Question 1

Are you affected by the SCDDA?

Accepted Answer

The obligations under the Supply Chain Due Diligence Act (LkSG) directly affect domestic companies with more than 3,000 employees starting from January 1, 2023. From January 1, 2024, this obligation will also apply to companies with at least 1,000 employees. When calculating the number of employees, group-affiliated companies are considered part of the parent company's workforce. Moreover, temporary workers are counted in the calculation if their duration of employment exceeds six months.

Please note: Companies that are not directly affected by the LkSG may still be indirectly obligated to comply with due diligence obligations. This can arise from being a direct supplier to a company directly affected by the LkSG or due to being an indirect supplier contractually obligated to adhere to the LkSG regulations. Directly affected companies rely on the active support of their suppliers and will seek contractual assurances of compliance, making adherence to the LkSG requirements significantly important for suppliers.

Question 2

What obligations does a company directly affected by the SCDDA have?

Accepted Answer

Companies directly affected by the SCDDA are required to make reasonable efforts to ensure that there are no violations of human rights or environmental obligations within their own business operations and supply chains. The law allows for a serious and appropriate effort to be deemed sufficient.

This initially leads to the obligation to observe due diligence obligations both in the company's own operations and in the supply chain.

In their own operations, companies must ensure that a risk management and risk analysis process is conducted and documented. The affected company must also take appropriate preventive measures and may need to agree on sanctions with its suppliers. Furthermore, there is a statutory obligation to establish a complaint procedure and fulfill documentation and reporting requirements (including publishing an annual report on compliance with the due diligence obligations from the LkSG).

In the supply chain, the affected company must primarily ensure that there are no human rights violations or breaches of environmental obligations from the LkSG when selecting contractual partners. If there are indications of such violations, the affected company must also conduct risk analyses and preventive as well as remedial measures with its direct suppliers, if necessary. The affected company will also seek contractual assurances of compliance with due diligence and possibly other obligations from its suppliers.

Question 3

What measures can you take as a supplier under the SCDDA?

Accepted Answer

It is important to distinguish whether you are a direct or indirect supplier. A direct supplier is a contractual partner whose supplies are necessary for the production of the product or the provision and use of the relevant service (German § 2 Abs. 7 LkSG). An indirect supplier, on the other hand, is any company that is not a direct supplier and whose supplies are necessary for the production of the company’s product or the provision and use of the relevant service (German § 2 Abs. 8 LkSG).

The SCDDA specifies some requirements that the affected company must observe in dealing with its direct suppliers. For instance, it explicitly mentions the obligations the affected company has towards its direct suppliers regarding the preventive measures to be taken. Among other things, a contractual assurance from the direct supplier regarding their own compliance with human rights and environmental requirements is provided for, as well as appropriate addressing along the supply chain.

Direct suppliers are also required to participate in training and continuing education to ensure compliance with due diligence obligations or to conduct such training themselves. When agreeing on control measures (e.g., audits) and on-site inspections by the company directly affected by the LkSG, it must be carefully examined that no unreasonable restrictions are placed on the direct suppliers.

We would be happy to review your contractual requirements and assist you in protecting your interests.

Question 4

What measures should you implement as a supplier under the SCDDA?

Accepted Answer

Suppliers must also consider the due diligence obligations from the LkSG when selecting their suppliers or contractual partners and pass them along in the supply chain.

Moreover, a supplier should know its own business operations and the associated risks, regularly reviewing them. This can also provide advantages in acquiring new customers or obtaining new orders from existing customers. The MKM Compliance Audit Assistant can support you in effectively and purposefully presenting and reviewing your business area.

Additionally, it is advisable for suppliers to establish contractual arrangements for the cost coverage of training and continuing education related to the LkSG by the client, provided the supplier conducts these independently. Finally, suppliers should also consider labor law aspects to ensure compliance with due diligence obligations. This may include implementing a code of conduct or specific guidelines for adhering to the requirements of the LkSG.

Feel free to reach out to us with any questions regarding the scope or design of obligations under the LkSG.

Question 5

What legal consequences may arise from violations of the SCDDA?

Accepted Answer

The Supply Chain Due Diligence Act includes a specific provision for fines in german § 24 LkSG. In addition to violations of due diligence obligations, which may include an incomplete or incorrect risk analysis, failure to implement a defined risk management system, or non-compliance with verification obligations, the legislator has also included violations of reporting obligations and enforceable orders in the provision for fines.

The legal consequences for violations of the regulations apply equally to natural and legal persons. German § 24 LkSG primarily addresses natural persons as an administrative offense, particularly the management of a company and relevant operational officers.

However, fines can also be imposed on legal entities under certain statutory conditions.

The fine range for violations of the SCDDA for natural persons varies depending on the specific breach of duty and can reach up to €800,000.00. For legal entities, a tenfold increase of the maximum amount can be imposed, potentially reaching €8,000,000.00. For certain violations, the legislator has provided for further increases in the fines. This can be up to 2% of the average annual turnover for legal entities with an average annual turnover of more than €400 million. The amount of the fine is at the discretion of the competent authority.

In addition to the imposition of fines, affected companies may also be excluded from the awarding of public contracts. Particularly harsh consequences for companies, alongside substantial fines, include the (discretionary) decision by the authority to seize the proceeds from violations of the SCDDA prior to the imposition of a fine, although this is rarely enforced in practice.

Feel free to contact us with any questions regarding the legal consequences of violations of the SCDDA.

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