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International Head of Regulatory & Compliance Solutions, TMF Group
25 February 2022
Read time
3 minutes

Transparency drive leaves no place to hide


Greater corporate transparency is the main thrust of most recent regulatory change. The OECD and the European Union (EU) are seeking closer scrutiny of what companies are doing, and where and why they are doing it. They aim to combat tax evasion and money laundering and ensure compliance with rules related to the environment, workers’ rights and other key areas of government policy.

With the increased emphasis on transparency, companies need to meet the growing regulatory demands, or face significant penalties.

The drive for transparency and control is manifesting in many recent regulatory changes:

  • Mandatory Disclosure Rules (MDR), which took effect across the EU from March 2020, are intended to enhance regulators’ understanding of companies’ structures across borders, to ensure that they have a legitimate business purpose and are not just in place to minimise taxation.
  • Common Reporting Standards (CRS) is a G20 initiative which began in 2017 and is being rolled out around the world. The information corporates provide to tax authorities under CRS is automatically shared with tax authorities in other jurisdictions. This allows tax authorities to collect taxes on undeclared global assets.
  • This drive to uncover and tax unreported income is also leading regulators to target digital assets and cryptocurrencies. New legislation related to this rapidly growing area of activity is due in the next 12-18 months and will apply to the owners, creators and distributors of digital assets. The legislation will incorporate anti-money laundering rules to prevent digit assets from being used to fund illicit activities such as drug trafficking and terrorism.
  • Corporate behaviour with respect to environmental, social and governance (ESG) standards is yet another regulatory focus. Furthermore, companies‘ own clients are also giving increasing attention to ESG issues, especially within the funds management sector, where large institutional investors want their investment managers to demonstrate their commitment to ESG principles when making investment decisions. Meeting such client requirements adds to corporates’ reporting burdens in this area.

Multiple penalties and risks for non-compliance

The trend towards greater corporate transparency has wide-ranging implications for corporates. Compliance with related legislation is mandatory, and the scope for non-compliance is diminishing - the rapid digitalisation of reporting processes is strengthening governments’ capacity to monitor and share information across jurisdictions.

The penalties for non-compliance can be significant. Fines are the most common form of sanction – and they can run into millions of pounds. Non-compliance may also carry further costs. Ignoring regulatory requirements tends to generate bigger, more complicated problems, which take more time and expense to resolve.

As well as these direct financial costs, non-compliance also risks reputational damage that may seriously undermine a company’s financial viability over the longer term. This is particularly true in relation to breaches of ESG standards, where unfavourable press coverage on, for example, production processes which pollute the environment, or employ slave labour, can lead to customers withdrawing their business in protest. Corporations also risk losing key talent for the same reasons.

Non-compliance may carry additional personal risks for a company’s directors. In most jurisdictions, directors may be held personally liable for wrongdoing in their companies. In extreme cases, directors may be imprisoned.

The administrative burden of compliance is rising

Recent and forthcoming regulatory developments are increasing the complexity of doing business, especially for companies operating across national borders. For those operating in Europe, compliance is further complicated by the fact that regulatory directives issued by the EU are translated into national legislation by each EU member state. This can result in marked variations in the law across member countries.

Companies need to adopt a systematic approach to compliance, which monitors legislative developments, assesses their implications for the company’s business and formulates an appropriate action plan to ensure the company is always protected from the various risks of non-compliance.

To avoid this onerous task, and the significant commitment of manpower and other resources it entails, corporates may seek an external specialist to assist them with their regulatory responsibilities, and shoulder the associated administrative burden.

Talk to TMF Group

TMF Group monitors all new regulations around the globe and possesses the multi-disciplinary expertise to assess the implications of new rules for cross border compliance.

We inform clients, almost in real-time, about such developments and the actions required to meet their filing deadlines. This keeps unwelcome surprises to a minimum and is an effective solution for managers who must contend with regulatory complexities, while also remaining fully focused on their company’s strategic objectives.

Find out more about how our global entity management services can support your business.

Make an enquiry.

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