At a glance
- The number of companies who are subject to the regulations under the Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG) have increased since the beginning of the year. The LkSG now applies to companies with 1,000 or more employees in Germany.
- Credit institutions and insurance companies supplying services to real economy businesses could also be subject to the obligations outlined in the LkSG.
- It is unclear how the requirements of the LkSG will apply to the financial sector. The legislation is drafted with the ‘real economy’ in mind, and the special features of the financial sector have not been considered.
Labour law ‘must-haves’
The LkSG requires companies to ensure that they are complying with human rights and environmental standards in its supply chains. Employment law expertise is required as early as the determination of the threshold value, because the concept of employee and questions of group attribution are decisive. It is also essential to install an effective complaints system and appoint a human rights officer.
Whistleblowing systems are not new territory for regulated companies, but the extent to which adjustments are necessary should be reviewed. Consideration should also be given to how and to whom the role of the Human Rights Commissioner should be entrusted. In the meantime, there are a large number of commissioners (eg money laundering, data protection and (occasionally) a remuneration officer). These are not subject to uniform regime, but to their own regulations. Consequently, the specificities of the Office of the Commissioner for Human Rights must be considered; in particular, impartiality, as well as independence and freedom of instructions with regard to the function performed.
Upstream or downstream
Due diligence obligations usually relate to the upstream supply chain. For example, the procurement of external services such as in IT or human resources, is clearly recorded. In contrast, the extension to further processing, distribution and use of products by the contractual partner (downstream supply chain) is generally not provided for. On the other hand, there is no provision for the extension to further processing, distribution, and use of products by the contractual partner (downstream supply chain). However, the due diligence obligations of financial service providers could possibly be extended to the downstream supply chain: for example, when granting loans, because these often lead to production processes. The bank would then have to find out which parties are involved and whether there are any violations of human rights and environmental regulations in this context. There is a lot of contention here.
‘Carte blanche’ by the Federal Office of Economics and Export Control?
A handout issued by the Federal Office of Economics and Export Control (BAFA) last year was intended to shed light on the matter. In the handout, the BAFA states, among other things, that the supply of money (provision of money or equivalent funds) is neither a service nor a supply within the meaning of the LkSG. In addition, the due diligence obligations should not extend to customers for whom banking, or insurance transactions are carried out (eg deposit or credit business). However, refinancing transactions are to be part of the supply chain, where there is a specific, traceable purpose between the refinancing business and the banking service provided.
The handout only partially led to an industry-wide sigh of relief to a limited extent. On the one hand, it is neither a formal nor a substantive law; it is merely a matter of state information action. On the other hand, narrow questions remain unanswered - for example, there is no reference to the granting of large loans, which are mentioned in the explanatory memorandum to the LkSG.
Takeaways for employers
The LkSG requires companies to implement corporate due diligence obligations in their supply chains that are appropriate to the nature and scope of their business activities and defines human rights and environmental risks. It is not always clear exactly what this means for the financial sector, as its special features have not been included in the LkSG. The law is primarily written for the real economy.
In view of the large number of unresolved questions, it is essential to obtain expertise with regard to the implementation of employment law. Negligence or non-compliance can be costly to companies. Fines of up to EUR8 million or up to 2% of global annual turnover can be imposed, as well as exclusion from public procurement.
Recently, there were fears that the announced EU Supply Chain Directive would bring stricter requirements for the financial sector. However, the financial sector has been initially excluded. Consequently, the LkSG remains the strictest law of its kind in the world for the time being.
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