Have you ever wondered what would be the outcome if there were no overheads to our actions? Or no rules that we are bound to follow?
In a corporate environment, negligence around work or norms would cause significant repercussions to the individual as well as the corresponding organization. To mitigate these risks, almost every company follows a distinct compliance policy.
What is Compliance?
In simpler terms, every company would pre-determine a set of rules and regulations to be followed by its employees based on the industry and the services offered. The process of adhering to these rules, to prevent the company from regulatory or reputational risks is termed as Compliance.
Regulatory Compliance versus Corporate Compliance:
Regulatory compliance refers to the process of being compliant to the legal mandates and directives introduced by the governing bodies of either the federal or the state legislations. These regulatory compliance norms would vary significantly based on the industry. It is a note-worthy fact that the legislation stakes would be relatively higher if you run a firm in sectors like healthcare or finance when compared to the other industries.
On the contrast, corporate compliance is nothing but an act of ensuring if the company is following their internal compliance structure. On a surface level, regulatory compliance and corporate compliance would appear similar. However, that is proven wrong due to one major dissimilarity between them which aligns with the legal regulations.
As in, with regulatory compliance, the accordance is monitored by the governing bodies of a federal or state legislation. Whereas, corporate compliance is generally created and executed on an organization level. It is further monitored by the upper management through an in-house compliance team or a Global Compliance partner.
Define Global Compliance or International Compliance?
Now that we are familiar with the concept of compliance, let’s shed some light on Global compliance. It simply means the act of meeting diverse regulations laid by an organization on both local as well as international grounds. When followed diligently, Global Compliance also contributes towards strengthening the risk management infrastructure of the organization.
Global Compliance rules
As mentioned earlier, Global Compliance is an international concept which applies for varied businesses that are established across the world. This rings a bell around how compliance regulations differ among varied countries and jurisdictions. While expanding your business to the international market, it is imperative to maintain global tax compliance. This could be accomplished by addressing some crucial rules which are mentioned below.
Tax Reporting and Compliance:
While expanding your business internationally, staying compliant with international tax filing could emerge as the most common issue. This is because, the tax slab and reporting procedure may differ across varied jurisdictions.
For instance, in some countries, the employers are expected to withhold the professional tax to be paid to the government by their employees. And further remit it to the tax authorities on behalf of all the employees. While some other countries would expect the professionals to pay their taxes independently.
On the other hand, international businesses are expected to align their accounting, reporting and tax filing processes through different laws that are admissible to the respective legislation. This includes,
- State or Federal level variation in Sales tax fixed for merchandize and services
- Property taxes on the real estate assets based on their location
- Excise and administrative taxes
- Franchise and employment/payroll taxes
- Taxes applicable for the dividends that a company provides to its shareholders
Moreover, when it comes to corporate taxes, businesses are bound to adhere to both federal as well as state tax rates. The federal corporate tax rate is standardized and must be paid by all businesses as a part of their taxes. Whereas, the state tax rates vary based on the respective province.
Failure to report or govern the applicable taxes would result in significant consequences to the business. Therefore, we assume that, the process of enabling tax reporting and statutory accounting across different countries is quite complicated.
International Payment Standards:
Once your business is established globally, managing the payments standards including bank payments or wire transfers would vary across different countries. To simplify this process, the Payment Card Industry (PCI) Security Standards council maintains, evolves, and promotes PCI standards to ensure data security.
The PCI-SS council also contributes towards helping businesses understand and implement the desired standards of security policies. This measure is initiated to protect the payment systems from potential breach or theft of cardholder data. The security standard also comes with potential validation and monitoring framework to maintain data compliance. Deviating from these standards would impose significant fines and penalties on the corresponding corporations.
We are aware that the financial transaction standards vary between different countries. That is exactly why we have identified the Legal Entity Identifier (LEI) framework which remains consistent across the globe. This system is generally used to verify the counterparties involved in an international transaction. It is also advisable to follow this framework because, it is credible and has been mandated by numerous legal systems including the United States and the European Union.
Data Protection Laws:
Firstly, the laws around data protection were implemented to restrict how customer information was used by organizations or government bodies. It basically controls the companies from misusing the personal details of their clients. Every legislation follows a distinct data protection law as a part of their legal framework. This includes guidelines around collecting and processing personal information from the client.
Every organization or sole trader who process personalized client information should pay an annual data protection fee to the tax authority unless they are exempted. This exemption comes handy if you are dealing with personal data of individuals for one of the following reasons:
- Staff administration
- Accounting and Record Keeping
- Marketing, Advertising and Public Relations
- Non-profit organizations
- Personal or Family affairs
- Judicial functions or
- Manually processing customer information instead of automating it using a computer
If the data processing remains within the afore-mentioned limits, the organizations are exempted from paying the data protection fee. Furthermore, defaulters who does not fall under the categories mentioned above, but still fail to pay the relevant fee will be held accountable for violation of the law. This would likely result in paying hefty fines in addition to attracting bad publicity for the organization.
