7 Reasons Compliance Teams Are Struggling
How challenging is it to work in compliance these days? World-class compliance experts from TMF Group share their views.
Priscila Westerhof-Fittipaldi, Portfolio Director of Corporate Secretarial Services at TMF Group, shared a story that left her in awe: “During our onboarding exercises with a global client who hired us for our Corporate Secretarial (CoSec) service, I came across a company with subsidiaries in Africa,” she recalls. “The official register of directors in a certain country had the name of a director who’d left the company already for five years. The previous service provider had forgotten to update the register and never picked on the annual review that this needed attention. Legally speaking, someone who was no longer part of the organisation was still an official representative. Just imagine the sort of trouble an error like that can cause,” she marvels.
Other disaster stories are all too easy to find. Andre Nagelmaker, Chief Regulatory Services Officer, reveals the basic misconceptions he observes in potential clients: “I talk to heads of compliance and ask them about their client’s FATCA[1] and CRS[2] filing. Obviously, these are different things – even when presenting similarities – which need to be completed independently. But they’ll say, ‘Yes, I’ve done my FATCA.’ And I’ll ask about CRS, and they’ll say, ‘No, I don’t need to, I’ve done my FATCA.'”
When mistakes like this become common, something is not right. This is the first truth of compliance: that many functions are struggling with the fundamentals, which leads to different teams in an organization to be prone to more mistakes. They may translate in late filing, or no filing at all, they can omit basic information, their overview of subsidiaries across jurisdictions can be patchy or nonexistent, etc.
But why? It’s not for lack of effort or professionalism. Far from it. The industry naturally attracts some of the brightest and hardworking talent. It’s potentially because of a number of mixed dynamics at the workplace, summarized below.
1. The timeline.
Compliance is an industry in flux. For example, Common Reporting Standard (CRS) is halfway a global rollout with 49 early adopters, being joined by a second wave of late adopters this year. Each country has a unique approach to it and yet global parameters. Organisations need to understand the nuances of classification under CRS rules, and then based on the outcomes find the best way to collect, compile review, validate and communicate the required information in each jurisdiction. It’s fascinating work, but no one said it was easy…
The same applies to the Ultimate Beneficial Owner (UBO) requirements. The European Union directive on anti-money laundering set an initial deadline of June 26, 2017 for member states to adopt relevant legislation, but most countries didn’t do it for a variety of reasons. Legal departments catering for international clients are coming to terms with mapping the UBO rules, implementation, deadlines and so much more.
These fluctuations make it ever so challenging to be in so many places at the same time with such different standards and to adapt to the speed of these initiatives.
2. Turnaround time expectations of compliance teams are higher than ever.
“The old days when compliance teams could take two days to respond to a request for information are now over,” says Westerhof-Fittipaldi. “When the board wants an update, they need answers in minutes.”
And we all know that answering some of these requests is far from simple. A multinational corporation might have dozens or hundreds of entities within its structure globally. Each jurisdiction will have its own rules and formats, and data gathering to resolve matters is not always at hand – this is driven by the way in which companies are set (central versus local specialized departments). Maintaining an overview of all entities across this landscape is a formidable endeavour.
3. Fragmentation of advisory services.
The market is flooded with a colourful mix of service providers, including accountants, boutique firms, lawyers and niche specialists. Some multinationals assemble a patchwork of advisors, each using their own processes and documentation and at times arriving at complete opposite conclusions. The central compliance function thus may struggle when reviewing and acting on or across jurisdictions.
4. Resources are stretched.
Compliance was often at the back of the queue for capital and headcount. Although that is rapidly changing, when budgets tighten, compliance is one of the first to be squeezed. This dynamic exerts yet more pressure on performance.
5. New technology, such as robotic process automation and big data analytics, is arriving.
Compliance teams are engaged in digital transformation as much as CIOs, but laws might not go at the speed of technology, forcing compliance to adapt while remaining in a pending situation of status quo until the regulators catch enough speed.
6. Tax authorities are getting tougher.
The words “fraud” and “evasion” are what compliance departments are faced with every day when searching, documenting, reviewing, rejecting, etc., but here as well, when explaining to the boards the increase in compliance driven processes to combat – in form and in substance – any shape of tax evasion. When needed, they even jump to the table with regulatory bodies and in some cases personally face legal consequences.
7. There are rising demands from third-parties.
The press is increasingly interested in compliance stories. And investors watch as well. They will steer clear of error-strewn companies affecting at times share price value and thus diminished capital-raising powers.
The combined impact of these pressures is that an industry struggling to meet expectations within extremely short periods to comply with the old, the new and the soon-to-arrive leaves, unfortunately, room for mistakes.
Naturally, once the stresses are understood, solutions meeting the specifics of each company can be put in place.
Organisations may rely too often on weaker compliance structures. A shift to a global framework may be one of the answers, with properly centralised supervision.
Technology can ameliorate the pressure on compliance teams, when supplemented with strategic support processes.
Compliance is now too complex to approach in an ad hoc manner. A transition to sturdy frameworks seems overdue. The scale of the challenge ought only to accelerate the understanding of the need to adopt new solutions.
This piece was originally shared by TMF Group and is republished here with permission. Learn more about TMF Groups’s Corporate secretarial services here.
[1] Foreign Account Tax Compliance Act
[2] Common Reporting Standard
