What is LkSG?
The German Supply Chain Due Diligence Act, which came into force on 1 January 2023, marks a significant step towards responsible corporate governance in global supply chains. It recognises the central responsibility of companies in promoting a sustainable economy and society. The LkSG sets clear requirements for companies that fall within its scope to carefully identify and reduce or end the potential negative impacts of their business activities on human rights and the environment.
Why was the LkSG introduced?
In 2016, the German Federal Government adopted the National Action Plan for Business and Human Rights (NAP), which aims to make the globalised economy more socially just in collaboration with businesses. The NAP is based on the United Nations Guiding Principles on Business and Human Rights, and places a clear focus on the state’s duty to protect, the possibility of judicial and non-judicial remedies, and corporate responsibility. The German Federal Government actively supported businesses in fulfilling this responsibility. This dialogue between the government and businesses laid the foundation for the creation of the Supply Chain Act and underscores the effort to promote responsible business practices along global supply chains.
What Reporting Obligations apply under the LkSG?
Companies affected by the LkSG must prepare and publish annual reports on the implementation of their due diligence obligations. The report must cover various aspects, including the identification of human rights and environmental risks, what measures the company has taken to fulfil its due diligence obligations, how the impact and effectiveness of these measures are assessed and what conclusions can be drawn for future measures.
The reporting obligation under the LkSG therefore represents a crucial obligation for affected companies to document their due diligence obligations regarding human rights and environmental impacts in a transparent and comprehensible manner.
What is the Role of BAFA?
One of BAFA’s main tasks is to review the reports prepared by companies for compliance with legal regulations. The focus here is on comprehensive documentation for the identification and reduction of environmental and human rights risks. In addition, BAFA has the authority to impose penalties if companies do not fulfil their obligations under the LkSG. In this way, BAFA contributes significantly to the implementation and enforcement of this far-reaching law.
Who is affected by the German Supply Chain Act?
The German Supply Chain Act impacts companies situated in Germany with over 3000 employees. Starting in 2024, it extends its reach to companies based in Germany with more than 1000 employees.
With the Supply Chain Act, the German government is pursuing the clear goal of increasing the transparency of global supply chains and ensuring the protection of human rights and environmental standards. This includes compliance with human rights standards, such as the prohibition of child and forced labour, slavery, disregard of labour protection obligations and freedom of association, inequality and withholding of an adequate wage, certain environmental pollutions relevant to human rights, as well as land deprivation, torture and inhumane treatment.
In addition to this, the LkSG considers environmental protection agreements, such as the Minamata Convention (risks from mercury-containing products), the PoPs Convention (risks from certain persistent organic pollutants), and the Basel Convention (risks from international waste transport). The implementation of the LkSG is intended to protect the rights of workers and minimise environmental impacts. The law provides clear guidelines for corporate due diligence and promotes responsible business conduct in global markets.
Understanding the Federal Office of Economic Affairs and Export Control (BAFA)
The Federal Office of Economic Affairs and Export Control, BAFA for short, is a federal authority under the jurisdiction of the Federal Ministry of Economics and Climate Protection (BMWK) in Germany. It performs important administrative tasks in the areas of foreign trade, economic promotion and energy.
Tasks of BAFA
One of BAFA’s central tasks is export control. Within the framework of the German Federal Government’s export control policy, BAFA acts as a licensing authority and works closely with other federal authorities. Export controls are based on international obligations and legal requirements, taking into account Germany’s security interests and foreign policy interests.
BAFA’s responsibilities in the foreign trade sector also include the implementation of import regulations established within the framework of the European Union’s common trade policy.
In the energy sector, BAFA implements measures to support the better usability of renewable energies and energy saving. It also participates in crisis prevention measures in the mineral oil sector.
In promoting economic development, BAFA focuses on programs for small and medium-sized enterprises.
The Auditor Oversight Authority (APAS), which was established in 2016 at the Federal Office of Economics and Export Control, is responsible for overseeing the activities of professionals and auditing firms and for conducting the statutory audits of public interest entities. In addition, BAFA has public and professional oversight of the Chamber of Public Accountants.
BAFA’s Role in Regulating Exports
As the central administrative and licensing authority, the Federal Office of Economics and Export Control is responsible for incorporating Germany’s security interests and foreign policy interests in the area of foreign trade law. In this context, one of BAFA’s main tasks is to check whether the export of goods or related acts in foreign trade, such as services and transit, are subject to licensing and whether a licence can be issued. Obligations for approval arise from the Foreign Trade Act and the Foreign Trade Regulation, the EU Dual-Use Regulation, the EU Weapons Regulation, the EU Torture Regulation, and various embargo regulations.
BAFA’s Role in Fostering Economic Development and Technological Innovation
The BAFA promotes economic development through various programs. It supports projects that focus on gender equality, non-discrimination, and ecological sustainability. In addition, it places a special emphasis on the digital equipment of intercompany vocational training centres to elevate the digital skills of the local population and small and medium-sized enterprises. It also promotes investments in these centres to ensure their relevance in the constantly changing technological landscape.
