German Supply Chain Law: Monitoring employment practices and environmental issues in Malaysia


last updated on 5 May 2022 | reading time approx. 3 minutes

Which risks occur along supply chains in Malaysia?

German companies must be aware of potential risks in their business activities in Malaysia under the German Supply Chain Act („Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten”, short: LkSG) and, if necessary, take measures as stipulated within the LkSG. The country-specific risks for Malaysia arise on two different levels: the ratification level, which indicates if and to what extent a country has joined the relevant international treaties and the implementation level.

The LkSG in connection with its annexes refers to a number of specific international treaties. Countries that have joined these treaties and have fully implemented them should impose lower risks in terms of the LkSG than those countries, which have not joined those treaties. Out of the 13 international treaties relevant to the LkSG and that specify the protection of human rights at work and various environmental standards, Malaysia has only joined and implemented six agreements. For example, Malaysia has not signed Conventions N 87, 105 and 111 of the International Labor Organization (ILO), which regulate freedom of association and the right to organize, the abolition of forced labor and discrimination in employment and occupation. Fortunately, on March 21, 2022, Malaysia ratified the ILO Protocol of June 11, 2014, to International Labor Organization Convention No. 29 of June 26, 1930, concerning Forced and Compulsory Labor, thereby sending a signal with respect to reported abuses in the country (see below).

Malaysia is also one of the few countries globally that has not joined the United Nations (UN) Covenant on Civil and Political Rights and the UN International Covenant on Economic, Social and Cultural Rights. The reasons for the absence are certainly complex and probably to be found in the history of the country, its specific economic development and in the ethnic diversity. The two relevant agreements on environmental protection under the LkSG, the Minamata Convention on Mercury and the Stockholm Convention on Persistent Organic Pollutants, are also not implemented. The Initial Assessment Report of the Malaysian Ministry of the Environment and Water from 2021, highlights that the country is making efforts to implement the Minamata Convention, which it has already signed. The Stockholm Convention was also signed in 2002, but needs yet to be ratified. The lack of implementation of the LkSG relevant treaties in Malaysia requires companies to be cautious in ensuring compliance with the LkSG.

In addition to the accession level, the implementation level must also be taken into account. According to the Rule of Law Index of the World Justice Project, Malaysia is doing relatively well in the area of “regulatory enforcement”, i.e. the effective implementation of law in the country, with 0.57 out of 1 on the global average of 0.54. However, in a regional comparison – especially with the more developed countries of the Asia-Pacific region – the country still lags behind.

Another aspect that must be considered is concerning the practical implementation of the potential risk of corruption. Corruption can significantly influence and prevent effective administration and the implementation of laws or regulations. According to the Transparency International Corruption Perception Index, Malaysia ranks 57th out of 179 countries. Thus, in order to ensure LkSG compliance, companies must pay attention to the implementation of existing rules in Malaysia.

Which industries appear particularly vulnerable to adverse impacts of human/labor rights or environmental issues in Malaysia?

Reports of exploitative employment relationships and violations of international labor standards in certain sectors in Malaysia appear regularly in local and international media. For example, there have been reports about forced labor of migrant workers mainly from South and Southeast Asian countries by rubber gloves manufacturers, on palm oil plantations and in the electronics industry. Such cases should not be generalized. However, a certain degree of caution seems to be required particularly when it comes to labor-intensive productions in which a high proportion of migrant workers are employed.

Is there any legislation in Malaysia which addresses these risks? To what extent is it enforced in practice?

The Malaysian legal system prohibits forced labor of migrant workers, which has been reported in the media. Malaysia has ratified the corresponding Convention No. 29 of the International Labor Organization. The Malaysian Constitution also expressly prohibits slavery and forced labor in Article 6. Furthermore, the Employment Act 1955 and the Occupational Health and Safety Act 1994 stipulates minimum labor law standards and regulates occupational safety. The Malaysian Parliament is currently discussing an amendment of the Employment Act 1955, which also entails the implementation of ILO standards. To what extend this potential amendment might support compliance under the LkSG remains to be seen. The problem in this regards seems not to be a lack of legislation but rather a problem on the implementation level. This issue is even more difficult to tackle due to the fact, that migrant workers do not have a particular political lobby in the country to advocate their rights actively. Furthermore, due to their visa situation and the precarious living conditions in their countries of origin migrant workers are vulnerable to such abuse.

Can you provide a case example (e.g. taken from local media coverage) in which a foreign or local company had to deal with such adverse impacts?

In 2020, in connection with allegations of forced labor of migrant workers at two Malaysian palm oil producers, the US Customs and Border Protection prohibited the importation of their products and the importation of products containing palm oil from the two producers into the USA. In this context, international media also drew attention to the international companies affected by the import ban – in particular companies from the food and cosmetics industries. The case shows that issues along the supply chain can lead to reputational damage as well as loss of markets.

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