The German Supply Chain Due Diligence Act in Action

By Katie Nadworny August 31, 2023

​The Rana Plaza garment factory building in Bangladesh collapsed on April 24, 2013, killing more than a thousand people and injuring nearly 2,500. In the aftermath, it was discovered that the factory was a link in the supply chains of many major European clothing stores and brands. Soon after, the Accord on Fire and Building Safety in Bangladesh was created, and international companies were encouraged to sign onto the accord.

The reckoning from that catastrophic event led eventually to the implementation in January of Germany's Supply Chain Due Diligence Act.

What Is the Supply Chain Due Diligence Act?

The Supply Chain Due Diligence Act aims to address German companies' obligation to make sure their suppliers have high standards regarding health and environmental safety. At the moment, the act applies to companies with 3,000 or more employees. In January 2024, that will be expanded to include companies with 1,000 or more employees. 

"It basically says that these companies need to fulfill certain due diligence obligations, which are described in detail in the act, and these obligations contain risk management, so that's the first thing you need to do," said Sebastian Runz, an attorney with Taylor Wessing in Dϋsseldorf, Germany. "You need responsible people in your company that are addressing this topic, and that are supervising this topic. … The act speaks of a human rights officer who supervises the implementation of the act, and then we have the board that is obliged to inform themselves on what happens in the company."

Focus on Risk Analysis

German companies must analyze any potential health or environmental safety risks involving their direct and indirect suppliers. "You need to perform a risk analysis with respect to these risks in your own business area," Runz said.

If a company in Germany identifies any risks in the supply chain, it must take measures to mitigate the risks. These can be either preventive measures or remedial measures, depending on the point in the process the risks are uncovered.

"When you have a violation already, then you would need to basically stop the violation if it's in your own business area, and if you have a violation at the supplier level, then you would need to implement a plan to minimize or end the violation. And the act describes a certain escalation process you need to go through," Runz said. "The last resort would be to terminate the relationship with your supplier if it's at the supplier level."

What Are the Consequences?

Exactly 10 years after the Rana Plaza building collapse in Bangladesh, the first complaint was filed based on the act.

"The assertion was made that three companies have not become signatories of the Accord on Fire and Building Safety in Bangladesh, which is purportedly in contravention of the due diligence obligations stipulated under the Supply Chain Act," said Maximilian Gross, an attorney with Reed Smith in Munich.

In instances of noncompliance, the Federal Office of Economics and Export Control possesses the authority to levy financial penalties, and in certain circumstances, restrict companies from securing public contracts. "Currently, there exists no civil liability provision within the act, thus precluding one company from suing another for potential breaches in the supply chain," Gross said. "However, individuals affected by human rights violations or employees who identify wrongdoing have the opportunity to approach a nongovernmental organization [NGO]. Subsequently, the NGO can file a complaint with the appropriate regulatory body in Germany."

The EU Prepares a Similar Directive

The EU is in the process of creating a directive on this topic, which would go further to address the deeper supply chain issues and apply to much smaller companies, including those with 250 or more employees. Though the directive is not likely to be ready until next year—and unlikely to become national law for a few years after that—it will ultimately build upon the German Supply Chain Due Diligence Act.

"Companies in Germany so far are able to look until a certain tier level, but not beyond, because they so far are not obliged to make the deeper supply chain transparent," Runz said, "and I think that a lot of companies are not doing that because they don't have to." 

Katie Nadworny is a freelance writer in Istanbul. 



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