New rules governing supply chain due diligence in Germany - Key facts and what you can do to prepare for the changes

What is the aim of the new legislation?

To prevent human rights violations and environmental damage in the supply chains of products or services.

When does it come into force?

1 January 2023

Who is directly affected?

Any corporate entity, however constituted, that has:

• A registered office or branch (according to Section 13d HGB) in Germany; [and]
• At least 1,000 employees. Note that:
  - As part of transitional arrangements, companies must have at least 3,000 employees by the end of 2023, with the 1,000 employee benchmark coming into effect on 1 January 2024.
  - Employees of subsidiaries are included in the parent company's calculation.
  - Only employees working in Germany and employees based in Germany but posted abroad (but not those posted to Germany from abroad) are counted.

What do companies need to do under the new rules?

• Companies must strive to comply with human rights and environmental standards (there is no obligation to succeed) and observe due diligence obligations in order to do so.
• Due diligence obligations apply to the conduct of the company's own business and to the business of a company's direct supplier (i.e. suppliers who have a direct contractual relationship with the company), with restrictions also applying to indirect suppliers.

What happens if the new rules are breached?

• The Federal Office for Economic Affairs and External Control (BAFA) is responsible for enforcing the new requirements and has a range of powers to ensure compliance. These powers include:
  - The ability to check for and correct breaches of the new regulations e.g. entering business premises; summoning persons; information and disclosure obligations (incl. handing over documents); requiring a corrective action plan to be created and, if necessary, to take concrete action.
  - Periodic penalty payments up to EUR 50,000.
• Fines based on a company's average annual turnover:
  - Turnover below EUR 400 million: a fine of up to EUR 8 million.
  - Turnover above EUR 400 million: a fine of up to 2% of worldwide (group) sales.
  - Entry in the competition register if a fine ≥ EUR 175,000.
• If applicable, an exclusion from the award of public supply, construction and service contracts (until the company has proved that it has remedied the breach). Any such exclusion would be for a maximum of three years.
• Breach of the new rules does not give rise to any special civil liability (in particular not under Section 823 (2) of the German Civil Code).

What can companies do now to prepare for the changes?

• Check your supply chains: Are all indirect suppliers known? How much influence do you have on your suppliers (and their supply chain)? Are there any known vulnerabilities?
• Talk to suppliers at an early stage: What measures can they implement to ensure compliance with the changes? Do they need support, for example in influencing downstream (indirect) suppliers?
• Check contracts with direct suppliers: Are there already obligations to comply with human rights and environmental standards in your contracts? Are any such audit and reporting obligations passed through the supply chain?
• Revise purchasing conditions and address any conflicts of interest; if necessary, translate into local languages and publish or make available to all suppliers.
• Consider digitising your supply chain to better track and manage risks.
• Prepare documentation and controls along the supply chain. How might the new requirements be documented across supply contracts? Could any such contract terms be agreed with other manufacturers and suppliers? Are there any industry-specific or cross-industry initiatives that can assist with this process? Can certifications be used?
• Adapt reporting to pre-empt the introduction of the new requirements.
• Define processes for internal complaints procedures.
• Appoint a human rights officer (or similar) and integrate them into your business.
• Educate and sensitise staff.
• Create a budget for the implementation of the new obligations.
• Adopt a risk-based approach. Tackle the "worst first."
• Document all measures and steps taken to fulfill duties of care.
• Introduce sustainability strategies to gain market advantage and stay ahead of the new rules.

You can download the flyer here