions may differ. (For example, if the German parent company has a decisive influence on a foreign subsidiary, it may be deemed within its "business area".) In addition, other actors within the supply chain (for example, subsidiaries' subsidiaries) must be carefully reviewed within the framework of the Act.  A “direct supplier” under the Act is a partner to a contract for the supply of goods or the provision of services whose supplies are necessary for the production of the enterprise’s product, or for the provision and use of a service. An “indirect supplier” within the framework of the Act is any enterprise which is not a direct supplier and whose supplies are necessary for the production of the enterprise’s product or for the provision and use of a service.^[2] Furthermore, it should also be noted that the Act sets forth certain provisions where an indirect supplier may be deemed to be a direct supplier in case the obliged entities attempt to circumvent their due diligence obligations.

Main Obligations

The main obligations to be fulfilled by the entities covered by the Act may be summarized as carrying out due diligence activities in order to identify, prevent or minimise the risks of human rights violations and damage to the environment.^[3] Accordingly, the obliged entities must exercise due diligence for the human rights and environment-related obligations set out in the Act in their supply chains.

The due diligence obligations are listed under Article 3 of the Act as follows:

1. Establishing a risk management system.
2. Designating a responsible person or persons within the enterprise.
3. Performing regular risk analyses.
4. Issuing a policy statement.
5. Laying down preventive measures in its own area of business and vis-à-vis direct suppliers.
6. Taking remedial action.
7. Establishing a complaints procedure.
8. Implementing due diligence obligations with regard to risks at indirect suppliers.
9. Documenting and reporting.^[4]

Sections 4-10 of the Act set out the details of each item under the due diligence obligation.

The main purpose of the Act may be interpreted as influencing companies to provide transparency and to assess the actions of their own supply chain. Companies must carry out due diligence both for themselves and also their direct suppliers. As for the indirect suppliers, a risk analysis must be undertaken if an enterprise has actual indications that suggest a violation of a human rights-related or an environment-related obligation at indirect suppliers to be possible.^[5]

Protected Matters under the Act

As explained above, the Act mainly focuses on protecting human rights and the environment. The main topics regarding human rights that are regulated under the Act include child labour, slavery and forced labour, discrimination, unlawful taking of land, occupational health and safety and related health hazards, withholding an adequate living wage, forming trade unions and torture. As for the environmental issues, the Act focuses on the prohibition of causing any harmful soil change, water and air pollution, harmful noise emission or excessive water consumption that

• Significantly impairs the natural bases for the preservation and production of food,
• Denies a person access to safe and clean drinking water,
• Makes it difficult for a person to access sanitary facilities or destroys them,
• Harms the health of a person.

The Act further prohibits the unlawful taking of land, forests and waters in the acquisition, development or other use of land, forests and waters, the use of which secures the livelihood of a person.

The Act also addresses various international conventions that regulate human rights. While defining the environmental-related risks, the Act refers to the Minamata Convention, an international treaty that was approved by approximately 140 countries, and the POPs Convention that was signed by 186 parties. Likewise, while defining human rights relates risks, the Act refers to various conventions of the International Labour Organization and other international treaties.

Sanctions

If entities do not comply with their obligations under the Act, certain administrative fines may be imposed. These can amount to up to eight million Euros or up to 2% of annual global turnover. The fines system based on turnover applies only to enterprises with an annual turnover of more than 400 million Euros. Moreover, if an administrative fine is imposed above a certain minimum level, enterprises may be excluded from the award of public contracts.^[6]

Conclusion

The Act stipulates various obligations for German entities and also the actors within their supply chain. Therefore, although it may seem like a national law, it may have enormous impact on foreign suppliers (both direct or indirect ones). Accordingly, any supplier (whether German or foreign) should carefully review the provisions of the Act to identify any rules that they need.