The German "Act on Corporate Due Diligence to Prevent Human Rights Violations in Supply Chains" (LkSG) took effect in 2023, requiring companies in Germany to implement risk management systems and report on their measures. Vague reporting requirements led to confusion, prompting authorities to introduce a detailed questionnaire. Although still complex, the questionnaire provides guidance. Nevertheless, in-depth preparation and involvement of external advisors is advisable.
Author: Stefan Schmierer, Managing Partner
LkSG applies to all businesses in Germany
In January 2023, "Act on Corporate Due Diligence to Prevent Human Rights Violations in Supply Chains" (Supply Chain Due Diligence Act – German: Lieferkettensorgfaltspflichtengesetz, short: “LkSG”) came into effect in Germany. This law does not only apply to German businesses, but to all businesses, regardless of their form, that have their head offices, places of business, or registered offices in Germany. The focus of the new law is to secure and protect human rights, as well as to ensure environmental protection and other human standards.
The law imposes various obligations on these business entities. Amongst others, the key obligations include implementing a risk management system, conducting a risk management analysis, establishing an in-house oversight body, as well as implementing measures to mitigate or address violations or potential violations of protected rights.
Whilst these obligations and duties are formulated in quite a clear and straightforward manner in the law, the same cannot be said about the requirement to implement and report on the fulfilment of measures taken by the entities. Section 10(1) and Section 10(2) of the LkSG encompass this reporting obligation, but unlike other sections, these sections are broadly and vaguely formulated.
Reporting requirements largely left up to businesses until recently
According to Section 10(1) of the LkSG, each entity has to regularly report on measures they have taken, as required by the law. Additionally, as per Section 19(2) of the LkSG, each entity has to submit a report to the responsible authority (“Bundesamt fuer Wirtschaft und Ausfuhrkontrolle, BAFA)” on an annual basis that contains information about the measures taken in compliance with the law.
It appears that these Section 10 obligations have left most entities in limbo as to what exactly needs to be reported and how to submit such a report to the authority. Based on our practical experience in recent years, it seems that most entities are concerned about this reporting obligation and hoped that the authority would provide a simpler template report, where clicking a few multiple-choice questions would suffice.
However, this expectation was not met. Throughout the year, the authority clearly emphasized that it requires all entities to submit a detailed report, written by the company itself, explaining in detail the measures taken to comply with the obligations of the LkSG. This was a disappointing development from the companies’ perspective since they were more or less left empty-handed as before. But BAFA stressed that such an open-ended approach would allow companies to create their own versions of the report and thus they would have complete freedom when preparing the report. Unlike providing a template, the BAFA’s argument was that the report cannot go wrong so long as it covers all the requirements outlined in the LKSG.
Expansive questionnaire created - still work intensive but provides guidance
However, it appears that pressure from several interest groups representing German and international businesses, as well as the political pressure on BAFA in Germany, led to the creation of a standard questionnaire. This questionnaire has become the mandatory form for all entities to comply with their reporting obligation under Section 10(2) and it must be completed online on or before the due date. The latest version of the questionnaire was published in March 2023 and can be found online (currently only in German).
Nevertheless, the questionnaire may still not meet the expectations of the business sector as it consists of approximately 15 pages with both detailed and multiple-choice questions. Some questions can be answered in a multiple-choice format, whilst others require a thorough analysis of the measures taken by the entities in light of the LkSG obligations. Furthermore, depending on the answers provided, the company may be required to answer additional optional questions. As mentioned, the questionnaire can only be submitted online in German language, and online registration is also required before accessing the questionnaire.
Questionnaire helps but due to complexity recommended to involve external advice
Even though the latest development may still not meet the industry’s expectations, it should be seen as a positive step forward for all involved entities. The current mandatory questionnaire is far from being a simple multiple-choice questionnaire that could be completed in half a day, but it gives responsible persons within companies a guidance on the questions that need to be answered and the areas of focus when drafting the report questionnaire. However, it is highly advisable for all concerned companies to familiarize themselves with the questionnaire and to start working on the questionnaire as soon as possible, since it can be foreseen that answering the questions will involve several departments (especially for larger entities), such as procurement, human resources, CSR, legal, and the board of directors. Moreover, considering the potential penalties for non-compliance with the LkSG (including Section 10), it is also advisable to involve external advisors to assist with the questionnaire.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
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