European ex-territorial legislation like the EU Corporate Sustainability Due Diligence Directive (CSDDD), various national supply chain legislation, i.e. German Supply Chain Act on Human Rights and Environmental Due Diligence (HREDD) mandate due diligence requirements to be cascaded to national i.e. Serbian companies. They impose HREDD obligations on companies with the aim of improving the minimum standards in international supply chains. However, the actual implementation of those obligations involve significant difficulties.
In principle, those due diligence obligations of so called "companies in scope" cannot be passed on to suppliers in third countries, such as Serbia. This also applies, for example, to the obligations to report to the regulators and other more general disclosures to the public. Similarly, suppliers in Serbia cannot face search and inspection measures or penalties.
Currently, there are no direct legal requirements in Serbia for introducing due diligence requirements, apart from some general provisions from the Law on Accounting, which is only applicable to companies with more than 500 employees, whereas the actual application and enforcement of those regulatory novelties in Serbia is still questionable. The Serbian Law on Accounting mandates companies to report on ESG processes including due diligence to make them accountable and legally responsible for providing non-financial (sustainability) ESG information. In order to have proper ESG disclosures and produce a non-financial ESG report, companies first need to set up relevant ESG practices and procedures that would underpin those disclosures, including a due diligence procedure. Currently, there are no indications that a greater number of companies in Serbia report on their due diligence procedures, which might be a solid indication that they do not have those procedures at all.
Company responsibility can be triggered by a third party person i.e. supplier, partner or agent under very narrow and specific circumstances. If that third party acted under the control or supervision of the responsible person (decision maker) within the company and lack of the supervision enables that third party to commit a wrongdoing, the company shall be liable. For those reasons it is important to install a proper due diligence procedure that would go beyond of meeting a mere reporting requirement from the Law on Accounting.
Similarly, currently there are no direct requirements with respect to keeping books and records in the context of due diligence requirements in relation to customers, partners, suppliers and similar. However, in order to maintain a proper oversight of its third parties and mitigate possible liability, companies should keep track of books and record of its third party dealings.
Due diligence in the supplier's supply chains
The introduction of due diligence in the supplier's supply chains is a highly controversial matter, and it is yet to be seen how it would work in practice. Generally, many suppliers are already familiar with purchaser's contractual requirement that suppliers guarantee that there are no human rights violations in their (supplier's) supply chain.
Suppliers should know however what risks exist within their own business operations and in their supply chain, allowing them to compare their information against possible the auditors' findings (if such an audit occurs), and present that information to their EU buyer.
Regardless of that, there are tacit requirements that might potentially be imposed on Serbian SMEs, in an indirect way, through so-called contractual assurances. German Supply Chain Act states in Section 6 under (4) that the company must establish appropriate preventive measures towards a direct supplier, in particular:
"The contractual assurance of a direct supplier that they comply with the human rights and environmental expectations required by company management and appropriately address them along the supply chain."
This basically means that the EU purchasing company may lay down or cascade the appropriate preventive measures to its direct supplier, inter alia via contractual assurances, ensuring that the Serbian supplier should comply with the human rights and environment-related expectations required by the purchaser's senior management and that it should appropriately address them along their own (supplier's) supply chain.
In recent years, there has been an increased focus on encouraging and supporting SMEs to undertake their own due diligence in a proportionate way, rather than in the 'trickle down' approach. While articles of the draft CSDDD on substantive due diligence provide that a company may take steps to support SMEs, including through the provision or financial support, it is not clear that this is sufficient to encourage SMEs to meaningfully engage in their own due diligence. It has been suggested that the CSDDD should therefore provide clearer obligations to companies in scope to support SMEs in meeting the expectations of the CSDDD and fully participating in the value chains of companies in scope of the CSDDD.
The best practice of the OECD and the UNGP suggests that, when acting as a buyer in their contracts with their suppliers or subcontractors, a supplier must also ensure that they comply with all of the buyer responsibilities. Such responsibilities include sharing the responsibility for HREDD. Similarly, any subcontracting by the supplier should be accompanied with HREDD on each subcontractor.
In any case, Serbian SMEs which are formally not "companies in scope" and subject to the CSDDD provisions need to familiarize themselves with the supply chain HREDD obligations, as EU companies might require them, via contractual assurances meet their own due diligence requirements, to do so i.e. to respect human rights and show responsibility for the environment in their own supply chain.
Despite that, the above practically means that Serbian suppliers would also need to conduct HREDD within their supply chains and identify whether their operations contribute to the negative impacts on certain ESG related areas.
ESG Due Diligence Defence
Finally, a company can mitigate the responsibility by proving that it took all reasonable measures to prevent the wrongdoing act of its officer via the so-called Due Diligence Defence Rule. Because of the Due Diligence Defence Rule, the supplier company could claim that they made a comprehensive inquiry of the matter at hand and had reasonable grounds to believe that certain statement was true with respect to possible ESG breaches. Therefore, if there is a danger that the supplier company can be found liable due to the wrongdoings of its subordinates, than there is an additional motive to ensure that such acts are not committed via installing a due diligence mechanism, preferably via HREEDD.
It should be also noted that adverse human rights and environmental impacts can be intertwined with or underpinned by factors such as corruption and bribery. It may therefore be necessary for companies to take into account those factors when carrying out human rights and environmental due diligence, in a manner that is consistent with the UN Convention against Corruption.
This all leads to conclude that installing a due diligence mechanism, especially in light of the new legislative trends from the EU on HREDD is a must, even for companies outside of formal reach of those legislative actions (so not companies in scope), for maintaining and meeting supply chain requirements but also for mitigating their own responsibility under penal law of the supplier's country, in this case Serbia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
