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The True Cost of Non-Compliance

The True Cost of Non-Compliance

The cost of non-compliance can be crippling for an organization. Legal and regulatory non-compliance have become very real risk management concerns for companies in a broad range of industries, from healthcare, to finance, manufacturing, and beyond. In fact, the COVID-19 pandemic has brought the entire risk management landscape into much clearer focus for business leaders since it exposed numerous vulnerabilities that had previously gone unrealized. It was these unrealized vulnerabilities that ultimately forced seemingly stable, well-established companies to close their doors after many years of doing business.

As with the case of pandemic-related risk management threats, many legal and regulatory compliance vulnerabilities go completely unrealized until it’s too late and the business is facing some very negative consequences. But it’s not just monetary fines that should be a concern. The true cost of non-compliance can be multi-pronged and all-encompassing. 

The True Cost of Non-Compliance in Fines

Fines are the most well-known consequence of regulatory non-compliance. The true cost of non-compliance in fines is often staggering. Beyond the immediate financial penalties, which can be substantial, there are often hidden costs to consider. These may include legal fees associated with defending against regulatory actions, increased insurance premiums, and the diversion of resources to address compliance issues. Additionally, non-compliance fines can result in damage to a company’s credit rating, making it more expensive to secure financing or conduct business operations. The cumulative impact of fines can erode profitability, hinder growth opportunities, and tarnish a company’s financial health in the long run.

Remediation and Regulatory Non-Compliance 

In addition to fines, it is not uncommon for regulatory bodies and organizations charged with regulatory oversight to order a company to perform remediation to correct non-compliance-related conditions or situations. Remediation can take two basic forms: correcting damage or harm that has resulted from non-compliance and making changes in order to achieve compliance. 

Some of these remediation demands can carry tremendous price tags too. For example, if a company is found to be engaging in some activity that has an adverse impact on the environment and a clean-up effort is required, the cost can quickly rise to six or seven figures. A company that needs to implement a new secure, HIPAA-compliant data storage and data management infrastructure to accommodate dozens of office locations could be looking at a price tag in the six-figure range. That’s not pocket change. 

Additionally, there is almost always a timeframe involved with non-compliance remediation orders, which can really ramp up the pressure. Not only does the organization need to deal with an unplanned expenditure — often, a very sizable unplanned expenditure — but the issue must be corrected within the specified timeframe. Most would agree that it’s preferable to address this kind of issue on their own terms and timeframe, with the project factored into their budget. But this, of course, requires that the company leaders acknowledge the compliance issue so the business can achieve legal or regulatory compliance before problems arise. 

The True Cost of Non-Compliance and Exclusion from Industry Organizations and Events

It’s fairly commonplace for prominent organizations that are involved in regulatory oversight to issue bans to companies that are found to be non-compliant. These bans may be temporary or permanent. The nature of the ban will vary depending upon the industry and the type of organization, but it’s typical to see consequences such as the following. 

  • Bans from industry events hosted by the organization, such as conventions, conferences, networking events, workshops, and so on.
  • Removal from “authorized,” “recommended”  or “certified” business lists.
  • Withdrawal of membership, certifications, credentials or other endorsements from the organization in question. 
  • Inclusion on a publicly accessible list of non-compliant companies. 

These are some of the most common consequences of regulatory non-compliance involving industry organizations. This can be very damaging since these industry-specific groups can be very advantageous from a networking perspective and from a perspective of pulling in new business. Notably, organizations other than the one handling the non-compliance issue are free to hand down consequences too.

Bad Press and Reputation Damage as a Cost of Non-Compliance

Fines and remediation have a very obvious impact on a company’s financials, but many fail to realize that regulatory non-compliance can have a dramatic and very negative impact on a company’s brand name identity and overall reputation. This is one very real cost of non-compliance that goes unrealized until it’s too late and the business is knee-deep in a public relations nightmare. 

It’s true that not every company will encounter reputation damage as part of the true cost of non-compliance. A business may be able to slip under the radar, without anyone realizing that an incidence of legal or regulatory non-compliance ever occurred. 

Generally speaking, larger, higher-profile companies tend to be at the greatest risk of experiencing bad press and reputation damage as a result of non-compliance. The same is true of more egregious and serious non-compliance scenarios, even those involving smaller companies. 

The power of bad press can be significant and far-reaching. Take the case of nearly a dozen financial institutions that were collectively fined nearly $2 billion dollars by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Not only did each bank face hundreds of millions in fines, but they also got lots of negative press due to the reason for the penalties. It’s said the banks allowed and even promoted the use of WhatsApp, iMessage, Signal and other non-approved messaging apps for business-related chats with clients. This resulted in an inability to meet the requirements set forth in U.S. recordkeeping laws and SEC / CFTC regulations. We can only surmise that the financial institutions’ PR teams were left scrambling as this story made headlines worldwide. 

Brand identity and reputation damage can be extremely costly to repair and the impact on a company’s profitability may be dramatically negative. Attempts to repair the damage are often minimally successful, with rebranding and/or the passage of time being the only true and viable solutions in some cases. This can be a very bitter and challenging consequence of legal or regulatory non-compliance. 

Using Risk Management Software to Avoid Regulatory Compliance Issues

The true cost of non-compliance can be, well, costly! But often, a business can avoid virtually all legal and regulatory non-compliance issues with the help of the right risk management software. Risk management platforms, such as governance, risk, and compliance (GRC) software, empower companies with the tools they need to identify vulnerabilities and risks, address compliance issues, create and implement an action plan, and monitor for regulatory changes that may warrant action on part of the business so they can maintain compliance. 

At iTech, risk management is one of our specialties. We develop innovative enterprise risk management solutions, from risk management and GRC software to more specialized platforms. We work with clients across all industries and we invite you to reach out to discuss your legal and regulatory compliance needs. Contact the iTech team today to discuss your company’s risk management needs and we’ll collaborate on a solution to help you avoid non-compliance and the many negative consequences.