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TT Talk – Commerical Due Diligence Act, Germany

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At TT Club, we frequently emphasise the  vital importance of due diligence. Since the vast majority of trade and transport transactions are conducted without the opportunity to meet your counterparty in person, rigorous processes are required to protect your own business and maintain safety and security more generally.

Legislative backing in Germany is a welcome development, albeit initiated from a perspective of human rights.

On 1 January 2023 the German Lieferkettensorgfaltspflichtgesetz (the “Act on Corporate Due Diligence Operations in Supply Chains”) of 16 July 2021 will enter into force.

The Federal Government considered that German companies are heavily involved in global sales and procurement markets and would therefore be confronted with potential human rights’ challenges throughout their supply chains.

The law was passed because the requirements of the 2016 National Plan of Action, which had been based on a voluntary self-commitment, were only fulfilled by 13-17% of companies.

From 1 January 2023, the new law requires companies incorporated in Germany with more than 3,000 employees (and more than 1,000 employees from 1 January 2024) to take responsibility and meet their obligations concerning the protection of internationally respected human rights by requiring them to implement a number of protective measures.

Foreign registered companies with branches or subsidiaries in Germany are also covered by the scope of the law and employees posted abroad are to be included in the total number of employees.

In comparison to the legislative situation in other EU Member States or to the average global situation, the scope of application of the German act is quite broad.

The Act applies to an extensive and non-exhaustive list of direct and indirect human rights violations along the entire supply chain including forced labour, child labour, discrimination, disregard for occupational health and safety measures and environmental damage.

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The new law is deliberately meant to become a potential role model and inspire a debate across both the EU Members States and the EU Institutions themselves on the benefit that similar laws, or relevant EU law might bring to international supply chains.

The obligations apply irrespective of the branch or area of business and are expressly not limited to the implementation of adequate due diligence measures towards a direct supplier but, partly, also extend to all of the direct supplier’s subcontractors further down the procurement chain, whether known or unknown.

Even though the competence of representing an affected person in court is confined to certain institutional claimants, such as labour unions and permanently established NGOs, the establishment of a domestic path of jurisdiction will nonetheless have some practically perceivable effect, at least in the medium term.

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Which obligations apply?

There are a series of different duties prescribed, however the central element is establishing an adequate risk management system for the entire supply chain. Companies are obliged to perform an individual risk analysis not only on their own business operations but also on the business operations of all of their direct and indirect suppliers.

Companies are subsequently obliged to take appropriate and effective measures preventing infringements. Moreover, there must be tools available and procedures in place that can minimise or prevent the effect of an infringement when detected. These tools must be specified and documented.

Furthermore, each company must appoint at least one person in charge for internal supervision of the due diligence measures adopted, with regular reporting to the board of directors. Companies must set up an effective complaints procedure for anyone affected by or aware of human rights violations or human rights risks.

An annual public written performance report on the success and effectiveness of the due diligence measures must be drafted and submitted to the controlling authority, the Federal Office of Commerce and Export Control, the Bundesamt für Wirtschaft und Ausfuhrkontrolle (BAFA) for review.

The new law prescribes neither an obligation of success nor a guarantee liability. Rather, affected companies must be able to prove that they have introduced risk management processes that are feasible and appropriate considering the risk assessment undertaken.

Leaving aside the commercial loss of reputation resulting from being involved in an investigation on human rights violations, the envisaged monetary fines are not insignificant, with substantial fines of up to 2% of annual group turnover and exclusions from public tenders.

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