What Do Laws and Legality Have in Common with Business Compliance?
by Francine Breckenridge, Chief Compliance and Legal Officer at U.S. Money Reserve
A whole lot more than you might think.
Business compliance can be difficult to understand, but it’s crucial to the health of any business. Compliance actually makes or breaks any business at any stage. Understanding the laws and legality in your business location is vital to ensuring your company’s growth in the future.
What’s more, merely meeting your legal minimums could prevent a business from attaining its goals because of missing specific opportunities. Compliance ensures that companies operate safely within a particular jurisdiction’s rules and laws. These usually include obligations like the health, safety, and welfare of those you employ, sell to, and work with, but there are also many other subtleties.
While national laws apply across the board, some specific areas have different rules and regulations that companies need to be aware of in order to remain on the right side of the law. If a company doesn’t know what laws it is subject to, it can’t grow in a smart and measured way. It’s that simple.
Here’s what laws and legality have in common with business compliance and how the two interrelate.
Laws Form the Structure for “Regulatory Compliance.”
If you’ve always thought that compliance was just about laws and regulations pertaining to your company, you’re mistaken. There are essentially two main facets of compliance: regulatory compliance and internal or corporate compliance.
Regulatory compliance deals with how you and your company follow the laws of the location in which your business operates. Your company is required to follow the legal requirements and mandates of its governing body and legislation. The laws tell you the rules of the road for your company to operate legally in a specific location.
Should you choose to ignore the regulatory laws and rules of the road, there can be tremendous penalties to pay. These can take the form of huge fees, fines, revocation of licensing, massive legal proceedings, and even potential jail time. Remember this: Penalties are not proportionate to the size of your business, but rather to the size of the violation. Even if you are a small business, if you break a significant law (say a privacy or data collection law), you could face massive penalties. Breaking the law as a corporation is just as bad as breaking the law as an individual, and it is something you want to avoid.
Legality Around Those Laws Creates Regulatory and Policy Bodies.
Regulatory compliance can be complicated for a number of reasons. For one, laws, regulations, and governance are continually changing. It takes a considerable amount of work and expertise to keep up with this continuously changing landscape. It is essential that a company remains within the legal lines as it conducts business.
In addition, regulatory compliance laws (discussed above) create the need for more regulatory and policy bodies. Currently, there are more than 450 different regulatory bodies in the U.S. federal government that create and manage regulations for various industries. This means that more than 450 different groups make multiple rules and laws for each of their sectors. The nuances within these rules and regulations can be bears to wrestle with, which is why having a great regulatory compliance officer and staff is crucial.
Adding yet another level of complexity, regulatory compliance doesn’t only deal with state and local laws but can also deal with international laws and governing bodies. Say, for example, you ship electronics all over the world. There are different regulations and rules in China than in the U.S., and the hardware and software you may ship could be in violation of various trade treaties or embargoes between countries by merely crossing borders.
The word “legality” refers to the “state or quality of being legal.” It primarily encompasses the entire legal environment associated with the laws, like an ecosystem growing up around a stand of trees. Legality can change at any moment based on what political party happens to be in power, what the market or consumers are demanding, or which way the wind is blowing on a given day.
To understand the difference between laws and legality, it’s best to think of laws like gravity (hard to change, always present), and legality like the tides that ebb and flow. Tides are sometimes higher or lower based on the moon phase, and legality, like the tides, tends to change over time as a result of external influences. Legality is much more fluid than laws and can and does change all the time. The two systems are intimately intertwined and affect one another in a number of ways.
Legality also tends to come up during the second facet of compliance: internal compliance. For example, laws are made about how many hours per day a worker can work. Those laws have to be implemented internally inside a company so that the company is compliant with those laws. An internal group (HR) is created to enforce and manage the legality of how many hours per day a worker can work. There is a certain standard that a company must maintain in order to remain externally compliant with the laws — and to make sure those are met, internal governing bodies are needed.
Legality is also generally less formal than laws. As the definition states, “The term ‘legality’ usually refers to a requirement enjoined by law or an obligation imposed by law.” In plain English, that refers to the associated rules and regulations that arise around a law to ensure that it is followed. It may help to think of legality as the series of steps you need to take to ensure that federal, state, and international laws are actually being adhered to within your organization so that the external regulatory compliance laws are met.
Internal or Corporate Compliance vs. External Compliance: How Do They Relate?
While it may appear that “compliance is compliance,” there is a difference between internal or corporate compliance and external compliance. Internal or corporate compliance can vary from company to company, depending on how each one is affected by a governing body or external laws. External compliance is mostly universal for all companies since the rules of the road are created by the laws.
This may seem like splitting hairs, but it’s an important distinction since it essentially gives companies the ability to decide how they want to meet the requirements of the laws. As I have written before, internal compliance is run differently in every company, yet the goals of that team are always the same regardless of your business: Stay on the right side of the law. Internal compliance helps identify internal risks, prevent compliance dalliances, monitor risks, resolve issues when they come up as they pertain to compliance, and advise and train others within the company to help deal with risk management.
Internal compliance is as much about adhering to laws as it is about prevention. Each company must determine the right way to translate external compliance requirements into actionable steps that can be implemented internally.
If you think of regulatory compliance as the roof over your head, consider internal or corporate compliance like the activities that go on in your house — things like sleeping, eating, hanging out, playing with your kids, etc. Regulatory compliance provides legal protection from the winds that buffet the world. Corporate compliance keeps your business, your employees, and your consumers safe as they go about their daily lives inside your company.
Why Compliance Matters
Regardless of the nuances between internal and external compliance, compliance matters if you want to ensure the safety and security of your employees, your goods, and your business. It’s also crucial to overall growth.
While compliance can seem like the “anti-fun” group in your business, its function is vital if you want to keep your business out of trouble, and it can even help you grow and expand your business in ways you might not expect. If you’re interested in learning more about how to use compliance to grow your business, you can check out my recent piece on Medium. If you’re just starting to learn about the importance of compliance and all the things that it can entail, be sure to check out this story on why compliance matters and how to start building your compliance plan from the ground up.
