Supply Chain Act

The Act on Corporate Due Diligence Obligations in Supply Chains (Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten) has come into force on 1 January 2023. It was published in the Federal Law Gazette on 22 July 2021 after completion of the parliamentary procedure. This is the first time the responsibility of German enterprises to respect human rights in global supply chains has been put on a legal footing.

The Supply Chain Act at a glance:

• The Act on Corporate Due Diligence Obligations in Supply Chains (Lieferkettensorgfaltspflichtengesetz, LkSG) places enterprises that have their central administration, principal place of business, administrative headquarters, statutory seat or branch office in Germany under the obligation to respect human rights by implementing defined due diligence obligations.
• The core elements of the due diligence obligations include the establishment of a risk management system to identify, prevent or minimise the risks of human rights violations and damage to the environment. The Act sets out the necessary preventive and remedial measures, makes complaint procedures mandatory and requires regular reports.
• The due diligence obligations apply to an enterprise’s own business area, to the actions of a contractual partner and to the actions of other (indirect) suppliers. This means that an enterprise’s responsibility no longer ends at its own factory gate but applies along the entire supply chain.
• Since 2023, the Act initially applies to enterprises with at least 3,000 and, from 2024, additionally to enterprises with at least 1,000 employees in Germany.
• The Supply Chain Act contains an exhaustive list of eleven internationally recognised human rights conventions. The legal interests protected in those conventions are used to derive behavioural requirements or prohibitions for corporate action in order to prevent a violation of protected legal positions. These include, in particular, the prohibition of child labour, slavery and forced labour, the disregard of occupational safety and health obligations, withholding an adequate wage, the disregard of the right to form trade unions or employee representation bodies, the denial of access to food and water as well as the unlawful taking of land and livelihoods.
• If enterprises fail to comply with their legal obligations, administrative fines may be imposed. These can amount to up to 8 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.
• An authority is equipped with effective enforcement instruments to monitor an enterprise’s supply chain management. The competent authority, the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle), has far-reaching supervisory powers. It can, for example, enter business premises, demand information and inspect documents as well as demand that enterprises take concrete action to fulfil their obligations and enforce this by imposing financial penalties.