BACKGROUND
What is the German LKSG act?
The German Supply Chain Due Diligence Act (SCDDA), also known as Lieferkettengesetz (LkSG), was adopted in June 2021. SCDDA requires companies to comply with certain human rights and environmental due diligence obligations. It is oriented towards the UN Guiding Principles on Business and Human Rights and the National Action Plan for Business and Human Rights and applies to the affected companies’ entire value chain.
Who is concerned?
As of January 1st, 2023, German companies (regardless of their legal form), will be directly obliged under the SCDDA if they have more than 3000 employees. From January 1st, 2024, this will also apply to companies with more than 1000 employees. Foreign companies are also subject to the SCDDA (LKsG) if they have a branch office with the same number of employees in Germany. While firms that are merely operating in Germany are not included, they will inevitably be impacted if doing business with German companies.
SCDDA (LKsG) also counts the following as employees:
-
Temporary workers (employed for more than six months)
-
All employees of companies belonging to the same consolidated group
-
All employees temporarily relocated to another EU country.
Requirements
Companies are required to establish, implement, and update procedures to improve compliance with human rights and environmental risks in their value chains, from the extraction of raw materials to customer delivery. However, firms have a higher responsibility to ensure successful measures to stop violations for their own operations and direct suppliers than indirect suppliers.
Firms are required to:
-
Form a comprehensive overview of their supply chains
-
Set up a risk management system, with a person responsible for overseeing it
-
Carry out regular risk analyses and assessments
-
Make a policy statement related to the company’s human rights strategy
-
Take measures to prevent and remedy abuses, such as procurement policies and training
-
Establish a complaint procedure including a whistle-blowing function
-
Document the company’s compliance and the effectiveness of preventive measures in an annual report published on the company’s website
-
Terminate business relationship with a direct supplier if there has been a grave violation and measures to remedy the situation was unsuccessful, with no other possible future measures
Consequences
BAFA, an administrative agency under the German Federal Ministry for Economic Affairs and Energy, verifies that companies publish comprehensive due diligence reports and acts against any violations. If a company violates the obligations, it commits an administrative offense and BAFA can:
-
Issue sanctions including periodic penalty payments up to €50 000
-
Issue fines ranging from €100 000 to €800 000
-
Fine up to 2% of the firm’s average annual turnover over the past three years if the company has more than €400 million in annual global or group turnover
-
If a fine is bigger than €175 000, the firm could be excluded from public procurement contracts for up to 3 years
While the companies do not risk criminal prosecution if violating the obligations, SCDDA (LKsG) allows trade unions and NGO’s to sue on another’s behalf, which allows them to take legal action. In addition, potential victims of violations resulting from non-compliance can file a complaint with BAFA.
Risk Mitigation
To ensure compliance with SCDDA (LKsG), firms should even before January 2023 start to design and implement an effective compliance system and get an understanding of their entire value chain in order to discover any human rights or environmental violations.
Sound complicated? Not with the right platform. TrusTrace provides actionable transparency of your entire supply chain and makes it easier to manage compliance, supply chain risk and communicate product origin easily and credibly. Contact us for more information on how we can help your company.
Disclaimer: At TrusTrace, we want to keep you informed on laws and regulations, but this information in the blog should not be considered or used as legal advice.
