Supply chain due diligence legislation of the European Union: Monitoring compliance and handling violations
The Directive on Corporate Sustainability Due Diligence - CSDDD was adopted by the competent EU authorities on June 13, 2024, with effect from July 25, 2024.
1. Monitoring compliance
Articles 24-25 of the Directive provide that each EU Member State is responsible for monitoring the implementation of the Directive within its territory, according to which:
- The Member State must appoint one or more supervisory authorities responsible for overseeing compliance with the obligations under the Directive;
- In performing supervision, the supervisory authority has the power to: (i) request information from companies within the scope of the Directive; (ii) investigate compliance with company obligations (either on its own initiative or following a request from an organization or individual) in accordance with national law;
- Upon identifying a violation of the Directive, the supervisory authority has the power to: (i) order the company to cease the violation; (ii) require the company to take remedial actions/measures; (iii) apply interim measures in cases where there is a risk of imminent serious and irreparable harm; and/or (iv) impose sanctions for non-compliance.
2. Sanctions for non-compliance
Article 27 of the Directive grants Member States the authority to determine the forms of sanctions for violations of the Directive, but at minimum they must include at least one of the following:
- Fines (not less than 5% of the company’s global net turnover in the financial year preceding the year the fine is imposed - note: the Draft Amending Directive proposes removing this minimum threshold);
- Public disclosure of the identity of the violating company and the nature of the violation if the fine is not paid within the prescribed period.
The Directive also requires that Member States consider a range of factors when deciding on sanctions, including the nature and impact of the violation, the actions and attitude of the company, and the benefits the company gained from the violation.
Note: These sanctions do not affect the civil liability or compensation obligations of the violating company for damages caused to organizations or individuals under national law. Companies are not responsible for damages caused entirely by their business partners.
In summary, Germany’s SCDDA and the EU’s CSDDD Directive currently represent the most comprehensive and up-to-date regulations in the EU and globally on corporate due diligence. Under these legal frameworks, companies within the scope are obliged to implement due diligence processes on risks, violations, or adverse human rights and environmental impacts (according to defined standards) occurring within their own operations, their subsidiaries, and their business partners/suppliers involved in the company’s supply chain. As domestic law, Germany’s SCDDA contains detailed provisions on all aspects, whereas the EU CSDDD Directive provides core principles, leaving room for Member States to define specific rules. Both legal systems assign the due diligence responsibility to large companies, but business partners and suppliers of these companies may also be significantly affected, as discussed in detail in Chapter III.
Source: Compiled by the TTWTO-VCCI Research Group