What is non-compliance? Explaining Corporate Risks and Compliance Measures

Recently, there has been a growing awareness of "compliance" issues in various parts of the world. This presentation will briefly explain what a compliance violation is, why compliance is considered important, what effects and risks companies face due to compliance violations, and the problems that can be caused by compliance violations. Examples of violations that can occur close to home and measures that companies should take will also be presented.

What is Compliance?

The word "compliance" translates directly to "observance of laws and regulations. Originally, the scope of compliance was limited to "laws and regulations," but in recent years the scope has expanded to include corporate and social norms. Accordingly, the scope of "noncompliance" has expanded to include not only "legal violations" such as window dressing and fraudulent loans, but also corporate attitude toward employees and inappropriate online behavior of employees.

Background of Increased Emphasis on Compliance

In recent years, there have been several factors that have contributed to the demand for a high level of compliance from companies: the media coverage of a series of corporate scandals in the 1990s and 2000s, the emergence of many global companies at that time, and a growing focus on the social responsibility of companies. The birth of many global companies at that time also drew attention to the magnitude of the social responsibility that corporations have.

The recent proliferation of social networking sites has also had a significant impact. The hurdles for whistle-blowing have been lowered, making it easier for corporate compliance violations to be uncovered, and the damage done to companies when inappropriate comments or other incidents flare up has also increased.

Impact and Risks of Compliance Violations

In these days when compliance is strongly demanded, public opinion is very critical of compliance violations, which can lead to significant damage, such as loss of corporate credibility. The following are examples of the effects and risks of noncompliance.

Risk of liability for damages

For example, if a company causes damage to a customer due to a compliance violation such as information leakage, the company may be held liable for damages by the victim. If the compensation is so large that it affects the management of the company, the company may be forced into bankruptcy or even be forced to compensate its shareholders for the loss. It is also important to be aware of the risk of administrative penalties such as "business suspension" and "business improvement orders," and of cases that may develop into criminal cases if they are clear violations of laws and regulations.

Risk of loss of social credibility

If a company commits a compliance violation, its image of not complying with laws and regulations and prioritizing its own profits will grow, and the company's credibility will be damaged. Once trust is lost, it will take time to recover, and a decline in brand power will inevitably lead to a loss of customers, resulting in a worsening of business conditions and an impact on employee salaries.

Risk of employee turnover

When a company's image is damaged and its performance deteriorates as a result of compliance violations, an exodus of human resources is inevitable. Not only will talented employees leave the company, but it will also be difficult to recruit new personnel, making it impossible for the company to recover from the deterioration of its business situation and to grow in the long term.

Causes of Non-Compliance

It is said that noncompliance tends to occur when multiple circumstances and timing come together. This section explains the causes of noncompliance, including the corporate environment and lack of countermeasures.

Insufficient knowledge of compliance or lack of morals

Lack of knowledge about compliance causes violations unintentionally. First of all, it is necessary to acquire correct knowledge from management and administrative employees in order to make it known to employees. However, even if they lack knowledge of compliance, morals based on general social norms will serve as a deterrent to crimes such as taking information out of the company. Regular reviews and updates on basic knowledge and morals are necessary.

There is a problem with the corporate organization's culture.

If there is an organization-wide culture that overlooks or covers up compliance violations when they are discovered, it is a problem not only for individual employees but for the company as a whole. Be wary of cases where unreasonable quotas or targets have been set. There is a greater likelihood that fraud will be committed despite the knowledge that it is a noncompliance.

No internal compliance rules or consultation service

If an internal management system is in place, compliance violations can be prevented. It is imperative to establish internal regulations as well as a contact point for employees to consult. It is also important to hold regular in-house training and study sessions to raise employee awareness of compliance issues.

Examples of possible compliance violations in the company

The following is a general description of the main types and examples of compliance violations that can occur in a company on a daily basis. It is important to understand the risks applicable to your company by learning about specific examples of compliance violations that are familiar to you and the background and factors that lead to the occurrence of such violations.

