Corruption as a breeding ground for human rights violations

Transparency International published its annual Corruption Perceptions Index on 25 January 2022. This showed the influence of corruption on respect for human rights. Corruption impairs the functioning of public administration and prevents the transparent follow-up of criminal offences. This, in turn, has an impact on the ability of the respective country's population to assert their rights and thus increases the risk of human rights violations. Accordingly, countries with a high corruption perceptions index also have many cases of human rights violations.

Corruption is costly and it would not be possible for it to take place without the flow of money from private actors in wealthy industrialised countries. The money usually reaches production sites in low-wage countries via the international supply chains of wealthy industrialised nations. The people in low-wage countries often work under undignified conditions. Well-known examples of this are agricultural workers in South Asia who spray plant poisons in cotton plantations for starvation wages and without adequate protection, or children who sew clothes in piecework in factories without windows or emergency exits. Local decision-makers accept bribes and turn a blind eye instead of holding the companies that enable and profit from these human rights abuses to account.

This was the starting point for the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG), promulgated on 22 July 2021. From 1 January 2023, all companies with at least 3,000 employees in Germany are obliged to ensure the protection and respect for human rights along their supply chain. From 2024, the Act will be extended to companies with at least 1,000 employees.

Due diligence covers human rights as defined in international conventions and certain environmental risks with an impact on people. These can arise, for instance, through the use of chemical, physical or biological substances in the supply chain. Those companies affected by the Act must monitor compliance with due diligence obligations in their own business operations and at their direct suppliers. In addition, they are required to respond to violations at their indirect suppliers on an ad hoc basis. Parent companies of groups are responsible for carrying out the relevant monitoring duties for their subsidiaries. 

On 23 February 2022 the EU Commission presented a proposal for a European "Corporate Sustainability Due Diligence Directive" that addresses violations of human rights and the environment. This draft stipulates similar requirements to the German Supply Chain Due Diligence Act but in some places it goes beyond the German Act in its scope of application.

The German Federal Office of Economics and Export Control (BAFA) monitors compliance with the LkSG. As part of conducting risk-based controls, it can, for instance, interview company employees, inspect company documents, request information on direct and indirect suppliers, and enter company premises, offices and commercial buildings. BAFA also examines the reports that companies must submit on their compliance with due diligence obligations.

If violations are identified, fines of up to EUR 8 million or 2 percent of annual turnover may be imposed and companies excluded from the award of public contracts. 

In addition, those affected by human rights violations also have the option to address their grievance to the BAFA and seek support from German trade unions and non-governmental organisations, in addition to filing a lawsuit in German courts. The latter will strengthen the rights of those residing outside of Germany.

The LkSG specifies the establishment of a group-wide complaints mechanism to enable the reporting of direct or indirect negative effects of the company's business operations on people or the environment. 

Each company establishes its approach depending on the individual risks to be determined. The guidance to the LkSG clarifies that written confirmation using a questionnaire completed by suppliers is not sufficient.

The following measures can contribute to compliance with due diligence obligations under the LkSG:

• Establishment of contact points: The regulatory requirements relating to the LkSG are high and the situation of people affected by violations of their rights is often precarious. Therefore, assessing and prioritising existing risks, implementing appropriate preventive measures, and handling human rights violations require specific knowledge. In some cases, these cannot be covered by the existing compliance and internal audit departments within companies. In order to comply with due diligence requirements, companies must ensure that trained contact persons are involved in a timely manner. 
• The use of external consulting services can also be useful in this context. Trained experts can act as sparring partners for the company's own employees in early stages until these employees have the necessary expertise to handle the new requirements.
• Due diligence checks: Due diligence checks can make an important contribution to preventing human rights violations in the supply chain by uncovering human rights risks in suppliers' business models. Identified risks should be addressed at the start of the business relationship and remedial measures agreed with business partners. Thanks to artificial intelligence and machine learning, it is possible to perform automated background checks efficiently. Checks must be repeated at regular intervals where business partners are required to make self-disclosures.
• Code of Conduct: Most companies have implemented a code of conduct that addresses compliance with regard to human rights and environmental risks. As part of the extended due diligence obligations for direct and indirect suppliers, the code of conduct can become an important management tool for introducing policies for mutual understanding on respecting human rights and the associated prevention obligations. As a result, companies should review their code of conduct for practicality in adhering to human rights due diligence obligations. 
• Training: Human rights violations do not start with factory fires. Denial of the opportunity to form or join a trade union or a lack of rest breaks for employees can also constitute a violation of human rights. In order to create a comprehensive understanding of human rights violations among the workforce and to adequately identify and eliminate risks, regular training on human rights issues is essential. This should include not only the company's own employees, but also suitable representatives of business partners along the supply chain.

Risks due to involved third parties are playing an increasingly important role in corporate governance: whether this in the context of corruption, money laundering or sanctions prevention, with regard to human rights and environmental obligations, or with regard to strategic or operational risks. It is therefore necessary to determine the corporate processes and areas in which third parties play a role, to identify, assess and manage risks that could emanate from them, and to introduce control mechanisms. KPMG's experts will be happy to assist you in designing and implementing a third-party risk management system. Get in contact with us.