By Elisabeth von Alvensleben
KALO & ASSOCIATES*
This article tries to bring to the interested parties the likelihood of the impact that a new German Act on Corporate Due Diligence Obligations in Supply Chains (in the Following: Supply Chain Act) may have on Albanian enterprises that export to German companies .
Before speaking of the effects of the new act it is necessary to give a short overview of the importance of Albanian exports to Germany.
Importance of Albanian exports to Germany
Although the main export destinations for Albania are Italy and Kosovo, Germany remains an important export target with growing importance (exports more than doubled from 2018 to 2022). Germany was the third most important export destination for Albania in 2022 with 31,962 million Lekë (approx. 277,348,832 EUR) in exported goods. Germany is also generally one of Albania’s most important trading partners, as it ranks fifth on the import scale with imports worth 58,563 million Lekë (approx. 508,177,826 EUR) per year.
What is the Supply Chain Act
Before becoming hard law, several recommendations were made to introduce human right standards into the corporate world. Reference is made to the UN Guiding Principles on Business and Human Rights since 2011, which widely called for the observance of human rights in the economic sphere. Similar recommendations were released by the OECD and by the International Labour Organization.
It is within this framework that on 1 January 2023 the German ”
The new legislation in detail
The new legislation applies to all enterprises, regardless of their legal form, having their central administration, their principal place of business, their administrative headquarters, or their statutory seat in Germany and having at least 3,000 employees in Germany (including employees posted abroad). Starting from 1 January 2024 the threshold shall decrease to 1,000 employees. Smaller companies being part of companies that exceed the above threshold are equally subject to scrutiny under the law.
German companies that fall within the scope of the regulation must comply with due diligence obligations throughout their supply chain. This applies both to their own business area and to external supply chains, including direct or indirect suppliers, whereby indirect suppliers are only subject to a full audit in certain cases (see below .).
This means that Albanian companies exporting to German companies that meet these criteria will be subject to special scrutiny by their trading partners and therefore will have to face new obligations, if they wish to enter into or continue their relationship with the German partners. The Albanian companies concerned will be those that are directly integrated into German corporate structures as well as external suppliers of German companies.
The legislation contains different measures to ensure compliance with human rights and environmental standards. These range – among others – from the obligation to set up a risk management system, to conducting risk analyses, implementing preventive measures, taking remedial action, setting up an internal complaints procedure, documenting and reporting.
Human rights and environmental risks exist if there is a “sufficient probability” that a violation of one of the prohibitions listed exhaustively is imminent. A violation of a human rights- or environment-related obligation is in place, when one of the listed prohibitions has been violated.
The human rights-related prohibitions include among others the interdiction of child labor, forced labor, the disregard of occupational safety and health obligations, the disregard of the freedom of association and the prohibition of unequal treatment.
Environment-related obligations designate the prohibition of the manufacture or use of mercury (-added products), the production and use of certain chemicals, the handling of waste in an environmentally harmful manner and the export or import of hazardous waste in breach with the Basel Convention.
When identifying a human rights and environmental risk the German enterprise must conduct preventive measures. Regarding direct suppliers this can involve contractual assurances of compliance and control mechanisms ensuring adherence to human rights and environmental obligations along the supply chain.
Termination of a contract with a direct supplier is only required if the violation of a human rights or environmental obligation is very serious and if no other less severe measure can remedy the issue.
If an enterprise subject to the Supply Chain Act identifies an already occurred breach in a direct supply chain, it must set up a plan for ending or minimizing the violation, which can mean the temporary suspension of the business relationship.
Although the provisions of the Supply Chain Act mostly address the enterprise’s own business area and its direct suppliers, indirect suppliers are not exempt from obligations.
If the form of indirect supply is used to circumvent the obligations of the Supply Chain Act, the indirect suppliers are treated as direct suppliers regarding the preparation of risk analyses and the implementation of remedial measures. To the same extent, the complaints procedure applies to economic actions of indirect suppliers. Further measures must be taken when an enterprise has “substantiated knowledge” that a violation of the Supply Chain Act has occurred within the structure of an indirect supplier.
On this basis, it can be stated that even Albanian indirect suppliers of German companies must be vigilant. They too must be aware of the new standards and comply with them.
Impacts on Albanian enterprises
How the regulations will affect trade with Germany in detail is still uncertain, but as the case always is, it will become clear when it is implemented in practice.
It is foreseeable that German companies will want to obtain contractual assurances of compliance with the standards mentioned in order to avoid liability. Contractual assurances will not be sufficient, however, as the law explicitly provides for investigative duties for German companies. Albanian companies must be prepared for negotiations with their German partners regarding the elaborated concerns of the Supply Chain Act.
It is certain though that German companies will pay attention to compliance with human rights and environmental standards when selecting their contractual partners, as they face severe penalties (fines of up to two percent of the average annual revenue if the latter exceeds 400 million Euros) and exclusion from the award of public contracts, when acting in breach of the Supply Chain Act. In addition, damage to the reputation of these companies could have even greater financial consequences. Albanian companies will, in general, have to adapt to that fact. And those who are and will be known for their transparency and integrity, are likely to be more favoured in doing business with German peers. Compliance with the standards set will therefore be economically noticeable. This is all true given that the European Union is already working on a similar, presumably stricter legislation, which is expected in 2024.
*This article is part of a series under the Tirana Times’ Patron Program.
