What you need to know about the Supply Chain Act
The Supply Chain Act applies to businesses with 3,000 or more employees whose headquarters, principal place of business, statutory seat, or domestic branch is in Germany. In January 2024, this threshold will be reduced to 1,000 employees, extending the scope of the act considerably. When calculating the number of employees, temporary agency workers with an assignment exceeding six months and employees posted abroad are also included. Furthermore, employees of all enterprises belonging to the same group employed in Germany must be accounted for.
Businesses under the scope of the act must set up grievance mechanisms and report on their activities to prevent or minimize risks and violations. The due diligence obligations include:
- Establishing a risk management system;
- Designating a responsible person or persons within the enterprise;
- Performing regular risk analyses;
- Designing and adopting human rights policies;
- Establishing preventive measures in its own business area and vis-à-vis direct suppliers;
- Taking remedial action in the event of an imminent or actual violation of a human rights or environmental obligation to end, minimize, or prevent such violation, as the case may be;
- Establishing a complaint procedure for the reporting of human rights violations;
- Implementing due diligence measures with regard to risks at indirect suppliers; and
- Documenting and reporting due diligence measures.
If any of these requirements are not met, severe consequences are triggered. Companies can be excluded from being awarded public contracts and may be subject to economic fines of up to €8 million or up to 2% of their annual turnover (only applicable to those companies with a yearly turnover of more than €400 million)—not to mention negative publicity and reputational damages.
In line with the Supply Chain Act, on February 23, 2022, the European Commission of the European Union (EU) published the draft of its corporate sustainability and due diligence directive that aims to promote sustainable and responsible corporate behavior by incorporating human rights and environmental considerations into company operations and corporate governance.[2] The proposed directive marks a shift from voluntary to mandatory sustainability due diligence in the EU and represents a step toward greater corporate accountability for environmental and social impacts. The directive must now be approved by the European Parliament and the Council of the EU. According to the proposed directive, once approved, the new obligations would apply after three or four years, depending on the company’s size and turnover. This is expected to lead to an extension of the Supply Chain Act’s scope.
Challenges and opportunities in Latin America
To adapt to the new legal framework, companies in Germany that fall under the scope of the Supply Chain Act are strengthening their third-party due diligence processes by increasing requirements for suppliers worldwide. Even small- and medium-sized companies will need to create or adapt their compliance programs accordingly if they want to become or remain part of the global supply chain in their sector.
In Latin America (LATAM), local compliance regulations and integrity culture vary across countries, presenting additional challenges when implementing the German Supply Act for LATAM and German counterparties operating in the region.
Navigating the complexities of compliance in LATAM requires a proactive and adaptive approach. Adapting to the act’s requirements calls for a thorough assessment of the local compliance landscape in each country of operation, which involves understanding the specific legal and regulatory frameworks, as well as local culture and corporate integrity culture. To tackle these challenges and comply with the German Supply Act, it is highly recommended to engage local legal counsel and compliance experts to navigate the intricacies of each jurisdiction.
German companies must understand different compliance practices and cultures across LATAM countries to establish effective communication channels and collaborative approaches with their LATAM counterparties. Strengthening third-party communication and training can help meet compliance requirements and build sustainable relationships based on shared values.
On the other hand, LATAM companies face their own set of challenges, including implementing a robust third-party due diligence process with specific tools to prevent, mitigate, and remedy human rights and environmental wrongdoings. This means evaluating existing compliance programs to assess the gaps and areas that require enhancement to align with the expectations of the German Supply Chain Act, including reviewing codes of conduct, policies, and procedures to ensure they comprehensively address human rights and environmental considerations. Additionally, companies may need to invest in training programs to raise awareness among employees and third parties about the act’s requirements and the importance of sustainability and social responsibility.
By navigating these challenges effectively, LATAM and German companies can boost their business opportunities and foster corporate reputations. They can build stronger partnerships that promote sustainable and ethical business practices, enhance their reputations, and contribute to developing a socially and environmentally conscious business environment in both regions. It calls for mutual understanding, open dialogue, and knowledge sharing to bridge the gaps and create a common ground for compliance and responsible business practices while establishing consistent standards and promoting a culture of integrity throughout the entire supply chain.
In conclusion, the German Supply Chain Act represents significant challenges for German and LATAM counterparties. Companies that include sustainability and social responsibility as key elements of their compliance risk management system will position themselves well and foster their reputation in an increasingly socially and environmentally conscious business environment.
Takeaways
- The German Supply Chain Due Diligence Act (Supply Chain Act) imposes new due diligence obligations on companies, presenting challenges for German and Latin American (LATAM) companies to ensure compliance throughout their supply chains.
- German companies affected by the Supply Chain Act are strengthening their third-party due diligence processes, creating opportunities for LATAM suppliers to enhance their compliance programs and remain part of global supply chains.
- Companies face the challenge of adapting to varying compliance regulations and integrity cultures across different countries, making effective communication channels and collaborative approaches between German and LATAM companies essential to bridge compliance gaps and build sustainable relationships based on shared values.
- LATAM companies need to implement robust third-party due diligence processes, including reviewing their compliance programs and tools to align with the Supply Chain Act’s expectations.
- Navigating the challenges of the Supply Chain Act can lead to opportunities for both German and LATAM companies, fostering stronger partnerships, enhancing reputations, and contributing to a socially and environmentally conscious business environment.
1 German Bundestag, “Act on Corporate Due Diligence Obligations in Supply Chains Of July 16, 2021,” https://www.csr-in-deutschland.de/SharedDocs/Downloads/EN/act-corporate-due-diligence-obligations-supply-chains.pdf?__blob=publicationFile.
2 European Commission, “Proposal for a Directive on corporate sustainability due diligence,” February 23, 2022, https://commission.europa.eu/publications/proposal-directive-corporate-sustainability-due-diligence-and-annex_en.