Enacted in June 2021 and came into effect on January 1, 2023, the German Supply Chain Act requires companies to assess human rights and environmental risks across their entire supply chain. It combines various German laws with the intent to eliminate child labor, ameliorate poor labor working conditions, and provide certain environmental protections within global supply chain activities.

From January 1, 2023, organizations with a registered office or branch in Germany with more than 3,000 employees – and other foreign-based companies of the same size with registered German branch offices – need to comply with the GSCA. From 2024 onwards, the law will extend to companies with 1,000 employees or more. In-scope companies are obligated to establish preventive measures and be accountable for any infraction in their entire supply chain.

The Act applies to all of an organization’s direct and indirect suppliers, starting with the extraction of the relevant raw materials through to the delivery to the end customer. This means that even if your operations are not based in Germany if you have a German customer impacted by the Act, you will need to comply with the GSCA to ensure your customer’s compliance.

The requirements are as follows:

• Establish a risk management system
• Define in-house responsibility for compliance
• Perform regular risk analyses
• Issue a policy statement
• Establish preventive measures in your own business area and for direct suppliers
• Take remedial action
• Establish a complaints procedure
• Implement due diligence obligations with regard to risks at indirect suppliers
• Document and report on due diligence activities

Avoiding the high level due diligence obligations are costly, fines can amount up to EUR 8M or in cases where the average annual turnover of a company is more than 400 million euros, the fine can go up to 2% of the average annual turnover.