The first complaints based on the German Supply Chain Due Diligence Act are alarming the business community.
Human rights organisations have filed a complaint against three retailers with the Federal Office of Economics and Export Control (BAFA). They accuse the three companies of violating the German Supply Chain Due Diligence Act (LkSG). This is the first complaint based on this act, which has been in force since the beginning of the year and applies to companies with more than 3,000 employees in Germany, including German subsidiaries of foreign firms.
The complaint states that the three companies are not signatories of the Accord on Fire and Building Safety in Bangladesh, which is said to be a violation of their due diligence obligations under the LkSG. In addition, an investigation conducted in March by the National Garment Workers Federation (NGWF) in Bangladesh found significant safety deficiencies, such as a lack of inspections and labor law violations.
Should BAFA also see a violation of the LkSG, various sanction options are possible. BAFA can impose a financial penalty directly, if the regulatory offense is significant enough. The law provides for fines of up to two percent of global annual turnover. For one of the companies, this limit would be around 800 million euros, and for another, in extreme cases, even up to ten billion euros would be possible.
Furthermore, companies fined more than 175,000 euros may be excluded from awarding public contracts for up to three years.
The LkSG does not offer associations a direct right to sue in court, but the EU is currently working on an even stricter regulation. In February 2022, the European Commission presented its highly anticipated proposal for a Corporate Sustainability Due Diligence Directive (CSDDD), which is currently under discussion within the European Parliament and the European Council. The CSDDD offers the possibility of harmonising the basis of due diligence legislation while allowing for more ambitious measures to be adopted at national level.
As the case might set an important precedent for the implementation of human rights due diligence laws, European companies should properly document human rights due diligence. In addition, companies should be prepared to cooperate with NGOs and consider responding to requests for information to avoid legal action by the LkSG. Attention should also be paid to the implementation of contractual obligations to cooperate with suppliers on preventive and remedial measures.
This becomes more relevant especially against the backdrop that the LkSG is currently in its first implementation phase and will apply to companies with 1,000 employees starting January next year.