Exporters should prepare now for new whistleblowing legislation

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British exporters and multinationals with a footprint in Germany are being warned of the potential impact of new legislation that demands they take action to comply with new rules coming into force at the start of next year.

The Supply Chain Due Diligence Act was passed by the German Federal Parliament on June 11, 2021, after lengthy negotiations with the German Federal Council and is due to come into force on January 1, 2023. It’s a piece of business legislation known in German as Lieferkettensorgfaltspflichtengesetz, or LkSG.

Legally, the LkSG legislation requires companies to adapt and update their compliance, purchasing and contract processes on certain human rights and environmental matters, including establishing a reporting mechanism (called “complaints procedure”) open to relevant stakeholders.

These adaptations include making a significant introduction of whistleblowing services. Safecall is already working with senior management and whistleblowing report managers in various companies, highlighting what they should do to prepare for the coming implementation.

It’s better for responsible businesses to act now and be compliant, rather than wait to see what happens. Further, implementation of due diligence efforts as defined will require significant lead time before processes are effectively implemented as required.

Aim of the LkSG legislation

In essence, the Supply Chain Due Diligence Act compels businesses and organisations that operate within Germany to improve their global supply chain compliance with human rights and material standards of environmental protection.

The LkSG act does this by placing due diligence obligations on those responsible for activities that fall within its scope.

So, with whistleblowing in mind, the LkSG act requires organisations to extend their whistleblowing processes into their global supply chain, if the organisation (or any of its significant subsidiaries) operates within Germany and falls within the scope of the LkSG act.

Companies and organisations this applies to

From January 1, 2023, any company or organisation with a headcount of 3,000+ employees working in Germany, which have a head office, administrative seat or statutory seat in Germany, or any company or organisation with a branch in Germany and usually employs 3,000+ employees in Germany.

From January 1, 2024, any company or organisation with 1,000+ employees working in Germany, which have a head office, administrative seat or statutory seat in Germany, or any company or organisation with a branch in Germany and usually employs 1,000+ employees in Germany.

For the purpose of calculation Group companies are included in the number of employees of the parent company; and temporary workers are only included if their duties exceed 6 months.

But – and this is important – even if a company or organisation with fewer employees is not directly affected by the LkSG act, they might still be affected indirectly.

That’s because these companies might still be obliged to enforce best efforts to improve due diligence within their own supply chain, as directed by their customers further up the supply chain.

In other words, just because you don’t have to comply, doesn’t mean that your customer might not have to.

Because if your customer is in scope of the LkSG act, they are obliged to seek contractual assurance that you (as part of their supply chain) are making best efforts to improve due diligence yourself (including accepting trainings and audits), and that you address the issue in your own supply chain as well.

Enforcing compliance

The LkSG act gives far-reaching powers of intervention to the authorities. For the LkSG act, the competent authority is the Federal Office for Economic Affairs and Export Control (BAFA). BAFA can, at the request of an affected person or because of its own initiative, impose remedial measures on the business or organisation concerned to ensure compliance. It has wide-ranging powers over information and access and must be supported to enforce the remedial actions.

In addition, trade unions also have the power to conduct litigation on behalf of an affected person.

In both the above cases, the affected person might be anyone along the supply chain, not just the employees of the company or the direct supplier affected.

BAFA also has the mandate to actively conduct audits (including information requests and on-site audits) of companies in scope of the LkSG act. If BAFA considers compliance measures non-existing or inadequate, BAFA can impose hefty administrative fines on the company, as well as in individuals in charge.

Penalties for violations

Penalties can be sweeping and heavy depending on the gravity and nature of the violation. Violation fines for lack of due diligence and reporting can be up to EUR 8 million for companies, and up to EUR 800k for individuals.

Companies with an average turnover of more than EUR 400 million might be fined up to 2% of their average annual global turnover. Organisations might also be excluded from significant public tenders for up to three years.

Whistleblowing actions that need to be taken

Responsible businesses must develop and implement a robust whistleblowing process as part of their Environmental, social and Governance (ESG) compliance. They must extend this service into their supply chain, to enable all relevant stakeholders launching reports, including own employee, employees of direct suppliers, but also those of indirect suppliers further down the supply chain.

Further, the LkSG act mandates certain specific requirements for the whistleblowing process, including, among other, publicly accessible rules of procedure, impartiality of the person entrusted with the operation, confidentiality, comprehensive (and public) information on accessibility and responsibility, and annual effectiveness review.

By doing so, the organisation can be shown to be making best efforts to comply with the respective due diligence obligation on the complaints procedure as imposed by the new LkSG legislation.

There will undoubtedly be future changes that will tighten up the legislative demands, but a reliable external whistleblowing provider will ensure that their reporting system and processes are able to adapt to any changes.

Required process
  1. Review your supply chain
  2. Identify concrete supply chain risks
  3. Choose how best to manage any risks
  4. Put regular supply chain reviews in place

Supply chains change over time. Old suppliers depart, new suppliers arrive.

So, it’s not enough to conduct a risk/mitigation exercise regarding the German Supply Chain Due Diligence Act once. Rather, under the LkSG act it needs to be conducted on a regular basis (as well as ad-hoc if risk-significant circumstances of the business change), and records need to be kept of when they are conducted.

Again, this flags to the authorities that your organisation is making best efforts to ensure there are either no human rights and environmental law violations, or that if they do occur, your organisation has the best possible awareness of when they take place and can rectify them and prevent future damage.

For further advice on whistleblowing systems, please visit: www.safecall.co.uk/en