Supply Chain Due Diligence Act in the financial sector

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The Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG) continues to raise questions, particularly in the financial sector. In addition, the number of addressees has multiplied since the beginning of the year. The LkSG now applies to companies with at least 1,000 employees in Germany. In addition, credit institutions and insurance companies as suppliers to companies in the real economy may also be subject to the LkSG’s obligations.

 

Labour law “must-haves”

The LkSG obliges companies to ensure compliance with human rights and environmental standards in their supply chains. Labour law expertise is already required when determining the threshold value, as the definition of employees and group attribution issues are crucial. It is also essential to install effective complaints systems and appoint a human rights officer.

Whistleblower systems are not new territory for regulated companies, but the extent to which adjustments are necessary should be reviewed. Consideration should also be given to how and to whom the task of the human rights officer should be assigned. There are now a large number of officers (eg money laundering, data protection and (occasionally) a remuneration officer). These are not subject to a standardised regime, but to their own regulations. Consequently, the special features of the office of human rights officer must be recognised and observed, in particular impartiality, independence and freedom from instructions with regard to the function exercised.

 

Upstream or downstream

Due diligence obligations usually relate to the upstream supply chain. This clearly covers, for example, the procurement of external services, such as in IT or human resources. In contrast, the extension to further processing, distribution and use of products by the contractual partner (downstream supply chain) is generally not provided for. However, the due diligence obligations of financial service providers could be extended to the downstream supply chain under certain circumstances: for example, when granting loans, as these often lead to production processes. The bank would then have to find out who the parties involved are and whether there are any violations of human rights and environmental regulations in this context. There is much dispute here.

 

“Carte blanche” from the Federal Office of Economics and Export Control?

A handout issued by the Federal Office of Economics and Export Control (BAFA) last year was intended to shed some light on the questions raised. In the guidance, the BAFA states, among other things, that the supply of money (provision of money or money equivalents) is neither a service nor a supply within the meaning of the LkSG. In addition, the due diligence obligations should not extend to customers for whom banking or insurance transactions are carried out (eg deposit or lending business). However, refinancing transactions should be part of the supply chain, where there is a specific, traceable purpose between the refinancing transaction and the banking service provided.

The guidance only led to an industry-wide sigh of relief to a limited extent: on the one hand, it is neither a formal nor a substantive law; it is merely a governmental information act. Secondly, dogmatic questions remain unanswered - for example, there is no reference to the granting of large loans, which are mentioned in the explanatory memorandum to the LkSG.

 

Conclusion and practical advice

The LkSG requires companies to implement corporate due diligence obligations in their supply chains that are appropriate to the nature and scope of their business activities and defines human rights and environmental risks. It is not always clear exactly what this means for the financial sector, as its special features have not been included in the LkSG. The law is primarily written for the real economy.

In view of the large number of unresolved issues, it is essential to obtain expertise with regard to implementation under labour law. Omissions or violations can cost companies dearly: Fines of up to EUR eight million or up to two per cent of annual global turnover can be imposed, as well as exclusion from the award of public contracts.

Recently, there were fears that the envisaged EU Supply Chain Directive would bring stricter requirements for the financial sector. However, the financial sector has been excluded for the time being. As a result, the LkSG remains the strictest law of its kind in the world for the time being.