From coercive penalties and fines through the Supply Chain Act

For many years, business graduate Saskia Anna Rotterdam has been working as a certified compliance consultant for medium-sized companies. While Ms Rotterdam’s work in recent years was mainly characterised by questions about anti-corruption measures and management training in compliance management, her current consultations revolve mainly around the area of supply chains. “Many SMEs think that the Supply Chain Due Diligence Act passed in June 2021 does not affect them. Many only read the first sections and think that the law mainly affects companies in Germany that have more than 3000 employees. But the law affects every supplier. And this can quickly result in fines of up to 50,000 euros or fines starting at 500,000 euros. These can be passed on to suppliers, which can have unpleasant consequences for medium-sized companies.”

The Supply Chain Act forces companies to take responsibility. “It is about corporate due diligence throughout the supply chain,” Rotterdam said. “Human rights violations and environmental degradation related to production and trade should thus be counteracted. But in addition to the well-known areas such as child labour or protection against torture, the Supply Chain Act also includes components such as compliance with nationally applicable duties of labour protection, compliance with minimum wage regulations or the prohibition of unequal treatment and discrimination.”

“I always tell the  companies: it’s about your liability reduction and about preserving jobs.” – Saskia A. Rotterdam

And this is where things are now getting very concrete for businesses in Germany. “Since the introduction of the law, medium-sized suppliers have been contacted by large companies and asked whether they comply with the regulations laid down in the law. Often with a very short deadline. For one of my clients it was just 10 working days. If nothing is prepared, it’s going to be tight.” Depending on the contract, some companies grant a special right to terminate the contract. Combined with the BAFA fine, this can threaten the existence of the company.

BAFA has been increasing its staff for months. Inspections are increasing. Medium-sized companies should also deal with the issue of the Supply Chain Act and its implementation in the company. Saskia Rotterdam helps companies with this – true to the motto: prevention instead of reaction, because the risk analysis set out in § 5 of the Act, in conjunction with the preventive and remedial measures, provide companies with a good and secure basis. “If the things that are queried are already prepared in the drawer, companies are 90 per cent safe. Then they don’t have to act reactively based on tips, complaints and even investigations by BAFA. That is very reassuring,” says Rotterdam. Those who now believe that this prevention is very time-consuming and cost-intensive are mistaken. “All in all, we usually need about 3-4 days – depending on the size of the company. I spend two days on site to get an overview and make recommendations for further implementation. Afterwards, of course, I also assist with the preparation of the necessary documents, if this is explicitly requested by the company. The costs are also kept within limits and depend on the size of the company.”

As MBS, we recommend that our clients seek advice against the background of the potential consequences of the Supply Chain Act. You are welcome to contact Saskia Rotterdam with reference to MBS.

Just the beginning:

Already in September, there was a first complaint in connection with the new supply chain law and human rights violations in Xinjiang in China. The human rights organisation European Center for Constitutional and Human Rights (ECCHR), based in Berlin, filed a criminal complaint against several German companies with the Federal Attorney General in Karlsruhe. According to ECCHR, companies such as Lidl, Aldi, and Hugo Boss may be profiting directly or indirectly from the forced labour of Uyghurs in the Xinjiang region of China and may be involved in crimes against humanity.           ■

CHECKLIST:

Are you a direct supplier to companies with more than 3,000 or 1,000 employees? (regardless of legal form)
■ Yes    ■ No

Do you have more than 250 employees?
■ Yes    ■ No

Do you have foreign (non-European suppliers)?
■ Yes    ■ No

Do you make more than 30% of your annual turnover as a direct supplier to companies with more than 1,000 or 3,000 employees?                 
■ Yes    ■ No

Are you an indirect supplier to companies with more than 1,000 or 3,000 employees?
■ Yes    ■ No

If 1-3 are already answered with yes, there is a need for action. On the one hand, because of the Supply Chain Sourcing Act and, on the other hand, because of the EU Whistleblower Directive and the upcoming Association Sanctions Act. If question 4 is also answered in the affirmative, the pressure to act to minimise liability in the form of implementing the Supply Chain Segregation Act will increase. If only question 5 is answered in the affirmative, it would be recommended to take a closer look at the topic and, if necessary, to take advantage of a brief consultation. If, however, 4 and 5 are answered in the affirmative, it should be examined more closely which supply chain law measures should be ready in the drawer.