The German Supply Chain Due Diligence Act (SCDDA) is a recent law that sets out binding requirements for responsible supply chain management by companies with their administrative headquarters, main office, or branch office in Germany. The SCDDA aims to improve the international human rights situation by preventing, minimizing, or ending risks related to human rights and the environment. This article provides an overview of the law’s binding requirements for responsible supply chain management, including the need for companies to establish a risk management system, conduct regular risk analyses, and take preventive measures. Additionally, the article covers the law’s scope, general compliance requirements, and potential sanctions for violations.
1. What has happened so far?
The German Supply Chain Due Diligence Act (SCDDA) is a German law designed to improve the international human rights situation by setting binding requirements for responsible supply chain management by companies. It is based on the UN Guiding Principles on Business and Human Rights (UNGPs), which established the basic principles of state obligations to protect human rights, corporate responsibilities to respect human rights, and corporate due diligence standards to prevent violations and implement remedial measures.
The SCDDA aims to prevent, minimize, or remove and terminate risks related to human rights and the environment by defining comprehensive obligations that cover the core areas of
- human rights,
- employee rights, and
- environmental protection.
Additionally, other legal positions, whose need for protection is “obvious, when all relevant circumstances are reasonably considered” need to be taken into account.
2. Who falls in the SCDDA’s scope?
The SCDDA in the first place applies to companies with their administrative headquarters, main office, or branch office in Germany. Since 1 January 2023 the SCDDA applies to companies with at least 3,000 employees in Germany, as of 1 January 2024 this threshold will be reduced to a minimum of 1,000 employees in Germany. Small and medium-sized enterprises below these thresholds are not directly affected by the provisions of the SCDDA, but may be a “direct and indirect supplier”.
For the purposes of the SCDDA, a direct supplier is a partner to a contract for the supply of goods or the provision of services, whose supplies/services are necessary for the manufacture of the company’s product or for the provision and use of the service in question.
An indirect supplier is any company that is not a direct supplier and whose supplies are necessary for the manufacture of the company’s product or for the provision and use of the relevant service.
Companies falling into the scope of the law are required to “pass on” many of their obligations to their suppliers.
3. What are the general compliance requirements under the SCDDA?
To comply with the SCDDA, companies must establish a risk management system, conduct regular risk analyses, anchor preventive measures (also for direct suppliers), and constantly document their due diligence compliance. Companies must take objectively necessary measures that are feasible and appropriate.
The Federal Office of Economics and Export Control (BAFA) is responsible for monitoring compliance with the SCDDA, and has the right to audit and demand annual reports, control compliance with the duty of care, issue appropriate orders and take all other appropriate measures, access properties and business premises, inspect documents and records, and conduct searches.
To provide suitable protection for the directly concerned parties in Germany, it will be necessary to specifically require suppliers to set up
- own risk management systems,
- allow audit,
- conduct employee training, and more.
Suitable sanctions such as
- extraordinary termination rights,
- compensation in case of non-compliance, and
- indemnification provisions
are required as well. The implementation of these measures will be a considerable challenge.
4. How are violations sanctioned?
Violations of the SCDDA are subject to substantial sanctions, including penalty payments of up to EUR 50,000, fines of up to EUR 800,000 or up to 2% of the average annual (global) profit depending on the type and significance of the violation. Further an exclusion from the award of public contracts for companies and fines of at least EUR 175,000.00 are possible.
Often the reputational damage of being identified with Human rights violations is another factor to be considered.
5. Conclusion & Outlook
In conclusion, the SCDDA represents a significant step forward in ensuring responsible supply chain management by companies, and aims to prevent and minimize risks related to human rights and the environment. The SCDDA applies to larger companies with their administrative headquarters, main office, or branch office in Germany, and requires them to establish risk management systems, conduct regular risk analyses, and document their due diligence obligations. While the implementation of these measures may be challenging, the SCDDA provides substantial sanctions for violations and sends a strong message that companies must take responsibility for their supply chains.
The European Union (EU) published a draft Directive on corporate due diligence in the area of sustainability in February 2022, known as the “EU Supply Chain Directive.” The planned EU Supply Chain Directive will likely go beyond the requirements and legal consequences of the SCDDA, and it is expected to be adopted by the EU Commission and subsequently transposed into national law soon.
Dr. Constantin Frank-Fahle, LL.M.
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