Paul Johns, CMO at Ethixbase360 talks to Michael Wiedmann, lawyer and compliance expert at Norton Rose Fulbright about the latest Lieferkettengesetz, or German Supply Chain Due Diligence Act (Act), developments and what it means for your business.
As a major contributor to the Lieferkettengesetz Questionnaire formation, Michael also discusses how businesses can comply with Ethixbase360 solutions, the added value the system can give your business, and the future outlook for due diligence across Europe (as of October 2022).
The Lieferkettengesetz creates a substantial new set of mandatory requirements for many companies around human rights and environmental due diligence within their third party relationships. Enforcement of the Act begins on 1 January 2023, and the penalties can be substantial, so organizations need to start preparing now to ensure compliance – check out our Essential Guide to Compliance with the Lieferkettengesetz to find out more.
Paul: How does the questionnaire identify risk within your supply chain?
Michael: There are several scoring systems provided through the questionnaire. These include scorings for third-party supplier locations, industries, products, employee types, and more. These make a very specific and detailed risk map of an organization’s entire supply chain, one major USP of the Ethixbase360 tool.
Paul: Does the LkSG Questionnaire provide for country and industry scoring as recommended by the competent authority, the Federal Office for Economic Affairs and Export Control (BAFA)?
Michael: BAFA emphasises the importance of risk analysis, and continuously state that risk analysis should start with country and industry scoring, or industry analysis. This is exactly what the Ethixbase360 software is providing through its scoring systems. You have readily available detailed country scoring, plus third-party supplier industry scoring. This is an invaluable tool for organizations to use in their compliance processes. One important factor to note in relation to country risk – where the supplier is registered is not relevant for the risk assessment – it is the country where the product originates (manufactured) that is important. That is what the LkSG asks for. These two factors are critical elements of an organization’s risk assessment.
Paul: Does the questionnaire identity certain groups within the workforce?
Michael: The Ethixbase360 tool lists and categorizes various levels of workers and vulnerable people, for instance, workers who have to use their hands for work in the manufacturing sector. These types of workers are typically more likely to be exposed to poor working practices and therefore they need more protection. This is reflected throughout the Ethixbase360 LkSG Questionnaire, which provides a detailed level of worker categories and the workforce makeup, enabling organizations to gain deeper insights into their supply chain operations and the criticalness of certain workers within the supply network.
Paul: How is risk integrated into the LkSG Questionnaire?
Michael: The questionnaire aligns, one by one, the description of the risk in the act with a dedicated question. So as an example, there are risks associated with child labor, so the questionnaire includes explicit groups of questions about child labor employment. In other words, the questionnaire maps directly to the associated risks within the act, enabling organizations to get a true reflection of their supply chain.
Paul: Do you think the Act is sufficient?
Michael: If I benchmark with the UK Modern Slavery Act, I would say, it is rather inferior in comparison. And also, the Australian Modern Slavery Act – they are mainly focused on Modern Slavery. Before our session, I looked at some training material from a client from the UK and it’s covering migrant worker issues. The Lieferkettengesetz is not only looking at forced labor and human trafficking, it’s covering discrimination of any type, safety at work, freedom of coalition, protection of indigenous people, use of security forces, and many other areas. We are not only talking about Modern Slavery but the protection of human rights as a whole. The Lieferkettengesetz and in turn the Ethixbase360 LkSG Questionnaire cover the whole spectrum.
Paul: Germany has raised the global standard with the introduction of this Act. Do you think we will see similar actions in other jurisdictions?
Michael: I think you are correct and you only have to look as far as the EU Commission, who released their draft directive in February. They have raised the bar even further. Once that is law, it will definitely create a global standard. In the meantime, the German economy is a major world player and the Act will have significant impacts beyond Germany, with foreign suppliers required to understand the specific compliance needs of German businesses.
For the time being, we have not seen something similar in the US. Although in most compliance areas the US is setting the pace. We have seen the Californian Transparency in Supply Chains Act, the Uyghur Forced Labor Prevention Act which was enacted this year, and the Tariff Act. We have seen certain movements and rather administrative measures in the US. However, we have not seen a global push for the protection of human rights. We have not seen provisions committing companies to fight for the protection of human rights. There have been snapshots in the US and other certain areas, but not a big range of protections.
Paul: How will organizations adapt their supply chains to comply with the Act?
Michael: One major concern raised by businesses, was that the Act will provoke companies to pull out of certain critical countries. Supply chains will be adapted, in turn possibly leading to more human suffering. Although the Act, like the UN Guiding Principles on Business and Human Rights, clearly states that there should be no cut-and-run approach when dealing with suppliers violating human rights, but rather stay and change. If your suppliers have certain human rights risks, you should support them, e.g. changing processes and ways of working, instead of immediately terminating the relationship. I don’t anticipate that the existence of this obligation will prompt any companies headquartered in Germany to relocate.
Paul: Thanks for making these points Michael around terminating relationships. We at Ethixbase360 have a responsibility to help mature the global supply chain and not just abandon it when certain standards are not met. This can be achieved through education, support, guidance, and investment. This will create parity and an even playing field, especially in emerging and developing countries where they really need financial stability.
