The German Supply Chain Act: risks for companies and their governing bodies due to possibility of increased pressure from the Federal Office for Economic Affairs and Export Control

The German Act on Corporate Due Diligence Obligations in Supply Chains (the “Supply Chain Act") will come into force on 1 January 2023 (see also News from 14 June 2021). In this short article, we are going to outline the risks that companies and their governing bodies could face if they fail to fulfil their obligations under the Supply Chain Act.

Responsibility

According to the government’s explanatory memorandum on the Supply Chain Act, the newly created due diligence obligations are “merely” obligations to make an effort. This is true if one considers the expected results of the due diligence obligations owed: companies are not responsible for preventing all human rights violations or violations of environmental protection regulations covered by the Supply Chain Act. They are, however, responsible for carefully working their way through the Supply Chain Act’s list of obligations. In this respect, they are definitely required to achieve results, i.e. they are obliged, for example, to carry out a proper risk analysis, establish an appropriate risk management system and take preventive and remedial measures. If business managers violate these obligations and their companies suffer damage as a result, there is a risk that they will be held liable. In addition, there are sanctions under public law, ranging from exclusion from the award of public contracts to heavy fines. In addition, there is the risk that the proceeds flowing from a  violation could be confiscated.

Federal Office for Economic Affairs and Export Control increases its resources

The Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle – the “BAFA”) is responsible for monitoring and enforcing the obligations imposed by the Supply Chain Act. It is currently developing the substantive and technical prerequisites to be able to fulfil its legally mandated duty to monitor compliance with the Supply Chain Act as from 1 January 2023. The BAFA’s effectiveness in this regard should not be underestimated. Although the explanatory memorandum indicates that the legislature anticipates the BAFA having 65 full-time employees, well-informed sources suggest that the BAFA expects to have 140 staff positions in 2023 and that it considers 300 to be necessary in the medium term. It is therefore to be expected that the BAFA will act as a proactive supervisory authority, take its statutory monitoring mandate very seriously and also issue administrative fines and confiscate benefits obtained from violations.

Outlook

Companies subject to the Supply Chain Act should therefore thoroughly examine their due diligence obligations, comply with them and meticulously document all steps taken. If a violation of one of the prohibitions standards set out in sections 2(2) and 3 of the Supply Chain Act does in fact occur in the course of the company’s business or in its supply chain, the only way the company will be able to defend itself against accusations that it did “not at all, incorrectly, incomplete or not on time” “carry out the implementation” and the associated fine is by proving it did comply with the necessary steps mentioned above.