Here is a rundown of the major failures our experts encounter when on boarding new clients and surveying the market.
Compliance is a mandatory aspect of doing business. It should be conducted as humanly as possible in an error-free way and with rigorous oversight. Inexperienced organisations operating without a global service provider to help them manage compliance can fall foul with alarming regularity. Here are some of the major failures we encounter when on boarding new clients and surveying the market.
Underestimating the consequences of failure
Mistakes in compliance may incur fines. In some jurisdictions, even prison sentences are a possibility. Official sanctions are just the start. A failure in compliance can have wide-reaching commercial and reputational implications. Depending on the jurisdiction, the status of “non-compliant” would become public information. Rating agencies and financing companies will use the information in their credit assessments. Existing customers may notice such, leading them to change their provider and hence a loss of business.
Overlooking unique requests
Some jurisdictions will require unusual levels of demands. For example, in Brazil legislation makes it mandatory to include processes and protection for a whistle-blower, to facilitate the exposure of malpractice. Other countries lack it. This is why local knowledge of a jurisdiction is vital – and should complement the operating at arm’s length from the global compliance function to avoid risks of not being aware of what these unique demands can trigger.
Waiting for notifications to file
Not all jurisdictions provide prompts for compliance obligations. Annual reports must be filed, and the obligation is on your company to meet the deadlines, with or without an official reminder. Proactivity is therefore key.
Failing to learn
A considerable mistake in compliance ought to lead to a review of procedures to ensure proper controls are set and regularly updated, with the goal of not falling under repetition. However, this is rare. Compliance functions frequently feel the need to carry on as in their experience: “We have learned that if a penalty doesn’t hurt the manager, it does not change his or her behaviour,” observes Andre Nagelmaker, Chief Regulatory Services Officer. Alerting directors to the possibility of them being personally liable for errors tends to provoke a more rewarding response.
“A $40bn revenue multinational came to us in a jurisdiction and asked if we could take care of their country reporting,” recalls Nagelmaker. “They added, ‘Oh, the deadline is in three weeks!’ Sounds amazing, doesn’t it?” Compliance takes time. A failure to understand the minimum timeline and its requirements is the root cause of an astonishing range of costly failures.
Wrong person in charge
The Greece national managing director of a multinational company recently asked his compliance service partner to manage Country-by-Country reporting notification for the structure. The mistake? The Greece managing director didn’t sit at the Headquarters, didn’t have full visibility of the whole structure and moreover, the head office had engaged another firm to do the same job! It’s an example of a common and not wrongly intended mistake – the incorrect person undertaking a job suited for a different function. We all know it, as companies grow and expand, this happens. A global framework should spell out roles and responsibilities and make the overlaps and gaps more visible for remediation.
Since no two jurisdictions are identical it is inevitable that compliance reporting will vary per region. The United Arab Emirates, for example, has around 40 internal jurisdictions. It is of no wonder than the global compliance function gets overwhelmed when the reports it receives are so different. Standardisation, when and where possible, is one solution. Reports should try to be produced in a similar format, with clear parameters and definitions, in a common language shared across the multijurisdictional organisations.
A lack of executive sponsorship
An isolated compliance team will rapidly run in difficulties. Any successful change programme will need co-operation from multiple departments, including legal and finance. To ensure all relevant parties are committed to improving compliance, engagement is needed from the CEO, board, and senior executives to support organisations in their change and keep them briefed, committed, and dedicated to the mission.
Ignoring dormant entities
An entity may cease to be useful, but that does not mean it can be ignored. Even dormant entities have compliance obligations. If the entity needs to be wound up, it should be done so through a formal procedure, not forgotten about. Visibility of worldwide portfolios is a challenge; global vision is therefore a well-developed talent.
A lack of education
It is a tumultuous year for compliance. New protocols are being implemented. New technologies put to work. It’s a struggle for compliance officers to stay up to date. Ongoing education is a standard pillar. A professional compliance specialist should receive proper, relevant and in depth online tuition, educational group sessions, and one-to-one coaching to ensure in-house officers are experts in their field. Empowered with these tools they will also be able to enhance and transfer the knowledge, to strengthen the compliance culture of any organisation.
Amber or red alert?
Your warning lights. How can an organisation know whether they are making excessive mistakes? Frequency of fines and penalties is probably a reliable indicator. Priscila Westerhof-Fittipaldi, Portfolio Director of Corporate Secretarial Services at TMF Group identifies a vital signal of malfunction: “If you outsource your compliance function, and you see that the local officers are constantly sending letters regarding your entities, or you have to correct filings, something is clearly wrong. Ask to be notified when reprimands are received.”