Dusseldorf Lidl only had to find out just a few weeks ago how explosive the issue of supply chains is: The discounter came under fire for alleged misconduct. The civil rights organization ECCHR accused the retailer of buying textile products from Uighur forced laborers in a complaint filed with the Attorney General. The fact that Lidl has since terminated the Chinese suppliers, as the company defended, only moderately defused the allegation.
It had hit the textile discounter Kik even worse ten years ago. 259 people died in the fire at the Ali Enterprises textile factory, a supplier in Karachi, Pakistan. Because windows were barred, there were no emergency exits and stairs proved to be inadequate, the fashion chain had to defend itself in court against accusations of carelessness.
But soon it will not stop at prominent individual cases. At the turn of the year, the Supply Chain Act, which the Bundestag passed last June, is intended to create clarity – and to prescribe responsible management of their supply chains for German companies.
But despite the impending penalties, many of the companies affected are not yet prepared for this deadline, as an analysis by the commercial law firm Graf von Westphalen (GvW) in Hamburg, which is available exclusively to the Handelsblatt, shows. Almost half of the companies surveyed do not carry out any checks on their suppliers abroad, and the law firm did not respond to another tenth.
Top jobs of the day
Find the best jobs now and
be notified by email.
The linguistic monster “Supply Chain Due Diligence Act” – LkSG for short – is a clear message. Berlin wants to put a stop to the destruction of nature in the global production of goods, but especially to child labor and the exploitation of workers in low-wage countries.
Anyone who violates the law faces fines of up to two percent of the annual turnover and the exclusion from public contracts for a period of up to three years. Not only German companies are subject to this threat of punishment, the same applies to subsidiaries of foreign companies in Germany.
From 2023, companies with more than 3,000 employees in this country are therefore obliged to take massive protective measures. Just one year later, the threshold drops to 1,000 employees. From then on, precautionary measures must apply to possible environmental damage in the entire international supply chain, from the raw material to the end product. In addition, companies face severe sanctions if their direct suppliers violate human rights. A lack of work breaks or inappropriately low wages can then lead to legal action.
Around 2900 German companies are initially affected. The Graf von Westfalen law firm examined 213 large German companies. The analysis, which was completed in December, uncovered organizational gaps that are surprising in their extent.
Only every fifth company checks itself
Although each of the companies examined employs more than 1,000 people, not even one in five sends their own staff to suppliers. A quarter of them are satisfied with sending service providers such as Tüv Nord, Tüv Süd, Hanse-Control or the Geneva-based inspection company SGS abroad for the audits.
The Supply Chain Act calls for companies to check themselves again and again. “The risk analysis begins with an overview of the suppliers and ends with ongoing monitoring of those who are at the greatest risk,” explains GvW lawyer Lothar Harings.
After all, the consequences of a lack of surveillance are seldom as easily recognizable as in the deadly factory fire in Pakistan in 2012. A study by the Rosa Luxemburg Foundation from Darjeeling, India, a region from which, according to the study, German importers such as Teekampagne or Tee-Gschwendner also purchase their goods, recently reported on starvation wages, inadequate accommodation and a lack of toilets for tea pickers.
In Brazil, the Berlin-based development organization Oxfam reported in mid-2021, working conditions were found on coffee plantations that went as far as modern slavery. On South African grape farms or the fishing cutters in Thailand, wages are often below the subsistence level. German supermarkets are also profiteers from time to time.
The risk that company leaders will find out about such abuses far too late to avoid future fines is enormous. Only a little more than a third of the companies surveyed by the law firm GvW have so far managed to set up an information and complaint procedure for employees of their suppliers. In 53 percent of companies, for example, there is no contact person whom supplier employees can turn to. As a result, every second company does not receive reports of occupational safety and environmental protection violations.
Even without the Supply Chain Act, companies would have had to set up such a reporting system long ago. The deadline for implementing an EU whistleblower directive issued in April 2019 expired on December 17, 2021.
The incidents of the past few months, which presumably resulted from this, are hardly good news. No less than 23 percent of the 213 companies examined reported in the survey themselves about violations in terms of human rights, environmental protection or occupational safety. A good 70 percent of these concerned human rights, with problems almost always occurring with a supplier. Another worrying factor is that they were only able to be eliminated by intervening in every second company.
Civil law suits through the back door?
At least the company-related lobby associations managed to join forces to keep civil liability out of the supply chain law. Anyone who has to pay a fine therefore does not automatically have to expect to be prosecuted by the injured party.
However, this does not rule out individual lawsuits from those affected. “Foreign legal systems allow such liability claims to an ever greater extent,” warns Christoph Schröder, lawyer at the commercial law firm CMS Hasche Sigle. Experts warn that an EU directive that is currently in preparation could also include civil law suits in the future.
In addition, there is enormous legal uncertainty. “In future, a German magistrate will have to decide whether, for example, the break times in Guatemala are appropriate,” said foreign trade expert Harings, describing one of the problems. In addition, responsibility under the Supply Chain Act only applies to direct suppliers who can be contractually influenced. It only has to act with indirect suppliers if it learns of specific violations. At the same time, the possibilities of influencing the respective companies must be taken into account, which Richter will ask before questions such as these: Can a DAX group such as BMW be expected to exert greater influence on processes at suppliers than from a medium-sized company?
Unsurprisingly, there has been criticism from business associations. “It is regrettable that politicians are trying to achieve a good goal with a badly made law,” complains BDI Managing Director Joachim Lang. “The planned regulations will pose major challenges, especially for medium-sized companies, and will not change the local circumstances very much.” For companies, incalculable risks would arise.
“German companies have temporarily a competitive disadvantage due to the supply chain law”, criticized CMS lawyer Schröder. But the Federal Republic of Germany is by no means going it alone with its supply chain law – even if it is the most comprehensive regulation in this matter worldwide so far.
Self-commitment failed in Germany
The US state of California had already introduced a “Supply Chains Act” 22 years ago, and Great Britain followed suit with the “Modern Slavery Act”. Both laws initially only provided for reporting requirements. In 2017, France finally passed the world’s first cross-industry due diligence law, and two years later the Netherlands passed a law on mandatory corporate due diligence in the fight against child labor.
The federal government, on the other hand, had initially relied on voluntary commitments with the National Action Plan for Business and Human Rights (NAP) since 2016. But the 2019 and 2020 evaluations showed something sobering: only 13 to 17 percent of German companies with over 500 employees met the requirements.
In addition, it will not stop with the German supply chain law. The European Commission has been planning a corresponding directive for a long time, which could even go beyond the German provisions. In Brussels, for example, there is a discussion about making small and medium-sized enterprises, so-called SMEs, also responsible – namely regularly when they are active in high-risk sectors such as mining or textile production.
The dispute over it also ensures that the announced date of agreement in the EU capital is constantly being pushed back. The legislative proposal, which was supposed to be presented in June 2021, was initially postponed to December last year. It is now said that it will be on the agenda of the college of commissions on February 15, 2022.
If the EU bodies come to an agreement in good time this year, Berlin would have to adapt its supply chain law, planned for the beginning of 2023, to the Brussels requirements.
More: Why many companies shy away from taking necessary steps