How To Avoid the Consequences of Noncompliance in Business

Kezia Farnham

The consequences of noncompliance vary greatly depending on:

  • The regulation or legislation being contravened
  • The scale of the contravention
  • The sector the business is in

But no matter the context, noncompliance with regulations or legislation generally has serious repercussions for businesses — reputational, financial, even criminal charges and prison time. The move towards individual accountability for compliance failings makes noncompliance both a corporate and personal concern.

As the regulatory and legislative landscape becomes ever-more cluttered, the considerations for organizations needing to comply become increasingly onerous. And concurrently, the risks of noncompliance grow.

What Are the Consequences of Noncompliance?

The increase in ways to fall foul of regulatory or legislative requirements is a worry for organizations; avoiding the consequences of noncompliance becomes more challenging as more regulations and laws are introduced.

If compliance is getting more complex, it’s perhaps natural that some business leaders might wonder: what are some consequences for noncompliance? Is it worth taking the risk of noncompliance when the work involved in complying can be so demanding?

The answer is always “no.” The cost and work involved in compliance may be high, but rest assured, the cost of noncompliance is far higher.

Fines

Financial penalties are the top concern of many organizations. The cost of regulatory noncompliance can be significant: the largest fine to date for GDPR breaches is an eye-watering 746 million euros ($847 million).

Even less dramatic fines are unwelcome; HIPAA violations carry a maximum penalty of $1.5 million per year for each violation. Executives who knowingly certify financial reports that don’t comply with SOX requirements face fines of up to $1 million, alongside ten years imprisonment.

Little wonder that the threat of fines can be one of the biggest drivers of regulatory compliance.

Imprisonment

As mentioned above, jail terms for regulatory or legislative breaches aren’t unheard of. Making a willfully false statement on your EEO-1 Report carries a possible prison term of five years. Violating US anti-money laundering regulations can mean imprisonment for up to 20 years for each violation.

Breaching health and safety and certain environmental laws can also incur prison sentences.

Reputational Damage

Your reputation can suffer if you experience a breach of compliance. The impact of reputational damage can be one of the biggest penalties for noncompliance. Its impacts are far-reaching and include: devaluing your brand, reduced profits, difficulty in securing investment, an increased cost of capital and the inability to recruit or retain talent. In the worst cases, the reputational damage can lead to total business failure.

This has been thrown into stark relief in recent weeks as businesses that continued to trade in Russia saw protests and boycotts, many eventually choosing to protect their reputations by joining those shutting down Russian operations.

ESG concerns are now firmly in the mainstream. The E of ESG — the environmental aspects — may get the most airtime, but diversity, equity and inclusion       issues like pay gaps and equal opportunities and broader societal concerns — the “S” — are fast catching up. Governance acts as the wrapper around all of this, keeping companies’ policies and processes on the straight and narrow.

Noncompliance with ESG issues doesn’t just mean failing to comply with regulation. Perceived shortcomings regarding ethics or integrity or accusations of greenwashing can tarnish your reputation and undermine your good intentions as fast as any regulatory breach.

Business Interruption

Breaching some laws will compel your organization to close operations until you have rectified the issue. This reduction in productivity can have serious implications for your business and its ability to operate.

Don’t Suffer the Consequences of Non Compliance

The consequences of noncompliance with regulations can be varied, significant, and severe. To reduce your risk of noncompliance, ensure you take a comprehensive and robust approach to governance, risk and compliance in all its forms.

No matter the size of your business, strengthen your compliance department to ensure you have the expertise and resource you need to support regulatory compliance. Regularly audit your approach to keep on top of the latest risks and apply best practices.

If you manage compliance and governance via manual, document-based processes, you increase your risk of non-compliance with regulations and legislation; consider whether compliance software might fortify your approach and reduce your risk of breaches.

And with the regulatory landscape changing and expanding constantly, don’t slip up by failing to keep aware of the latest requirements. Climate-related reporting, financial disclosures, DE&I obligations — the list of regulations you need to comply with is ever-growing.

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Kezia Farnham Diligent
Content Strategy Manager
Kezia Farnham

Kezia Farnham is the Content Strategy Manager at Diligent. She's a University of the Arts London graduate who has enjoyed over seven years working across journalism, public relations and digital marketing, with a special focus on SEO and CRO in the B2B SaaS sector.

Kezia is passionate about helping governance professionals find the right information at the right time.