Leakage of personal or confidential information

It is a violation of compliance when an employee intentionally leaks data such as personal information or confidential information. There are many other cases of unintentional leakage of information. Important information that is lost in casual conversation, such as chatting with a supervisor or colleague on the road or talking with a business partner, may be leaked to someone outside the company who is present at the time, so care must be taken.

Embezzlement and other misconduct

Window dressing and embezzlement are serious compliance violations that are subject to criminal penalties. In addition, there are many other possible cases of embezzlement or theft in the course of business, even if not directly involving money, such as taking without permission or selling for profit equipment, stationery, or other supplies used by employees on a daily basis, or using company vehicles for personal use.

Long working hours and service overtime

A company is also in noncompliance if it habitually works overtime in excess of the "45 hours per month, 360 hours per year" overtime limit stipulated by the Labor Standards Law. Formalization of inappropriate working conditions, such as service overtime, can lead to loss of social credibility and carry significant risks, such as overwork death of employees.

Sexual harassment, power harassment, and other forms of harassment

Sexual harassment, power harassment, moral harassment, and other forms of harassment also violate social rules and ethical standards and lead to noncompliance. In many cases, the harasser has no awareness of the perpetrator and misunderstands that harassment is part of appropriate guidance and communication. Therefore, it is necessary to inform employees about harassment on a regular basis, for example by conducting harassment training.

Measures that companies should take to ensure compliance

It is very difficult to regain trust in a company after a compliance violation has occurred. It is important to take measures before a problem occurs. The following is a list of specific measures that companies need to take.

Understand the risks your company is facing

Based on the above examples of noncompliance, it is first necessary to understand the risks to which your company may be subject. Appropriate compliance varies depending on the nature of the business and covers a wide range. Since it can be assumed in every aspect of daily operations, identify and visualize the possibilities by interviewing employees in various departments.

Establish an internal compliance management system

Once you have identified possible compliance violations in your company, the next step is to create internal rules and establish a management system. Do not rely solely on the good sense of your employees, but rather, structure the rules and establish a management system with sustainable rules. In addition to clearly stating details such as how to access confidential data, it is also important to establish labor management rules.

Provide in-house training and establish a consultation service.

Once the company has decided on a direction, it is necessary to make it known to all employees so that they can understand it as their own. It is effective to conduct regular in-house training and study sessions to thoroughly educate employees and raise their awareness of compliance. It is also important to establish a department or contact point where employees can report and consult.

Establishing a system for "forensic investigation

Forensic investigations, which are forensic investigations conducted in the event of incidents such as internal fraud or information leaks, are also effective in preventing compliance violations. By demonstrating to your employees that you have a forensic investigation system in place on a regular basis, you can help deter compliance violations.

→ [Related Article] What is a forensic investigation? Explanation of necessary cases, cautions, and examples

Prompt response is key when compliance violations occur.

Compliance violations can still lurk around us even when we take measures to prevent them. The key to preventing secondary damage is how quickly and appropriately you can take action when a compliance violation occurs. Compliance violations require a wide range of high-level knowledge, so it is difficult to cover everything. When information leaks, labor-related compliance violations, and other matters require investigation, it is wise to hire a specialized vendor. A forensic investigation by a vendor will allow for a quick initial response, and will allow for efficient investigation and fact-checking of anomalies and signs of fraud, leading to early clarification of the situation.

FRONTEO has been a pioneer in forensic investigations in Japan since its founding in 2003. As a leading company with an overwhelming track record in the field of compliance violations, we have helped many companies solve their problems with a high level of reliability. In digital forensic investigations, which are in increasing demand as the handling of digital data increases with the spread of the Internet and social networking services, FRONTEO is able to investigate digital data with high accuracy by utilizing its self-developed AI engine. We can predict and understand incidents that may occur in a wide range of fields, and propose effective and cost-effective investigations for all kinds of issues.

The potential for noncompliance exists close to home in every company, and if handled incorrectly, can cause long-term and potentially devastating damage. Consult with FRONTEO before a problem arises and make the necessary preparations for your company.

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