It could get very expensive very soon: The new German Act on Corporate Due Diligence in Supply Chains

Did you happen to eat some mango from Africa today, drink coffee from Brazil, or put on some clothes made in Asia? Particularly in Europe, we maintain successful trade relations and benefit from the products and produce of other countries. Over the past few years, it has become more important for a large number of people to know where their products come from and under which working conditions they were manufactured. However, this process has not always been transparent, especially since we are all familiar with television reports on working conditions that violate human rights. The Act on Corporate Due Diligence in Supply Chains, introduced in Germany early this year, is intended to put an end to this situation.

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By following this UN-led NAP (National Action Plan for Business and Human Rights) initiative, German companies will be held accountable for ensuring compliance to human rights within their supply chains. From production to transport and trade, any German company involved in the value chain must implement concrete due diligence requirements to respect human rights. The NAP in Germany describes five core due diligence obligations. Let's take a look at these in more detail:

1. Recognizing responsibility

The new German act requires each company to publish a policy statement on its human rights compliance strategy. This policy is to be approved by management and communicated both internally and externally. The contents of the policy statement cover the following areas:

  • Results of the company risk analysis on environmental and human rights risks
  • Prevention and corrective measures taken
  • Description of procedures on how to comply with the due diligence requirements
  • Appointment of a human rights officer
  • Definition of clear responsibilities
  • Outlook on planned preventive measures.

The goal is for each company to disclose its human rights strategy to all of its stakeholders. In this connection, their expectations also need to be communicated to the company's own employees and suppliers.

2. Recognizing risks

The policy statement places great emphasis on risk analysis. It is necessary for each company to transparently present its production, transport, and trade supply chains along with the associated risks for human rights and the environment. This also includes the business areas of its suppliers. When analyzing potential risks, it is important to distinguish between different types of impact:

  • Risks caused directly by the company,
  • Those risks arising from contractual relationships, for example with suppliers, or
  • Risks arising from complex business relationships without direct contractual arrangements, as may arise in dealing with numerous third-party intermediaries.

3. Minimizing risks

Based on the risk analysis, each company is now required to take appropriate preventive measures to prevent breaches. These include:

  • Agreements on appropriate contractual human rights clauses with direct suppliers
  • Implement appropriate purchasing strategies
  • Carry out training for employees and suppliers
  • Regular monitoring activities with respect to all stakeholders.

In case due diligence is violated in the supply chain or at the company's own site, then the company must take immediate action to end or reduce it — even if it is a matter involving past human rights violations. Suppliers in the supply chains also need to be monitored. When it turns out that they have violated human rights, for example in the production of goods, the transport of economic goods, or in direct trade, then the company must act immediately and impose sanctions.

4. Informing and reporting

Due diligence requires comprehensive reporting. Any actions and violations in the context of the supply chain act are to be documented on an ongoing basis. In its annual report to the overseeing body, the Federal Office of Economics and Export Control (BAFA), the company will provide information on the

  • Human rights and environmental risks identified
  • Measures taken to fulfill the due diligence obligation
  • Evaluation of the impact and effectiveness of these measures, and
  • Method to develop further preventive measures in future cases.

This documentation must be submitted to BAFA no later than four months after the end of the fiscal year and must also be publicly available on the company website for at least seven years.

5. Enabling complaints

Under the supply chain act, each company is also required to have a complaint procedure in place. This is aimed at any stakeholders involved who are directly affected by a human rights violation or has knowledge of potential or actual violations. The company will need to communicate with employees and suppliers to establish an effective complaints system.

The company is to ensure that each complaint is handled confidentially and does not have a negative impact on those filing the complaint. Adequate channels for submitting a complaint is to be provided, for example, a dedicated hotline, email address, or online form. In addition, clear procedures for handling and investigating complaints are to be established.

Setting up an effective complaint handling procedure strengthens the transparency and performance accountability of a company. By taking complaints seriously and addressing them appropriately, a company can demonstrate its commitment to respecting human rights and environmental standards along with building trust with their stakeholders.

Failure to comply with due diligence obligations can become costly

When a company fails to meet its legal obligations, then it can become expensive. The fines may be as steep as € 8 million or two percent of global annual sales. In addition, it is possible that a company may be excluded from being awarded public contracts if its fines exceed a certain amount. This aspect is monitored by BAFA, which has extensive control authority over companies. For example, they may enter the company's business premises, inspect documents, or request information.

What happens when supply chain law violations are reported? This has recently been reflected in headlines on the first complaints filed against the corporate giants Amazon and Ikea. Human rights organizations have filed complaints against these retailers with BAFA. Both companies are being accused of violating the German Act on Corporate Due Diligence in Supply Chains. Should BAFA also determine that there has been a violation, then it may become very expensive for the companies involved. In Ikea's case, the limit would be approx. € 800 million; in Amazon's case, fines of up to € 10 billion would be possible in extreme cases.

Among other things, the ECCHR (European Center for Constitutional and Human Rights) and FEMNET (African Women's Development and Communications Network) criticize retailers for not signing the so-called "Bangladesh Accord", an agreement designed to improve building and fire safety in the country's textile factories. In addition, safety deficiencies and labor law violations had been found in factories supplying Amazon and Ikea. BAFA did not want to comment specifically on this matter yet, but affirms that each complaint is examined in full depth and on an individual basis.

I'm curious to see how these cases will develop and how the supply chain law will be enforced. The fact is, however, that every company must deal with the new regulations in depth. If you have any questions concerning this subject and in particular would like to know what role purchasing plays here, then please feel free to discuss this with me in a personal appointment.

For more on this and other issues for sustainable purchasing strategies, listen to my podcast.

In my new book Der Einkauf im Wandel [Purchasing in Transition], discover the 5 success factors that will define purchasing in the future.

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