On June 11, 2021, the Bundestag passed the "Act on Corporate Due Diligence in Supply Chains" (Supply Chain Due Diligence Act, LkSG, or Lieferkettengesetz). This is an important step towards protecting human rights, preventing child labor and halting environmental degradation in global supply chains. Also, the European Parliament has announced the introduction of legislation on the European supply chain due diligence in the future.
Since this Act applies not only to companies which have their principal business office in Germany, but also to foreign companies with a branch office there, the "Act on Corporate Due Diligence in Supply Chains" will have an impact also on foreign business partners of German companies.
The law will enter into force on January 1, 2023, and will apply to all larger companies based in Germany regardless of their legal structure. “Larger” means they have more than 3,000 employees (working in Germany or seconded (entsandt) to work in a foreign country). “Based in Germany” means they have their main headquarters or registered business office in Germany. Foreign companies with a branch office in Germany and at least 3,000 employees working there will also be affected by the Act.
On January 1st, 2024, the 3,000-employees threshold will be reduced to 1,000, and it will affect German and foreign companies.
Violations or non-compliance with those new regulations will result in fines of up to 2% of annual turnover. In the case of serious breaches, companies may be excluded from public contracts for a certain period of time.
In order to remain compliant with the Act, companies must undertake certain precautionary actions. The most effective form of protection is a transparent supply chain, with adequate depth of information on every stage of the process. Therefore, ensuring compliance with the new regulations is likely to result in further digitization and automation of supply chains.