Lieferkettensorgfaltspflichtengesetz: a tongue-twister of new supply chain regulations
Together with China, Germany is still regarded as the exporting country par excellence. Made in Germany has long been an indication of superior quality and standards. The great reputation of German products extends to the export of raw materials, finished goods, components and subcomponents throughout the world. However, given the size and complexity of the supply chains of international companies, the n
After lengthy disputes over how to achieve the objective set out in the 2016 Coalition Agreement of protecting human rights and the environment through new requirements on the supply chains of large companies, on June 11 the German Bundestag passed the bill on Supply Chain Due Diligence (Lieferkettensorgfaltspflichtengesetz / LkSG). The basis of the bill is constituted, in particular, by the United Nations Guiding Principles on Business and Human Rights. The goal is to prevent child labor, forced labor, discrimination and inadequate safety standards throughout the supply chain. It also seeks to prevent workplace accidents and work-related health risks by establishing adequate conditions, as well as to mitigate environmental risks. Accordingly, this new law incorporates the protection of the environment and human rights into corporate duties, and these apply not only to a company's own production, but also to its direct suppliers and, to a lesser extent, to its indirect suppliers. Consequently, as of January 1, 2023, all German companies with more than 3,000 employees (in Germany) will be subject to this law and, from 2024, it will also apply to those with at least 1,000 employees. This legislation deems as companies all those institutions which, regardless of their legal form, have their headquarters, principal place of business, administrative seat or registered office in Germany, as well as foreign companies that have a registered branch in that country. Specifically, this Supply Chain Act requires companies to take the following measures: Establish a risk management system through which potential violations of human rights and environmental protection can be identified. Carry out the risk analysis at least once a year for the proper identification, assessment and prioritization of relevant violations of environmental protection and human rights within the production chain. Issue a public declaration by the company's management disclosing its corporate strategy for the protection of human rights and the environment. Integrate adequate preventive measures for all types of company activity. Establish immediate corrective measures in the event that, within the company or on the part of a direct supplier, human rights or environmental protection violations occur. Incorporate an internal complaints procedure whereby any person may report risks of human rights or environmental protection violations. Prepare a mandatory due diligence information document for the company taking into account the obligations of this law, documentation that must be prepared on an annual, ongoing basis and retained for at least seven years. In addition to the liability it imposes with respect to the conduct of direct suppliers, the law also establishes certain obligations regarding indirect suppliers – that is, the suppliers of the suppliers. Nonetheless, recognizing that it is extremely difficult for a company to influence or control in detail even its indirect suppliers, the LkSG contains so-called “obligations of endeavor,” which establish that there is no obligation of success, nor a guarantee liability. Therefore, the due diligence duties are subject to a reservation of appropriateness, which grants companies discretion and room for maneuver. Failure to comply with the LkSG may result in penalties of up to 50,000 euros (even twice as high as the usual range of administrative penalties). In the case of a company with an average annual turnover of more than 400 million euros, the penalty may amount to 2%. The calculation is based on the worldwide turnover of the three business years preceding the penalty. The calculation of the amount takes into account, among other factors, the scope, duration and effects of the infringement, as well as the efforts made to remedy the harm. In addition, those companies with a serious due diligence breach, and subject to a fine of at least 175,000 euros, may be penalized with a prohibition from participating in public procurement and concession processes. But what impact could this new law have in Mexico? The revolution in markets and investments is being guided by the new ESG (Environmental, Social and Governance) policies. The LkSG is a first step by the German nation toward implementing this type of practice throughout its supply chain, regardless of where the companies are located. Since Mexico is one of the world's leading producers of auto parts, which form part of the production chain of German corporations, the LkSG will also play an important role in national territory. Thus, Mexican companies that are part of the supply chain must begin as soon as possible to assess and make changes to their production processes in order to comply with the LkSG, ensuring the protection of the human rights of their workers and the conservation of the environment. In light of this, it is necessary to take measures to comply with the due diligence requirements so that German investors already established in Mexico do not relocate to other countries. Attention must be paid to the very specific catalog set out in the LkSG regarding the obligations a company must fulfill. Consequently, the importance of setting up an internal body in charge of these new responsibilities must be borne in mind, as well as fostering a robust culture of compliance and respect for the law. In addition, consideration must be given to the need to carry out, or update, a thorough risk analysis process on matters such as M&A (mergers and acquisitions), as well as when assessing the due diligence compliance of the company's business partners, both existing and potential. That said, although those Mexican companies that form part of the supply chain of German companies subject to the LkSG cannot be fined or penalized directly for their non-compliance by the German authorities, there are other types of repercussions. If a Mexican company within this category fails to comply with the LkSG, its German client can indeed be penalized. For this reason, a scenario that is anticipated as likely is that clients (German companies) will request special certifications from the producing companies that form part of their production chain, verifying that they carry out their practices in accordance with the LkSG, regardless of their physical location (outside German territory). It is therefore very important that Mexican companies in this situation have the advice, backing and support of experts that enable them to implement and adhere to the measures established by the new law, in order to prevent the loss of German clients that require adjusting their supply chain to the LkSG. For additional information on the subject of this note, please contact our experts: Rupert Hüttler, Partner: +52 (55) 5258-1038 | rhuettler@vwys.com.mx Melanie Koch, Foreign Attorney: +52 (55) 5258-1034 | mkoch@vwys.com.mx
