What is compliance, why is it becoming increasingly important for companies and how does an organization set up compliance management? Our guide answers these questions.

Compliance is growing in importance at both national and international level. This can be seen clearly in the EU where directives have been adopted compelling governments to pass new laws while companies have to abide by new reporting obligations. Environmental mismanagement, sexual harassment, questionable lobbying and tax offences are also provoking increasingly sharp public reactions. Companies can protect themselves by introducing an effective compliance system. The importance of compliance, the regulations companies need to watch out for and who should be responsible within an organization are all explained in this guide.

What exactly does compliance mean? Definition and basics- Compliance means that a company adheres to the applicable rules and laws. This includes both country specific laws and requirements from the regulatory authorities as well as internal company directives. A range of tools and process can be implemented and used by a company to bring about good compliance. They are designed to ensure that misconduct or violations can be detected, prevented or resolved at an early stage, ahead of any serious consequences such as criminal prosecution, fines or severe damage to a company’s reputation.

The origins of compliance- The signal for companies to start embracing more compliance began after a series of scandals in the United States. In the 1970s, lobbyists for arms company Lockheed bribed politicians in other countries to persuade them to buy fighter jets. In Europe, the affair made headlines in Germany where it put then Defence Minister Franz-Josef Strauß and his party on the spot. In Italy, the Netherlands and Japan, Lockheed also attempted to push the purchase of its aircraft with payments running into the billions. The scandal resulted in the passing of the Foreign Corrupt Practices Act or FCPA for short in the US. In the decades that followed, the issue of compliance has continued to grow in importance.

Which topics are part of compliance? 

Compliance isn’t just about protecting an organization from bribery or corruption. In the workplace, it also encompasses avoiding other potentially criminal behavior such as sexual harassment. In the US, the scandal surrounding film producer Harvey Weinstein, who was accused of rape and harassment, made waves. Convicted, he ended up in prison and the #MeToo movement has continued to shine a light on inappropriate and punitive behavior towards women since then. Recent surveys show that many women have already experienced harassment in the workplace. If such behavior is not prevented in the company or remains unpunished, the physical and psychological impact on those affected can be termed duos. If the victims make their experiences public, there may be an investigation which results in damage to the company’s image as an employer as well as its perception among both business partners and customers.

Avoiding financial scandals has also become an important area of compliance. At the turn of the millennium, US company Enron was still considered an entrepreneurial prodigy by American media and investors until the top management was convicted of extensive balance sheet falsifications. Not only did the scandal drag the company into insolvency, it also led to the introduction of the Sarbanes-Oxley Act (SOX) and new regulations for corporate reporting. Germany also recently experienced a similar scandal when financial services provider Wire card was convicted of falsifying its financial statements. Ex-CEO Jan Marsalek has been on the run since and CEO Markus Braun has been in custody for more than a year and a half.

Companies also have to keep an eye on issues such as their corporate code of conduct, environmental protection, labor laws and price fixing. Depending on the industry, employees also have to be trained to deal with specific situations such as corruption in the healthcare sector.

Depending on the size and complexity of the company, the following areas may be subject to additional analyses to minimize risks in the long term:

• Third party due diligence
• Security procedures and controls
• Creation of documents for early risk detection
• Development and implementation of guidelines and rules
• Case Management: Guarantee and case management system

 Why is compliance important for companies?

• reaction of reports

Compliance is no longer just an option for companies, it is a requirement. In the event of violations, CEOs, managing directors and board members are all threatened with prosecution and fines. Public pressure has grown too: in the #MeToo era and amid heightened climate and environmental awareness, breaches of the rules threaten major reputational and image damage for companies. Both the media and social media can intensify this effect, as can the public.

Those who invest in compliance see benefits on several levels:

• Violations can be detected and prevented at an early stage
• The company complies with the law
• Directors and employees are protected from fines or prosecution
• The company enjoys a positive reputation
• The company becomes more attractive to new employees, business partners and investors