Understanding the true costs of compliance and non-compliance
Article 5 minute read

Understanding the true costs of compliance and non-compliance

22 August 2018

Companies are dealing with an avalanche of new compliance rules and requirements at an ever-increasing speed and they must understand the costs of getting it both right and wrong.

Making sure that your business is fully compliant across different countries is not easy, but is necessary for the operation of the company. The unknowledgeable business person or legal professional may unwittingly fail to comply with regulations and authorities. This can lead to fines, the inability to continue running business in a country and even loss of licenses. 

Compliance costs to companies 

The increase in number of reporting obligations that businesses must comply with is affecting the compliance costs as well, since they vary across all entities and jurisdictions and must be identified and managed. According to the Cost of Compliance 2018 report by Thomson Reuters, 61 percent of firms are expecting an increase in their total compliance budget in 2018. This is up from 53 percent in 2017.  

Understanding and following these new obligations can be overwhelming but is mandatory. Interpreting what the local authorities want and how they expect it to be delivered can cost your company time, money and new business opportunities.  

Misconceptions about compliance 

The biggest and most dangerous misconception regarding compliance is that it is easy to manage. Many people think compliance is only filling out a few forms every year and then they are finished. But that couldn’t be further from the truth. Compliance laws are not only different in every jurisdiction, but regulations can change rapidly in some areas. 

Another misconception is that everything can be submitted in English. 85% of the countries researched in our Compliance Complexity Index 2018 require the forms to be filled out in the local language. Understanding the local nuances of compliance is imperative to successfully comply in all jurisdictions where your business operates. 

Costs of non-compliance  

Mistakes in compliance can not only cost your company financially, personal liability is a real concern for compliance officers who are taking on risks as they are accountable for compliance at their company. Proper conduct and ethics are a big part of compliance and individuals are responsible for following the rules for their business. In 56% of the countries researched in our Compliance Complexity Index 2018, the failure to comply with corporate secretarial requirements is subject to either fines of more than 5,000 USD or prison sentences for the officers. 

Too often compliance is limited to a couple of departments or even individuals but following certain regulations can require input from additional functions. Not counting on a team of experts can have detrimental costs to your business. Ideally, everyone should be educated on what compliance means and how it can affect their role and how it fits into the bigger picture.

Another cost of non-compliance is time. There are some countries which allow businesses to submit filings online, but on average 44% of the countries require the forms to be submitted in person. Therefore, companies need the time of an expert to prepare the forms in the local language, and file all the appropriate paperwork at the local authority’s offices.  

Lastly, it is frequently forgotten that non-compliance may cost companies business opportunities. Compliance is fundamental for companies to participate in tenders, obtain specific licenses, render services to other companies, or even be sold to another group. Nevertheless, the path to bring a non-compliant subsidiary back to a compliant status may be filled with unpleasant surprises, such as appointed directors that left the company and were never replaced, and financial statements not being filed for extended periods. Some issues can take longer than expected to be solved causing important deadlines to be missed.  

With the risks and penalties so high, it’s important to outline the compliance costs and include it in your budgets and decide whether or not to handle it internally or use a trusted partner. 

Keys to compliance programs

Multinational companies managing many entities across several countries can have a hard time establishing a unified compliance program that ensures all entities are in good standing and compliant with the ever-changing local regulations. 

Enacting a strong compliance program with a knowledgeable team is essential to understanding all regulations and policies across all jurisdictions the business operates in. Companies need to decide if the processes can be managed in-house or if they will require support from an expert provider. There are some hidden costs for compliance departments to consider when making this decision:

  • Training –making sure your staff is constantly up to date with the most recent regulations or trusting the compliance function to a global partner that already invests in their experts training; 
  • Technology – what systems do you need to use and where and how integrated are they? 
  • Service provider fees – working with multiple providers and legal firms can result in many invoices paid by different parties and sometimes even different departments. The costs can be very high when all invoices are calculated.

Compliance is becoming even more important for businesses everywhere and having sufficient local knowledge is the key to success along with being prepared and informed. 

The difficulty of adhering to business regulations across 84 countries was surveyed and the results complied in the Compliance Complexity Index 2018. The report includes areas related to managing your local entities, as well as regulatory compliance, such as the ease of setting up a company; the information firms must report to local authorities; and the relative difficulty of complying with national legislation locally.

We can help 

TMF Group is helping companies to become and remain compliant with local and global requirements in more than 80 jurisdictions globally. Our experienced company secretaries, lawyers and paralegals are based around the world and have unrivalled local knowledge to help your business adhere to local regulations. TMF Group is an independent business and can standardise processes and reporting for your entities’ compliance activities, while providing you with local expertise and support. 

Download the Compliance Complexity Index 2018.  

Questions? Get in touch with us today.

Written by

Priscila Westerhof-Fittipaldi

Director of Corporate Secretarial Services
Priscila

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