A real-time example of violating data protection law was recorded recently in the Wall Street Journal. Per that instance, one of the big four audit firms had to pay a violation fee of nearly 10 million USD to settle the allegations around tipping off confidential information of their client. In addition to this, the Securities and Exchange Commission also allegedly fined four accountants who were directly involved in the misconduct.
Anti-Bribery and Corruption Compliance:
Out of all the non-compliant practices, Corruption raises a greater concern in terms of political as well as economic growth of a country. Because, it increases the poverty index and promotes inequality, which directly impacts the foreign and domestic affairs, distorts public investment besides reducing public revenues. The anti-corruption law was framed to crib all forms of bribery including, embezzlement, theft, fraud, extortion, blackmail, and influence peddling.
On a global scale, we see various countries drafting sophisticated laws against bribery and corruption. Such crucial compliance regulations and requirements, when coupled with increasing enforcement activities across the globe, pose as a challenge to companies that are established on a global market. In addition to this, certain countries have also introduced individual criminal liability for bribery related offences.
To better understand the compliance policy, let us breakdown and analyse the famous Wirecard scandal which whooped the wall street in the recent past. The revenue system accused Wirecard AG for accounting malpractices. In 2019, Financial Times published an allegation based on the investigations recorded. Post this revelation, Wirecard filed for insolvency around a hefty sum of 1.9 billion Euros which went missing from the company records. This led to the arrest of its CEO and cornered the company’s long-time auditor Ernst & Young for having an oversight on such a sensitive aspect.
That being said, it is evident that EY failed to verify the fraudulent bank statements of Wirecard which led to criminal investigations. This scam brought potential defame to Wirecard as well as their auditing firm which resulted in losing a number of high-profile clients from both the ends.
Despite of us evolving as a modern society, we cannot deny the fact that slavery and exploitation of blue-collared labourers is still persistent among us. As an effort to eradicate this, many countries have implemented extensive anti-slavery laws. Per these laws, businesses are responsible for ensuring to the public that, the organization does not promote any form of slavery or worker exploitation.
Protection from Slavery per the international law has been reiterated in the Slavery Convention legislative. This was coined by the International covenant on civil and political rights (ICCPR). The ICCPR is governed by the Human rights Committee which is responsible for monitoring the present conditions of slavery on an international level.
Consequences of Global Compliance Failure:
For global businesses, World compliance is an instrumental piece of the administration puzzle. However, compliance features do come with significant consequences when it comes to international business. This is because, the organizations are bound to align its services across multiple locations. Some of the most common consequences dealt by the businesses includes,
As mentioned earlier, failing to maintain compliance with the data privacy policies laid by the federal or state legislation would result in hefty fines. Violating the customer privacy or not recording their consent would also fall under failure of global compliance and will be charged per the civil law.
Violation of Criminal Law:
When establishing an online business, it is imperative to follow the criminal law diligently. Indulging in corruption, money laundering or other fraudulent activities will be considered as violation of criminal law and charged accordingly. These charges may lead to imprisonment of the officials or stringent criminal penalties to be paid by the company.
Most businesses operate on underlying contracts as they are essential to draw line over the scope of services provided. Failing to comply with the limitations stated in these contracts would classify as a material breach of contract. This could result in termination of the contract per the term clause or indemnifying the losses incurred.
In industries like healthcare, finance, and logistics, it is essential to acquire certain licenses or approvals based on the federal and state regulations. Violating these compliance policies would result in revocation or confiscation of such licenses or approvals. This shall also lead to a potential sting at the reputation earned by your business.
Best practices for managing global compliance?
Having discussed about the potential consequences of global compliance failures leads us to develop a successful framework for managing international compliance. Let’s discuss about some steps that could be followed to effectively manage world compliance:
Focus on Compliance from the Inception:
When you are launching an international business, compliance should be a forethought and not an afterthought. You cannot conceptualize your business and later fit-in the desired compliance requisites. You will rather have to consider the compliance factors alongside the development of your business. Doing so would help you with adding compliance requirements to every stage of your business thereby, preventing you and your company from uninformed external threats.
Compliance management team:
If you are a business owner or a representative from the upper management, it would be nearly impossible for you to monitor the compliance policy across the firm. Hence, it is essential for such companies to recruit a distinct team or staff who would manage the compliance regulations and track them diligently both internally and on a global scale.
In today’s scenario, most of the international businesses fail to value the importance of Compliance. This creates ripples on the corporate governance module. As in, Compliance and Corporate governance go alongside each other in predominant of the operations. This ranges from allocating a budget to manage compliance measures, to recruiting a team that would oversee the compliance policies. This fostering compliance would result in a profitable corporate governance module.
How can we be your Global Compliance Partner?
When you deal with international business operations, it would be increasingly difficult for you to remain in control over all the compliance obligations. This process could be simplified by hiring a Global Compliance Partner like Multiplier to manage all the compliance related activities of your company.
We at Multiplier offer global payroll and compliance software to onboard, manage and process the payrolls for your international employees. We would like to be the face of your firm in terms of managing global compliance pertaining to labour laws, processing payments, or drafting contracts. To know more about our services including security and compliance, book a demo with us or visit us.