Compliance definition

What does compliance mean?

How does a company behave in a legally compliant manner or in accordance with legal standards and regulations? Answers to this question are provided by compliance, a term that can best be translated as "fulfillment of (legal) requirements". In plain language, this means that compliance encompasses all measures or activities of a company that follow the purpose of ensuring that the company's business is conducted in accordance with statutory or legal requirements.

Typically, compliance is set hierarchically, i.e. employees or departments are given a set of rules and guidelines that prescribe certain behavior in very specific situations. In cases where, due to the specific nature of the business, there is no exhaustive list of "compliance-compliant behavior", specifications in the sense of honest, ethically desired behavior then come into play.

What is the importance of compliance for companies?

Internationally active companies in particular operate in sometimes clearly distinguishable jurisdictions, which makes it difficult for employees and corporate bodies (management boards, etc.) to conduct themselves in a legally compliant manner at all times. At the same time, a company is liable for the actions of its employees, which means that a set of rules on compliance-compliant behavior must already be in place within the company organization.

This means: Compliance in the practical sense goes hand in hand with rules and clear rules of conduct to which every employee must adhere. The larger the organization and the more diverse the business activities (e.g., abroad), the more comprehensive this compliance framework is and the more regularly it is put to the test. This includes both precautionary measures to prevent violations from occurring in the first place, as well as preventive, supportive measures such as operational control bodies which, for example, make contracts above a certain contract value dependent on the approval of a designated body.

Compliance is therefore an absolutely essential instrument or set of rules, listing not only generally applicable "self-evident facts" but also concrete specifications for the desired behavior of employees.

The risks of compliance violations

Compliance with legal requirements is not only crucial for business success, but also has clear significance in terms of potential damages. Violations of the law or non-compliant behavior can lead to companies having to pay fines or face claims for damages. In the age of digitalization, potential compliance violations are also regularly accompanied by reputational damage, i.e. the image or public image or perception of a company can suffer as a result. Compliance rules are also intended to protect employees from possible recourse or liability.

Typical areas in the context of which compliance principles are developed

  • Corruption
  • Violations of the Anti-Discrimination Act
  • Unfair competition
  • Violations of labor law regulations
  • Data protection breaches
  • Money laundering
  • Terrorist Financing
  • External economic relations
  • Antitrust issues
  • Reporting obligations (e.g. when a company is listed on a stock exchange)
  • Regional environmental standards

Images:

Logistik Lexikon Compliance Definition

Image: Ivelin Radkov / Shutterstock

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