The Supply Chain Due Diligence Act and the still underestimated issue of liability

published on 15 September 2022 | reading time approx. 5 minutes

by Dr. Christine Varga-Zschau and Jessika Gruber

The Supply Chain Due Diligence Act (Gesetz über die unternehmerischen Sorgfalts­pflichten zur Vermeidung von Menschenrechtsverletzungen in Lieferketten, abbre­vi­a­ted LkSG), was passed by the Bundestag on 11.6. 2021 and is scheduled to come into force on 1.1.2023. As regards general forward-looking aspects of compliance, LkSG imposes extensive compliance obligations on companies to be met in the area of human rights and environmental protection.

• Serious consequences of violations »

• A closer look at the possible sanctions »

• Criticism of the Act continues »

• The clock is ticking... »

Serious consequences of violations

LkSG contains a catalogue of various road safety obligations that are to be specifically designed and imple­men­ted through corresponding compliance measures. If appropriate compliance measures are neglected by a com­pany, the legislator does not, however, rely on the possibility of raising civil liability claims for pushing ahead with these legally required measures, as initially envisaged in the legislative process. Instead, action is to be taken against those responsible for the company using the means of administrative offences law to make them reconsider their approach. To ensure that the Act works effectively, the legislator has created a treasure-trove of tools available for enforcing regulatory sanctions.

When assessing which liability, civil or regulatory, is the greater evil, one should not be deceived: at first glance, companies may think that civil liability is the greater sword of Damocles and elements of an offence that give rise to an administrative liability may be perceived as less severe; however, a second look and a more in-depth analysis of the topic shows that the weight of such elements is often underestimated.

This is because administrative offences are still often qualified as so-called trivial offences and companies assume that the range of penalties is therefore manageable. But in reality, it’s quite the opposite!

The Federal Office for Economic Affairs and Export Control (BAFA), which is responsible for penalising vio­la­tions of the due diligence obligations standardised in the LkSG, will in future have almost all conceivable sanc­tion instruments at its disposal. Among other things, BAFA can

• issue orders and take measures to not only detect and eliminate but also prevent violations of due diligence obligations. The Act does not enumerate which orders or measures are to be expected.
• not only enter and inspect company premises, business and farm buildings during normal business and operating hours without prior notice, but
• also take this opportunity to inspect business documents and records from which any violations of due diligence could arise.
• Although these rights of accessing and inspecting premises by the authorities do not formally qualify as a search measure, they are actually equivalent to such a measure due to BAFA's factual authorisation to obtain information and documentation. It seems all the more alarming that the rights enshrined in the Basic Law, such as the so-called nemo tenetur principle (the right against self-incrimination), should apparently not apply here.
• in the event of violations of the LkSG, the authorities have recourse to a sanction mechanism, which in some circumstances can have an effect of threatening the existence of the company: The range of sanctions provided for in the LkSG extends from exclusion from the award of public contracts to the imposition of heavy fines.

A closer look at the possible sanctions

As is generally possible under the law of administrative offences, sanctions can also be imposed here both on companies and on their officers, i.e. management/executive board/supervisory board. LkSG provides for the following possible sanctions:

• Companies themselves can be fined for a legally established violation of due diligence obligations. Under certain conditions, the fines can reach up to five or eight million euros.
• Furthermore, the law even provides for turnover-related fines for certain violations, especially for companies with an average annual turnover of more than 400 million euros. Companies may thus face a fine of up to two per cent of the average worldwide annual turnover, which is
• determined on the basis of the previous three business years. It does not matter whether the offence was committed intentionally or because of negligence!
• But that's not all yet. A fine can result in the exclusion from a public procurement process. This was and still is an underestimated but at the same time feared sanction instrument for companies that depend on the award of public supply, construction and service contracts for their existence. It is obvious that exclusion from participation in the award procedure of corresponding contracts can quickly become a financial disas­ter for such companies. A company can be excluded for up to three years and must undergo the so-called self-cleaning procedure pursuant to Article 125 GWB (Act against Restraints of Competition).
• Company managers can be fined up to 100,000 euros, up to 500,000 euros or up to 800,000 euros per violation, depending on the violation and its severity. However, not only the company officers, but also the company's supervisory bodies are required to monitor the proper fulfilment of the requirements of the LkSG by the management within the scope of their control and advisory function and to assist the management in an advisory capacity. This requires at least a basic knowledge of the LkSG, the obligations arising from it and their effective implementation in the company.
• If the supervisory bodies do not comply with these requirements, they may be punished for this failure with a fine of up to 800,000 euros, unless the stricter regulation of turnover-based fines is applied.

Although the Act generally acknowledges the significance of the administrative offence itself in the process of assessing the fine, it provides a differentiated system for weighing up various factors to assess the fine, where­as the list of factors is not exhaustive. As part of the assessment, in particular,

• the offence that the offender has committed, his motives and objectives as well as
• weight, duration and extent of the administrative offence

are taken into account.

After the Act comes into force on 1.1.2023, it is important to use the time left to implement and meet the legal requirements. Otherwise, the company may be committing the first violation subject to a fine already by not appointing a human rights officer who has to ensure that the corresponding risk management is monitored.

For this violation alone, the company may be punished with a fine of up to 500,000 euros, unless the stricter regulation of the above-mentioned turnover-based fine is to be applied.

This is because according to LkSG the performance of a risk analysis is the central prerequisite for the imple­men­tation of an appropriate and effective risk management system. The aim is to identify, prevent, end, or at least minimise the extent of human rights and environmental risks as well as the violation of protected rights along existing and future supply chains.

The second central aspect in addition to the above-mentioned risk analysis is the introduction of preventive measures. Thus, LkSG requires introducing a complaints procedure at the company, which enables raising a concern about risks and violations of the law and thus ultimately allowing to meet the obligation to establish a whistleblower system. At this point, two birds can be killed with one stone: introducing a reporting procedure to report commercial criminal law and other violations, plus addressing the subject area of risks and legal viola­tions arising from LkSG.

Criticism of the Act continues

Not only the number of possible fines, but also the fact they are based on vague provisions or indeterminate legal terms allowing leeway for interpretation cast a dark shadow over the future application of LkSG in prac­tice. Especially imposing fines for failing to act in time is subject to harsh criticism. Because what does "failing to act in time" mean?

If no reference is made to other provisions, it is precisely this question that becomes key in an alleged offence: missing regulations on a time limit. From the point of view of criminal law, this is problematic, because the so-called requirement of certainty applies here. According to this principle, an act can only be punished/penalised if the criminal liability for the act/the fact of performing the act constituting an administrative offence was determined by law before the act was performed. In this case, this also includes the question of when an act is still performed in time.

If one draws parallels to other areas of law, it can be assumed that this question will have to and will be answered by case law – even if at a later time. However, this fact, together with the absence of civil liability, should in no way lead to taking the Supply Chain Due Diligence Act lightly or even negating it.

The clock is ticking...

In order to adequately address the Supply Chain Due Diligence Act within the company, to carry out the risk analysis and to create and implement the necessary structures for preventive measures, it is necessary to take action. NOW!