BAFA’s Contribution to Environmental and Energy Policies
BAFA plays a decisive role in environmental and energy policy by promoting energy efficiency and renewable energies in companies. This serves to achieve the EU’s climate targets and reduce energy and resource consumption. Innovative technologies such as self-supply of electricity and smart load management are supported to help companies reduce their energy costs. BAFA is also active in promoting environmental protection and energy saving initiatives in the craft sector, with a focus on resource-efficient processes and renewable energy.
The Role of BAFA in Export Control Regimes
Effective export control requires close coordination within the European Union and at an international level. This particularly includes preventing the spread of weapons of mass destruction and the destabilising accumulation of conventional military equipment in crisis regions. The BAFA is directly involved in this international coordination and participates in relevant meetings of the EU and meetings of international export control regimes.
What is BAFA’s Reporting Obligation?
The reporting obligation at the Federal Office of Economic Affairs and Export Control plays a fundamental role in the implementation of the Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz – LkSG) and fulfils several central tasks. In particular, it creates transparency and accountability by requiring companies to disclose their activities in supply chains. This makes potential human rights and environmental risks visible and enables companies to identify these risks and take appropriate action. This not only reduces business risks, but also ensures that legal requirements are met. In addition, mandatory reporting helps companies protect their reputation and build the trust of their customers, investors and other stakeholders by emphasising their commitment to responsible business practices and sustainability in supply chains.
BAFA‘s Reporting Process
Here is the step-by-step process:
Legal Obligation to Prepare a Report
Under the Supply Chain Act (LkSG), affected companies are required to prepare an annual report on the fulfillment of due diligence obligations in the previous business year. These reports must be submitted to the Federal Office of Economic Affairs and Export Control (BAFA) no later than four months after the end of the business year and must be publicly accessible on the company website for seven years. The fulfillment of due diligence obligations must be documented internally on an ongoing basis, and this documentation must also be kept for seven years but not publicly accessible.
BAFA’s Verification of Reports
BAFA will review reports and their publication for the first time as of 1 June 2024 without imposing sanctions for submissions made by 31 May 2024 at the latest. No special reporting rules apply to submissions from 1 June 2024 onwards. Other due diligence obligations and their monitoring are not affected by this deadline regulation.
Which Companies are subject to Mandatory Reporting?
From 1 January 2023, companies based in Germany with more than 3000 employees are obliged to report. From 1 January 2024, companies based in Germany with more than 1000 employees are also obliged to prepare a report. This also applies to companies that operate a branch in Germany and have more than 3000 employees there, and from 2024 more than 1000 employees. Even if companies do not fall directly within the scope of the LkSG, they may still be indirectly affected by it. This is because the directly affected companies are obliged to take comprehensive measures to ensure conformity with human rights and environmental standards. This can have an impact on the supplier and requires good cooperation to fulfill the obligations of the law.
How to Submit the Report?
The report according to the LkSG is based on the answers to a structured questionnaire containing open questions, closed questions and multiple choice questions. The complete and truthful answering of this questionnaire is an essential step in order to comply with the reporting obligations according to §10 section 2 LkSG. The report is submitted electronically to the Federal Office of Economic Affairs and Export Control. To be able to carry out this process, prior registration is required.
What Steps are Required for Companies to Meet the Legal Compliance?
In tracking due diligence, a company must clearly articulate several important points after completing the questionnaire in full: Whether the company has identified any human rights and environmental risks or due diligence violations, and if so, what they are. What the company has done with reference to the obligations described in the law, including the elements of the policy statement, and the actions the company has taken in response to complaints. How the company evaluated the impact and effectiveness of the actions, and what conclusions it drew from the evaluation for future actions.
If no human rights or environmental risks and no violations of corresponding obligations are identified and this is convincingly stated in the report, no further explanations are required.
The protection of trade and business secrets shall be given due consideration in the preparation of the report. However, the documentation is not public, so it may contain sensitive information that touches on business and trade secrets.
Avoiding Penalties and Ensuring Compliance
The LkSG provides clear guidance on adequacy and effectiveness, which includes the type and scope of business, the influence of the company, the severity and likelihood of risks and breaches, and the company’s contribution. These factors must be considered in the design and review of risk management, the identification, weighting and prioritisation of risks, the identification of breaches and the implementation of preventive and remedial measures, and the establishment of an appropriate complaints’ procedure.
Effective strategies help to identify and mitigate human rights and environmental risks, and thus prevent or reduce human rights violations. Regular assessments of the effectiveness of these strategies are necessary to ensure that the intended results are achieved.
The LkSG provides for a range of sanctions to ensure compliance, including possible exclusion from public procurement for up to three years. Fines can be imposed for violations of the law, the severity of which determines the amount. Failure to remedy known violations can result in sanctions of up to 2% of annual turnover, while inadequate grievance mechanisms and follow-up can result in fines of up to €8 million per case.
How can Prewave help?
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