Enterprise Risk Management and Compliance with the German Supply Chain Due Diligence Act: Navigating Third-Party and Vendor Risks

The enforcement of the German Supply Chain Due Diligence Act (LkSG) has witnessed its first complaint, potentially setting the tone for future compliance actions. The National Garment Workers Federation (NGWF), supported by organizations such as the European Centre for Constitutional and Human Rights (ECCHR) and NGO FEMNET, filed a complaint against Tom Tailor, Amazon, and Ikea, accusing them of failing to meet their human rights due diligence obligations. The response of the oversight body, the Federal Office of Economics and Export Control (BAFA), to this complaint will provide insights into the enforcement landscape going forward. Enterprises must take note of key examples to ensure compliance and avoid non-compliance penalties under the German Supply Chain Due Diligence Act.

Understanding the Complaint and BAFA’s Role: The NGWF complaint alleges numerous violations, including poor health and safety conditions, lack of freedom of association, and failure to join the International Accord for Health and Safety in the Textile and Garment Industry. While the complaint is not a legal claim, BAFA will assess whether an investigation is warranted. BAFA’s decision on what aspects to examine will be crucial, determining whether they focus on addressing specific allegations or conduct a comprehensive front-end risk mapping and due diligence process.

The Importance of Avoiding Low Expectations: The Act’s “best efforts” approach raises concerns about setting low expectations for compliance. If BAFA merely reviews companies’ processes on paper without evaluating their implementation, it may provide excessive discretion and leniency, undermining accountability for the impact. Striking a balance between substance and pragmatism is essential for BAFA to establish a high compliance standard.

BAFA’s Progressive Actions: Despite a period of silence since January 2023, BAFA has taken encouraging steps. The agency has reached out to 78 companies in the textile, electronics, and food sectors to inquire about their appointment of human rights officers and the presence of a complaints procedure. BAFA has also requested progress updates from clothing sector companies on their LkSG implementation. While progress reports are not due until June 2024, BAFA’s ongoing monitoring ensures companies meet their milestones. The compliance landscape remains under scrutiny, as the German supply chain law seeks to establish a global compliance standard in its inaugural year.

Long-Term Implications and Industry-Specific Initiatives: The NGWF complaint presents potential long-term ramifications. While BAFA may not recommend signing up to the International Accord for the accused companies, sector-specific or industry initiatives could become standard practice for demonstrating effective due diligence. Initiatives such as the Solar Stewardship Initiative, Shifting Gears Initiative, or the Global Network Initiative already address complex human rights issues in various industries. Enterprises seeking practical guidance should observe BAFA’s approach to this complaint and anticipate future compliance actions.

Avoiding Non-Compliance with the German Supply Chain Due Diligence Act: To ensure compliance with the German Supply Chain Due Diligence Act and avoid non-compliance penalties, organizations must proactively manage third-party and vendor risks. Key strategies to consider include:

  1. Implement Robust Due Diligence Processes: Establish comprehensive due diligence processes to assess potential third-party and vendor risks related to human rights, labor rights, and environmental impacts. These processes should involve thorough risk mapping and ongoing monitoring of supplier practices.
  2. Engage in Effective Communication: Maintain open lines of communication with suppliers, ensuring they understand the Act’s requirements and expectations. Establish regular dialogue to address any concerns, encourage compliance, and provide guidance on meeting compliance standards.
  3. Establish Internal Compliance Programs: Develop internal compliance programs that align with the Act’s provisions. This includes appointing a human rights officer or equivalent, implementing a complaints procedure, and maintaining comprehensive records of due diligence efforts.
  4. Conduct Regular Audits and Assessments: Perform regular audits and assessments of suppliers’ compliance with the Act’s requirements. This includes evaluating their implementation of risk mitigation measures and verifying their adherence to established standards.
  5. Collaborate with Industry Initiatives: Engage with industry-specific multi-stakeholder or industry initiatives aimed at addressing supply chain risks. Participating in these initiatives demonstrates a commitment to effective due diligence and can serve as a benchmark for compliance.
  6. Stay Informed and Adapt: Monitor updates and developments regarding the Act and related enforcement actions. Stay informed about evolving industry practices, standards, and initiatives, and adapt compliance processes accordingly.

Compliance with the German Supply Chain Due Diligence Act is paramount for organizations operating within its scope. The NGWF complaint against Tom Tailor, Amazon, and Ikea serves as an important milestone, with BAFA’s response shaping the compliance landscape. By proactively managing third-party and vendor risks, implementing robust due diligence processes, and staying informed about industry initiatives, organizations can avoid non-compliance and navigate the complexities of the Act effectively.\

Compliance with the LkSG doesn’t have to be difficult. Empowered Systems offers a wide range of tools to assist with organizational compliance. From holistic compliance management, to internal audits ensuring third-party compliance, to vendor risk management, and finally to ESG risk management, we have you covered with our holistic GRC lifecycle.

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