Moving to the next question, why do we ask for Policies and Controls through the LkSG Questionnaire?
Michael: This is done in order to measure and analyze the maturity of a compliance system, in particular in the area of human rights. It is key to ask for the policies and controls processes, to get an idea of investment into compliance by any given supplier and overall supply network. Even if an organization claims to have all the relevant policies in place, you need to check if the compliance system is being implemented effectively. Never rely only on face-value statements. Always keep in mind the old German proverb, “Paper is patient”. Nevertheless, the existence of such policies is a good indicator that compliance is taken seriously and is invested in. The questionnaire asks suppliers about training initiatives and whether human rights audits have been undertaken to assess whether these types of policies have been implemented.
Paul: From an audit perspective, how are the various authorities going to test adherence to the Act? Will there be independent audits? How do companies prove they are taking the right steps?
Michael: This is quite an interesting point. The competent authority, the Federal Office of Economics and Export Control (BAFA), released a catalog of 437 questions on 14 October 2022. By answering this questionnaire, a report will be created which fulfills the annual reporting requirements that are requested under the Lieferkettengesetz Act. The questionnaire includes Yes/No and multiple-choice questions, as well as free text questions, enabling the competent authority and stakeholders to understand the levels of due diligence undertaken by any given company. The specific mechanisms to be used by authorities are not clear yet, however, the posted questionnaire will be checked for inconsistencies. These control mechanisms are being established as we speak and BAFA is recruiting to build up its core team. I would suggest artificial intelligence will be used to identify inconsistent statements and to trigger further investigations – a deeper dive into an organization’s supply chain and due diligence measures.
Paul: Is there an articulation of the penalties or fines, or the impact, and not meeting those standards?
Michael: Yes, if an organization doesn’t file a report it costs €100,000. This is the cheapest fine an organization can receive. If an organization isn’t undertaking remedial actions, it might cost fines of up to 2% of its annual global turnover. I don’t expect that this will happen in the first years, but we will be closely monitoring any actions taken by BAFA.
Paul: What aspect of your business has to be based in Germany for the Act to apply?
Michael: The Act is applicable for all enterprises regardless of their legal form that (i) normally have at least 3,000 employees in Germany, and (ii) have their central administration, their principal place of business, their administrative headquarters, or their statutory seat in Germany. The second criterion requires that relevant decisions for supply chain risk management are made in Germany.
Exceptionally this is also assumed in cases where a foreign company has only a branch office in Germany and employs at least 3,000 people in Germany. Probably, this clause was intended and in practice is only applicable to Amazon, having an office in Munich, is incorporated in Luxembourg but employs more than 20,000 people in Germany.
The threshold of 3,000 people will be lowered to 1,000 people as of January 1, 2024.”
Paul: Can the LkSG Questionnaire support the distribution of an organization’sSupplier Code of Conduct?
Michael: One interesting feature of the Ethixbase360 tool is automation and the ability to follow up with supply chain stakeholders. Most organizations have a Supplier Code of Conduct, but the question is how will it be rolled out. This is where the Ethixbase360 solution stands out, automates the process end-to-end, and eradicates burdensome stakeholder management tasks.
Paul: Are there any questions within the LkSG Questionnaire regarding indigenous people? Does the act explicitly protect indigenous people?
Michael: There are several questions related to indigenous people, and the Act itself covers the banning of the unlawful eviction and unlawful taking of land, forest, and waters which will affect the livelihood of a person. This means in particular if a company builds a factory/site that needs a lot of space, e.g. mining, they may acquire land from the state – the Act states that if this is the case certain checks must be undertaken to prove legal entitlement. A recent NGO report stated that 60% of the land around the globe is not registered on any records at all. This is addressed in the Act through the wording, ‘the livelihood of a person which also includes the cultural heritage of indigenous people. The questions in the LkSG Questionnaire explicitly address these important issues.
Paul: This is a very welcome addition to supporting different communities across the globe.
Michael thank you for your insights on this topic and we look forward to speaking with you again once the Act has been enforced in 2023.
About the collaboration of Ethixbase and Norton Rose Fulbright:
Ethixbase360 entered into an exclusive license and collaboration agreement with a global top 10 law firm* Norton Rose Fulbright in 2020 to develop a modern slavery supply chain risk assessment questionnaire for third parties. The questionnaire is offered by Ethixbase360 via its Ethixbase360 360 Third-Party Risk Management platform and is an integral component of the Ethixbase360 Human Rights Module.
The questionnaire applies know-how developed by Norton Rose Fulbright using its global expertise in identifying and assessing modern slavery and human rights risks, to provide an indicative risk rating. The rating can be used to assist organizations to manage supply chains, modern slavery, and human rights reporting obligations in multiple jurisdictions. Other components of the Ethixbase360 Human Rights Module include Risk-Based Due Diligence, Policy and Code Management, and Third-Party Training.
The partnership between Norton Rose Fulbright and Ethixbase360 was expanded in 2022 to capture the Lieferkettengesetz requirements with the Lieferkettengesetz Questionnaire launched in mid-2022 to enable organizations to prepare for their 1 January 2023 obligations.
Find out more about the Lieferkettengesetz Questionnaire