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What the Supply Chain Act Means for SMEs.

The Supply Chain Act – Why SMEs Should Take a Look at the Regulations of this Still Young Law in Germany.

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LkSG, Supply Chain Act, Due Diligence in Supply Chains Act – Never heard of it?

Then you may belong to those companies that have not yet been or are not currently covered by the scope of the Supply Chain Act, which has been in effect since the beginning of 2023.

The law aims to encourage companies in Germany to contribute to improving the global human rights situation and to socially shape the ongoing globalization of the world economy (National Action Plan Business and Human Rights).

The current regulations, in simplified terms, oblige large companies with at least 3,000 employees, and from 2024 with at least 1,000 employees, to systematically record, assess, and manage their own supply chains regarding potential risks related to human rights violations or negative environmental impacts, with an annual reporting obligation to the Federal Office for Economic Affairs and Export Control (BAFA).

In the context of the law, a supply chain includes all steps, both domestic and international, necessary for the production of products and the provision of services of the respective company – from the extraction of raw materials to delivery to the end customer.

Even from the initial information, logical indications arise as to why SMEs could be affected by the new law. Whether you send cleaning staff to a corporate headquarters or spare parts to a major customer – all of you become part of a supply chain subject to the regulations of the Supply Chain Act as soon as your customer meets the criteria for the mandatory application of the law.

While SMEs are not obligated by the law itself, your large customer may ask you to cooperate in fulfilling its own due diligence obligations under certain circumstances. This will be the case whenever you have been identified by your customer as a potential risk in their own supply chain, and you are actively involved in the recording, assessment, and management of your own risk potential.

Although the law requires large companies to differentiate between low-risk and high-risk suppliers and demands appropriateness in implementing the requirements, in practice, it is often operated on the principle of “more is better” – partly due to lack of experience in dealing with the new law, partly for simplification and standardization of the prescribed systematic approach following the further principle of “same process for all suppliers.”

In our practice, we frequently receive calls from uncertain SME customers facing sometimes absurd demands from their large customers. These demands range from sensible and necessary requests for cooperation in determining their own risk potential in the form of audits or questionnaires to required disclosures of your sources, including the agreed-upon conditions and terms.

Here is a brief overview of justified and unjustified demands from your large customers in connection with the Supply Chain Act. Since we are neither authorized nor interested in providing you with potentially incorrect legal advice, we refer exclusively to BAFA publications at this point and expressly point out that the following lines do not constitute legal advice. You can find the link to BAFA publications here: 

Justified demands on SMEs:

  • Recording of information, in the form of audits, interviews, questionnaires, or similar, designed to enable the risk assessment of your company, in the context of the Supply Chain Act, by another company to which you are in a supplier relationship and which is subject to the regulations of the Supply Chain Act.
  • Necessary preventive measures based on a comprehensible risk assessment – for example, training, signing of individual additional agreements such as a supplier code or code of conduct.
  • Request for cooperation in addressing identified LkSG violations.
    Possible involvement of your employees or other stakeholders in complaint procedures of the obligated company.


Unjustified demands on SMEs:

  • The general fulfillment of obligations under the LkSG by SMEs, including conducting risk assessments of SME supply chains or reporting to the BAFA.
  • The transfer of obligations of the large customer under the LkSG to a supplier.
  • The demand for a blanket contractual clause in which you assure that you fulfill all obligations under the LkSG or ensure compliance with all LkSG standards in your supply chains (e.g., assurance to “respect all human rights in the supply chain”).


The BAFA generally recommends seeking individual legal advice when in doubt. From our perspective, this approach is appropriate whenever a direct connection between the requested information and the necessary information to fulfill the legal purpose cannot be established. In case of doubt, refuse to disclose this data, especially if it concerns trade secrets or legally protected data, such as personal data. Also, in case of doubt, refuse to sign generalized clauses or clauses that cannot be reasonably expected from you given your own capabilities.

Further recommendations based on BAFA publications:

  • Highlight the principle of proportionality in the face of seemingly unwarranted demands from your major customers and request justification for the required measures. For example, if you receive extensive questionnaires regarding the observance of human rights and environmental aspects in your company, even though these issues do not apply to your business, kindly ask for an explanation.
  • Participate in preventive measures only if the fundamental and case-specific justifications are provided to you. Request information on how the planned preventive measure reduces the specific risk of violating the regulations under the LkSG.
  • Participate in remedial measures only when you are informed about the specific violations of the LkSG regulations found in your case, the required measures, their purpose, and when this purpose is fulfilled. This naturally includes clarifying the question of cost distribution and the extent to which there is contractual permissibility for the demand for remedy.


Even though the Supply Chain Act currently only obliges large companies and places great emphasis on appropriateness and the individual capacity of involved third parties, a clear trend is emerging that aligns the standards and protected legal interests in line with the law to become the norms of everyday business for all parties involved.

Therefore, the new Supply Chain Act represents a logical consequence of the ongoing shift in values that has been taking place for years, permeating all layers of society and public life.

It might be challenging for individual companies or corporate groups to permanently isolate themselves from these trends. This also applies to SMEs. So why not create something today that will increase your value tomorrow.

If you have questions about the Supply Chain Act, feel free to reach out to us!

Finally, here’s an overview of which human rights and environmental aspects have special significance according to the LkSG:

Human Rights

  • Prohibition of child labor
  • Protection against slavery and forced labor
  • Freedom from discrimination
  • Protection against unlawful land deprivation
  • Occupational safety and related health hazards
  • Prohibition of withholding adequate wages
  • The right to form unions or workers’ representatives
  • Protection against torture

Environmental aspects

  • Prohibition of causing harmful soil changes or water pollution
  • the Minamata Convention on Mercury
  • the Stockholm Convention on Persistent Organic Pollutants
  • the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal
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