Regulatory burdens are increasing for Global 2000 companies. More regulations are passed every year, requiring companies to meet an ever-rising standard for self-monitoring and near-faultless business practices. In manufacturing alone, the U.S. federal government passed over 2,300 new regulations between 1981 and 2013. Over 270 of these regulations are classified as “major,” meaning they are expected to have an effect of $100 million or more on the economy.
The U.S. is hardly the only nation tightening the regulatory screws. Around the world, other nations are enacting new regulations, many of which are modeled on U.S. regulations. For example, in the past 5 years, six nations with large economies have passed laws modeled on the U.S. Foreign Corrupt Practices Act (FCPA) of 1977, which establishes penalties for bribing foreign officials:
- In South Africa, the New Companies Act took effect, establishing new standards for the conduct of company directors.
- In the UK, the Bribery Act took effect, establishing penalties as high as 10 years imprisonment and unlimited fines for bribery.
- In Mexico, the Mexican parliament passed the Anti-Money-Laundering Law and the Federal Anti-Corruption in Public Contracts Law. It also creates a National Anti-Corruption Prosecutors Office.
- Canada revised its Corruption of Foreign Public Officials Act (CFPOA) and passes the Fighting Foreign Corruption Act, which applies to Canadian citizens and to any company based in Canada or organized under its laws.
- India passed the Companies Act, 2013, which introduces a stricter definition of fraud, establishes monetary and criminal penalties for those involved in fraud, and requires companies to implement improved fraud-monitoring systems.
- Brazil passed the Clean Company Act, establishes fines up to 20% of annual revenue for bribery committed by any company, Brazilian or foreign, with any operations based in Brazil.
The list above encompasses, respectively, the 40th, 5th, 15th, 10th, 7th, and 9th largest economies in the world (measured by annual GDP). The list does not include the FCPA itself, which has been in force since 1977, applies to the world’s 1st largest economy (the U.S.), and resulted in its highest penalties in 2013.
The Hidden Costs of Regulations
When assessing the costs of these regulations, it’s natural for an enterprise first to think of the direct costs of regulatory penalties. After all, these fines can reach tens or hundreds of millions of dollars.
For FCPA violations, Siemens AG was fined $800 million, Alstrom was fined $772 million, and KBR/Halliburton was fined $579 million. (Siemens was also fined by European regulators, increasing its total penalties to $1.6 billion.) In some cases, FCPA penalties also include the imprisonment of the individuals responsible for the regulatory violations.
However, these settlement costs are hardly the only expenses borne by companies accused of FCPA violations, according to analysis by Professor Mike Koehler of the Southern Illinois University School of Law. Even in the case of Siemens, Anti-Bribery/Anti-Corruption (ABAC) monitoring before and after the penalties created a burden that likely amounted to hundreds of millions of dollars, pushing the total regulatory costs for Siemens possibly close to $2 billion.
Non-penalty costs for FCPA violations include:
- Reduced stock prices and market capitalization
- Increased lending costs
- Delaying or derailing mergers and acquisitions
- Delayed or lost business opportunities, as would-be customers wait for the regulatory investigation to be completely settled
- Shareholder litigation against company directors
- Ongoing monitoring and investigations to answer the question of “where else” in a company’s global operations corruption may have occurred
As Koehler points out, the costs for ongoing monitoring, especially when mandated as part of a settlement, can be substantial. When oil and gas services company Willibros was cited for FCPA violations, it paid a $32 million penalty. It also agreed to ongoing monitoring and scrutiny. Within three years the costs for that external monitoring reached $10 million.
Reducing Burdens with a Third-Party Compliance Solution
To address the challenges of new, overlapping regulations, increased regulatory penalties, and ballooning regulatory costs, Global 2000 companies should invest in a rigorous third-party risk and compliance solution. With centralized insight into third party activities around the world, enterprises reduce the risk of being penalized by regulators. They also reduce the monitoring costs before or after a regulatory violation.
A third-party compliance solution enables companies to:
- Document and distribute code of conduct guidelines for employees and third parties
- Establish clear criteria for vetting and onboarding third parties
- Centralize information about third parties so monitoring can be comprehensive and timely
- Implement processes for re-assessing third parties when regulations change and when news of third party infractions appears
- Automate data collection, monitoring, and corrective actions, controlling costs while strengthening compliance
Applying technical innovation and deep domain expertise, the Aravo Enterprise platform delivers unrivaled configurability, regulatory agility, ease-of-use, high performance and scalability. Aravo Enterprise is already used by Top 5 companies in industries such as automotive, mining, and pharmaceuticals, consumer goods and life sciences. Aravo currently supports a user base of 65,000 corporate users managing 3.1 million third parties in 33 languages and 112 countries.