Germany Has Enacted a Supply Chain Law Focusing on the Prevention of Human Rights Abuses

Background

The Federal Law on Entrepreneurial Due Diligence Obligations in Supply Chains (“German Supply Chain Law”) was approved by the German parliament on 11 June 2021.  The legislative step follows a long journey that began with the German government’s National Action Plan (“NAP”) for the Implementation of the United Nations Guiding Principles of Business and Human Rights, which was published in 2016.

Once it enters into force on 1 January 2023, companies must adopt the standards that the German Supply Chain Law sets. The Law aims to prevent human rights abuses by suppliers to German companies.

Which companies will be affected?

Companies with more than 3,000 employees must follow due diligence obligations within the scope of the German Supply Chain Law. It should be highlighted that the number includes both German-based employees and those based abroad. German subsidiaries of foreign companies also fall within the scope of the Law. Additionally, companies with more than 1,000 employees will have to comply with the new obligations as of 1 January 2024.

Moreover, companies within the scope of this law must ensure its requirements are implemented by their direct suppliers. It should be underlined that indirect suppliers will also be subject to the law if human rights violations are discovered by German companies. Thus, Turkish companies that engage with German companies at any level of the supply chain will fall within the requirements of the German Supply Chain Law.

What are the obligations under the German Supply Chain Law?

In order to maintain legal, safe and humanitarian business operations, companies must ensure suppliers act in accordance with the German Supply Chain Law at every level of the supply chain. According to the law:

  • companies are obliged to respect human rights throughout their entire supply chain,
  • companies must set up complaint mechanisms and report on their due diligence activities at regular intervals,
  • companies must assess human rights risks throughout their supply chain and take preventive and corrective measures accordingly,
  • companies must adhere to environmental due diligence obligations, especially regarding the prevention of harmful chemical usage in global production processes.

It should be noted that companies with a yearly global turnover of more than EUR 400 million can be sanctioned with fines of up to 2% of their turnover for any violations.

Also, any violation of the obligations can give rise to exclusion from public tender procedures.

How can companies comply with due diligence standards under the German Supply Chain Law?

Until 1 January 2023, a transitional period of roughly a year and a half allows companies to adjust their operations to the new obligations. In order to manage legal, financial and reputational risks companies can:

  • include human rights compliance in contracts, policies and strategic planning processes,
  • conduct a human rights impact assessment and take necessary measures to embed human rights and environmental due diligence within the company and third-party risk management processes,
  • foster training and communication for human rights & environmental compliance awareness within the company and third parties,
  • review and reinforce complaints mechanisms and speak-up programs,
  • assess and manage their third-party risks.

Conclusion

Within the scope of the newly introduced German Supply Chain Law, companies must follow through with their obligations in order to prevent human rights abuses. It is important for companies to acknowledge that non-compliance with the standards will inevitably make them uncompetitive in their relevant industries. Companies must also, enforce their compliance programs in order to prevent financial and reputational risks.