Germany’s Due Diligence Supply Chains Act. Overview and possible impacts for Costa Rican companies.

Germany’s legislative affairs are often perceived by Costa Ricans as being too distant. In this case, however, we could experience effects due to this new statutory act.

In June 2021, Germany’s Federal Parliament approved the Due Diligence Supply Chains Act, which will enter into force on January 2023. This Act imposes a series of obligations on large corporations that operate on German territory, more specifically carrying out a due diligence procedure on Environmental and Human Rights on every participant of their command chain, regardless of its geographical location. This due diligence covers a study and assessment of potential risks of a company’s subsidiaries, subcontractors, and, above all, direct suppliers.

This Act will be applied to companies with more than 3,000 employees located in Germany, and, as of January 2024, to companies with more than 1,000 employees, regardless if they are German or international companies with branch offices in Germany.

This legal standard responds to the great number of goods commercialized in the German market that are produced, completely or partially, in Asia, Africa, Central America, and other countries. It is a common practice that products and inputs in these sectors are obtained at low costs. In some cases, this is associated with poor environmental and Human Rights practices. The approval of the Due Diligence Supply Chains Act seeks, thus, to ensure good practices in Environmental and Human Rights laws on a global scale by obliging companies to monitor their activities.

Some of the bad practices this statutory act aims to eliminate or minimize are: forced and child labor, lack of safety devices in working environments, discrimination of any kind, use of non-authorized chemicals, water, and air pollution, excessive noise, illegal deforestation, amongst others.

From a practical point of view, companies subject to these legal provisions will need to create internal risk mitigation and assessment procedures to be applied to every link in their production and supply chain and publish a yearly report on the results of these procedures.

Furthermore, the Due Diligence Supply Chains Act provides that a claim can be presented before the German Courts by trade unions or NGOs, regardless of where the breach occurred, in case a company violates its legal obligations to monitor and mitigate risks.

The Due Diligence Supply Chains Act was issued within the framework of the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises, whose aims are to increase the responsibility of businesses in Human Rights Law and to encourage the Member States to actively participate in monitoring corporate responsibility.

According to the above, Costa Rican enterprises that are registered as suppliers or subcontractors, or well involved in any way in the supply chain of companies subject to the Act, will most probably be required to conform with internal assessment procedures on Environmental and Human Rights Law during the execution of their activities, whatever their nature. Moreover, Costa Rican companies will likely carry out the relevant amendments to comply with international standards in these subject matters. If Costa Rican enterprises do not abide by these directives, the head company will probably evaluate the termination of the contract agreement, to avoid being exposed to legal sanctions.

One way to comply with the legal requirements can be through international certifications that allow the companies located in Germany to guarantee that all of their suppliers and other supply chain participants comply with the applicable standards. There is no official position on this matter, whatsoever.

Germany is the second European State to introduce this kind of legal standard after France, and the European Union is currently working on regulations on this matter.

There is a general feeling that this legislative agenda originates from a failure of companies to regulate themselves (“Compliance”), whereby companies voluntarily accept to establish their internal procedures to comply with corporate, ethical, and environmental good practices and anti-corruption policies and working conditions. If this is the case, it is possible that this type of legislative agenda, together with international organizations like the UN and the OECD, will create a wave of new laws globally that will reach the Costa Rican Legislative Body in a near future.

By: Fabiola Gamboa Ávalos, Associate TACTIC Estudio Legal

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