Supply Chain Compliance Act (LkSG) and the future of the supply chain - Compliance in supply chains

The Supply Chain Due Diligence Act was promulgated as a federal law in July 2021 and will come into force in part, but mainly on January 1, 2023. A threshold adjustment will take effect from 2024.

The law sees its origins in the United Nations Guiding Principles on Business and Human Rights and the resulting 2016 National Action Plan in Germany.

It regulates the human rights and environmental due diligence obligations of companies in the supply chain. The term supply chain is fully defined in Section 2 (5) as all steps in Germany and abroad in the manufacture of products or the provision of services, from the extraction of raw materials to delivery to the end customer. As a result, the entire end-to-end performance processes of a company.

For whom and when does it apply?

The Supply Chain Due Diligence Act (LkSG for short) applies to

• Companies with their head office, principal place of business, administrative headquarters or registered office in Germany;
  and
• German branches of foreign companies that meet the threshold for employees in Germany

In brief: Activity in Germany and number of employees

• From January 01, 2023: at least 3000 employees
• From January 01, 2024: at least 1000 employees

Employees posted abroad and temporary workers (longer than six months) are counted. However, branches of foreign companies in Germany are not.

In groups, affiliated companies in Germany with the number of employees of all group companies must be taken into account when calculating the number of employees of the parent company (including employees posted abroad).

The bans recorded can be divided into two categories:

Human rights prohibitions	Prohibitions under environmental law
Child labor Forced labor all forms of slavery Disregard of occupational health and safety obligations Disregard for trade union freedom Unequal treatment in employment (e.g. because of origin, social background, age, gender, political opinion, religion, etc.) failure to act in breach of duty (see annex to the LkSG)	Certain bans related to mercury under the Minamata Convention Ban on the production and use of certain chemicals (persistent organic pollutants) in accordance with the Stockholm Convention on POPs Ban on the export of hazardous waste in certain circumstances under the Basel Convention

The list is not exhaustive but provides a good initial overview.

How can companies prepare for the LkSG?

The three pillars are operating a compliance management system, ensuring the integration of the CMS in the company and the recurring audit in the cycle of events.

What does a possible implementation concept look like?

In preparation for the entry into force of the LkSG on January 1, 2023, the companies concerned should plan the following steps:

1. Define responsibilities for the LkSG (compliance if necessary)
2. Create concept for risk analysis (if necessary with risk management)
3. Develop prevention measures (together with audit if necessary)
4. Develop a concept for remedial measures (with areas if necessary)
5. Set up a complaints procedure (possibly with compliance, quality management)
6. Draw up a policy statement (by company management if necessary)
7. Documentation and reporting (audit, revision)

What liability risks arise from the LkSG?

There is no obligation to succeed or guarantee liability for the companies, but rather an obligation to make an effort. There is no new liability under civil law. Proof that companies have introduced the described risk management processes that are individually feasible and appropriate for them is sufficient.

We are familiar with appropriateness (Section 2 (2) LkSG) from other regulations such as MaComp (Minimum Requirements for Compliance) or the German Banking Act (KWG). By analogy, this is measured by the type and scope of the business activity, the company's ability to exert influence and the typically expected severity of the breach, the reversibility of the breach and the probability of the breach.

The type of causation also plays a role. Sanctions in the event of an infringement therefore only arise from intent or negligence.

How can you integrate the topic into your company?

Basics
Corporate social responsibility, or CSR for short, refers to the social responsibility of companies as part of sustainable business.

Global challenges
Industrial development and the globalization of the economy offer mankind many opportunities to shape the world we live in in a positive way. However, these processes are sometimes accompanied by negative side effects that affect both social coexistence within the global community and the preservation of an intact environment.

Benefits for companies
There are many different motivations for companies to take CSR seriously. Self-interest is one of them - and is a significant and thoroughly positive driver for the topic. CSR is not a luxury, but something from which companies can benefit economically.

If you would like to know more, please contact us.

A contribution by Dr. Gerd Grimberger

Chief Certified Compliance Officer (DIZR)