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| On 11 June 2021, the German Bundestag adopted the Act on Corporate Due Diligence in Supply Chains (“Act”) which was passed by the Federal Council (“Bundesrat”) on 25 June 2021. The Act is one of the most far-reaching pieces of legislation in the world in relation to supply chain due diligence. In comparing the Act with the draft EU Directive on Corporate Sustainability Due Diligence, it can be said that that the Act influenced the said draft of the EU Commission in many areas.
Key elements of the Act:
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From 1 January 2023, the Act will apply to companies domiciled or with a branch office in Germany employing 3,000 employees or more in Germany (including employees in German affiliated companies). From 1 January 2024, the threshold will be lowered to 1,000 employees.
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The Act prohibits violations of (i) human rights in particular, child and forced labor, acts of modern slavery, violations of basic work safety regulations, the freedom of association, acts of discrimination, fair wages and (ii) breaches of the International Conventions for the protection of the environment in particular the Minamata Convention on mercury, the Stockholm Convention on persistent organic pollutants and the Basel Convention on the control of hazardous waste and their disposal.
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To avoid such violations, companies have to comply with a number of due diligence obligations. Key obligations include: (i) establishing a risk management system, (ii) appointing a responsible person to monitor the risk management system, (iii) conducting regular risk assessments, (iv) adopting a policy statement on its human rights strategy by the executive board (v) introducing prevention measures in its own operations and vis-à-vis direct suppliers, (vi) implementing a grievance mechanism, (vii) having a system in place to assess the risk relating to indirect suppliers (viii) implementing a document retention system (of the obligations mentioned before for seven years) and (ix) annual reporting.
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Companies must make the annual report on the fulfillment of the due diligence obligations publicly available on the company’s website and submit it electronically to the Federal Office for Economic Affairs and Export Control (“BAFA”). The first annual report for the 2023 year must be published by the end of April 2024 at the latest. The report is generated from the responses to a structured questionnaire. The questionnaire is currently being developed by the BAFA and will be published once finalised.
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The BAFA as the supervisory authority will have comprehensive investigation powers to monitor compliance with the Act. The authority is entitled to: (i) proceed on a risk based approach or (ii) take actions upon request, if the person making the request makes a substantiated claim that his or her protected legal position has been infringed as a result of the non-fulfilment of a due diligence obligation.
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Non-compliance with the Act can result in a fine by the authority with up to 2% of the average turnover of an undertaking. The order of coercive fines and the exclusion from public procurement for the period up to three years are other possible sanctions.
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Affected persons have no civil claims against companies that breach their due diligence obligations. However, those persons who suffer harm from the non-compliance with those due diligence obligations might entrust their case to a German union or NGO who might file a claim on the basis of the law of the harmed person. It will be interesting to see how this clause, on the background of recent cases of human rights violations and environmental protection lawsuits in neighbouring countries, will be applied.
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Different to the Dutch Child Labor Due Diligence Act, the Act does not provide any corporate criminal liability provisions.
Overall, the Act establishes, for the first time outside the finance and insurance sector and the scope of the Money Laundering Act, concrete and detailed requirements for compliance.
This is particularly remarkable since the two other draft acts in the area of compliance, the Act on Corporate Criminal Liability and the Act on the implementation of the EU Whistleblower Directive, have not even been discussed in the Bundestag before the end of its electoral period in October 2022. The new government announced in its coalition agreement that it will implement the Act unchanged but will improve the Act where necessary. Simultaneously, it will support an effective EU Supply Chain Directive based on the UN Guiding Principles on Business and Human Rights that does not overburden small and medium-sized enterprises. Furthermore, the government announced to revise the National Action Plan on Business and Human Rights (2016) in the light of the Act.
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