One year of the Supply Chain Act - how effective are the rules?

Human rights - One year of the Supply Chain Act - how effective are the rules?

When a T-shirt arrives in a store in Germany, a chocolate bar in a supermarket or a sofa in a furniture store, the products have often been through many production stages in different countries.

For almost twelve months now, the Supply Chain Act, which has been sharply criticized by the business community, has made companies in Germany responsible for ensuring that they do not profit from child and forced labour at their suppliers. According to the Federal Office of Economics and Export Control (Bafa), which is responsible, it has not yet had to impose sanctions for violations in the first year.

According to the authority, there have been 486 inspections of companies since the law came into force on January 1 - mostly in the automotive, chemical, pharmaceutical, mechanical engineering, energy, furniture, textile and food and beverage industries. The Bafa received 38 complaints and contacted the company in six cases.

The authority's initial assessment is positive: the obligated companies are taking a closer look at their supply chains and for the most part successfully implementing the requirements of the law. They have also approached their suppliers in order to eliminate or mitigate shortcomings.

Industry criticizes high costs

However, the business community is still criticizing the rules. "The aim of the law is shared by the German economy, but is causing difficulties in practice," said the President of the German Chamber of Industry and Commerce (DIHK), Peter Adrian, to the German Press Agency. The effects are already being felt by small and medium-sized companies. "When they do business with large companies, small companies are also required to meet the standards," said Adrian.

"An example from my practice: we supply machines to large companies that expect us to comply with the specifications. We already have 157 upstream suppliers alone, from whom we in turn purchase products, for which we then have to check compliance with the standards right from the start. This is sometimes almost impossible, it doesn't work," said real estate entrepreneur Adrian.

What the Supply Chain Act requires

The German Supply Chain Compliance Act (LkSG), as it is officially known, currently applies to companies with more than 3,000 employees. According to the Federal Ministry for Economic Cooperation and Development (BMZ), around 900 companies are affected. From 2024, the law will apply to companies with more than 1000 employees.

Among other things, they must analyze how great the risk is that they benefit from human rights violations such as forced labor, set up a risk management system and a complaints mechanism and report on this publicly. In the event of violations in their own business operations or at direct suppliers, the law requires companies to take immediate and appropriate remedial action "to prevent, end or minimize the extent of the violation".

The requirements are monitored by the Bafa, which also investigates complaints submitted to it. If the Federal Office finds omissions or violations, it can impose fines. Companies that have not adhered to the rules can also be excluded from public contracts.

EU law to follow

In mid-December, negotiators from the European Parliament and the EU member states also agreed on such a law across the EU, which makes companies jointly responsible for complying with human rights in their supply chain. In principle, the rules apply to companies with more than 500 employees and a turnover of at least 150 million euros. Among other things, it is envisaged that companies can be held accountable in European courts if human rights violations occur in their supply chains.

"What is now on the table in the EU goes far beyond that, because it is not only about the entire supply chains, but also about the sales chains," said the President of the Federation of German Industries (BDI), Siegfried Russwurm, to dpa. "This is completely unrealistic for component manufacturers, for example. They don't know the end customers of the majority of their deliveries at all." In addition, there is the threat of civil liability for misconduct by other companies in the supply chain.

"I fear that the LkSG, and even more so the EU version that has now been agreed in Brussels, will completely overburden us," says DIHK President Adrian. The uncertainty and burden on companies will increase drastically as a result of the EU regulations and will further increase the annoyance with EU policy among many companies.

The agreement on the EU law still has to be confirmed by the European Parliament and the EU member states, but this is normally a formality.