German watchdog reports on the first year of the Supply Chain Act

As the regulatory landscape for global supply chains tightens, Germany's Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG) has emerged as a significant piece of legislation with profound implications for businesses, which allows for insights into what can be expected from public enforcement under the CSDDD. The Federal Office for Economic Affairs and Export Control (BAFA) recently published its Accountability Report (Rechenschaftsbericht) for 2023, thus covering the LkSG's initial year of application.

Key BAFA findings

BAFA is responsible for monitoring and enforcing the LkSG and must report annually on its monitoring and enforcement activities during the preceding calendar year. For the LkSG's first year of application, its report includes the following highlights: 

Low volume of complaints

Contrary to initial concerns, there was no overwhelming influx of complaints. In 2023, only 30 complaints were submitted, involving 40 companies. BAFA filtered out cases where data was missing, companies were not subject to the LkSG, or the issues did not fall within the LkSG's scope. Eventually, in six cases, BAFA contacted 14 companies for further investigation. While it is too early to evaluate the substance of these complaints as only one case was concluded in the reporting year, BAFA highlights that the involved company responded promptly and appropriately.

Proactive measures

BAFA proactively conducted 492 audits, 180 of which were concluded in 2023. 

These audits primarily followed a risk-based approach, where BAFA identified key industries under general risk considerations. The focus was on 11 industries that BAFA considers as characterised by significant human rights risks, particularly in the early stages of the value chain. These industries have direct links between human rights risks and economic activities within the value chain and possess market power that potentially offers greater collective leverage to manage risks. BAFA in 2023 initially focused on the textile, the food and beverage, as well as the automotive industry, followed by electronics, communication and digital, tourism and leisure, mechanical engineering, logistics, chemicals and pharmaceuticals, as well as energy.

BAFA's audits included 86 occasion-related inspections. The majority of those inspections were conducted following media reports, stressing the importance for companies to monitor press coverage carefully. The report also illustrates BAFA's willingness to seek amicable, tailor-made solutions for each individual issue. For example, BAFA became involved in repeated strikes by truck drivers in Gräfenhausen, who were demanding unpaid wages from their Polish employer. BAFA conducted fact-finding investigations at the strike location with two inspection teams, securing documents and interviewing affected drivers on a voluntary basis. As a result of the incident, BAFA invited to a transport conference in Borna, which saw active participation from industry stakeholders. This led to the decision to continue this dialogue and develop a BAFA guide specifically for the transport sector. The guide is scheduled for publication in the second half of 2024.

Sanctions

BAFA believes that many companies are seriously addressing potential human rights and environmental issues in their supply chains. According to the report, they have also shown significant improvements by responding to audits. In line with that, BAFA did not yet impose any hefty fines or other harsh sanctions, but focused on preventative action and cooperation. However, it is also worth noting that some administrative prerequisites for sanctioning companies were, as outlined in the report, only established in the course of 2023. The BAFA reports for the coming years might thus very well look different.

Company reports

In 2023, companies submitted 53 reports for review to BAFA. This low number is not surprising, as noted by BAFA. Firstly, the reporting obligation pertains to the fiscal year, which often aligns with the calendar year. Secondly, BAFA had announced that it would begin reviewing LkSG reports only from 2024. In view of the upcoming implementation of the CSDDD, BAFA has recently extended this cut-off date to 1 January 2025, so no significant increase in the number of reports is expected this year either.

Yet, it is worth noting that more than half of the companies that submitted a report used the shortened report format which is permissible under specific conditions. However, BAFA mentions that most companies did not adequately justify their use of this shortened form. Going forward, companies should thus take greater caution when choosing the shortened report format to avoid sanctions.

Lessons to be learnt

BAFA’s report offers a rich analysis of its enforcement activities and significant lessons that can be extrapolated to broader regulatory contexts, most importantly with regard to CSDDD enforcement in the future. It is reassuring that BAFA recognises that most companies take their obligations under the LkSG seriously and cooperate diligently with the authority. This is largely due to BAFA's cooperative approach, which not only focuses on monitoring but also on supporting companies in fulfilling their new obligations. This approach becomes particularly evident in the way BAFA conducts its audits on a case-by-case basis. It is also to be welcomed that – despite the political debates about mitigating or even repealing the LkSG and the upcoming CSDDD – BAFA, in its report, announces further guidelines for the near future (e.g. on the role of standards, audits and certifications, the transport and logistics sector, remedial measures vis-à-vis direct suppliers, and children's rights).

For more background on the LkSG, see our client alert and previous blog posts. 

In our podcast series, we explore in bitesize format various aspects of the CSDDD that businesses need to be aware of. The latest podcast focuses on the similarities and differences between the CSDDD and the German Supply Chain Act, as well as any lessons we can draw from the German law for the upcoming CSDDD implementation.