Compliance to the German Supply Chain Due Diligence Act

German Supply Chain Due Diligence Act (Lieferkettensorgfaltsgesetz) (“Act”) was approved on 11 June 2021 by the German Federal Parliament. The Act, which would enter into force in 2023, primarily focuses on preventing human rights and environmental law violations. The Act, would not only affect the undertakings that fall under its scope but also be of importance for those domestic and foreign companies who are in the supply chain thereof. The novelties brought by the Act may be summarized as follows:

The most important issue regarding the Act’s scope of application, is to determine the undertakings that are subject to compliance to the Act. The undertakings covered by the Act are those having (i) their principal place of business, statutory seat or any branch in Germany and (ii) three thousand or more employees in Germany (including all of the employees working under a group company). The threshold related to the number of employees will be applied by reducing to thousand employees from 01.01.2024.  How this number will be calculated in group companies, and under which circumstances the assigned persons will be considered as employees, are regulated in detail in the Law.

The main obligation imposed to undertakings covered by the Act is the due diligence and reporting which is always required for the direct suppliers and, in certain circumstances, required for the indirect suppliers. Supplier’s activities towards their obligations regarding human rights and environmental issues constitute the basis of the due diligence. Besides, undertakings are obliged to make internal assignments and establish internal systems, especially the risk unit, in order to ensure compliance standards.

The sanctions regarding the implementation of the Act is mainly regulated as monetary fines. In addition, legal entities with an annual turnover of over 400 million Euros may be fined up to 2% of their turnover.

It is expected that the undertakings that are subject to the Act would review their business partners in their supply chain and restructure this chain in order to minimize the risk of fines. Consequently, it is considered that the effects of the Act will not only concern the undertakings within the Act’s scope, but also all domestic and foreign undertakings in a supply relationship with the covered undertakings.

You may find the full text of the Act here.

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