As a result, the cost and complexity of regulatory compliance is likely to increase, as is the value of relationships with regulators and local trading partners. Business resilience is becoming a key competitive differentiator for many companies facing such a volatile geopolitical environment with an increasing impact on trade, tariffs, ransomware, cybersecurity and mergers and acquisitions. You need to know and comply with many laws and regulations. A misstep can lead to costly and time-consuming court challenges. Compliance risk is the risk that a company has been determined to be in violation of already established laws or regulations. This can have many causes, including inadequate controls, negligence, and human error. Ensuring that a company is able to maintain compliance, and it is, can be a significant source of costs. As with regulatory risk, compliance risk management is an integral part of an organization`s overall risk management. Tax policy reforms can affect the bottom line of businesses and retail investors. Any changes in income tax legislation directly affect the revenues generated by the respective parties and may present new regulatory risks. Another type of regulatory risk would be stricter pollution standards for manufacturers or mileage requirements for automakers due to public concerns about climate change.
In this case, the risk may not come from corporate malpractice, but simply from a broader concern for the common good – in this case, the effects of climate change. To help legal leaders understand the new risk landscape as organizations begin to emerge from pandemic crisis mode, Gartner experts have identified four key topics that help explain the many risks they face. United Cacao operated the largest cocoa plantation in Latin America and launched an ambitious growth strategy in 2014 based on the rapid expansion of cocoa plantations in Peru`s Loreto region of the Loreto Amazon region. The company has raised capital in the equity and bond markets, including an initial public offering (IPO) on the London Stock Exchange`s alternative investment market. However, this aggressive expansion has violated environmental regulations. When environmental groups released satellite images showing that primary forests had been cleared for new plantations, Peru`s Environmental Investigation Agency investigated illegal logging linked to United Cacao`s operations. A subsidiary of United Cocoa has been ordered to cease operations due to illegal deforestation. These issues violate the London Stock Exchange`s commitment to the United Nations.
Sustainable Stock Exchanges and led to the delisting of United Cocoa from the alternative investment market in 2017. The company filed for bankruptcy the same year and equity and debt investors lost about $42 million. The concept of assessing and balancing risk to create value is not new or unique to listed companies and also applies to private companies, regardless of legal and regulatory requirements. Among the many types of business risks that businesses are trying to offset, but whose ineffective management could bring the business down, are: To mitigate the regulatory risk posed by reduced AAC rates and the PPR infestation, Canfor Corporation acquired additional sawmills and harvesting rights. They were located in areas not affected by PPD infestation or in areas with high AAC levels. Canfor also closed its sawmill in Quesnel, which became unprofitable due to limited wood supply. In addition, Canfor continued to acquire and operate sawmills in the United States where wood supply is not affected by PPS issues. In 2016, Lumber Liquidators, the largest hardwood retailer in the United States, was criminally charged with importing hardwood floors from China from illegally mined wood, in violation of the Lacey Act. Lumber Liquidators made false statements about the type and country of origin of imported wood and wood flooring products manufactured by Chinese suppliers from wood originally harvested in Russia and Myanmar. to make some of this timber illegal.
The company had to pay a $13 million fine, a $1.2 million fine for community service and detain assets related to illegal deforestation. She was also sentenced to a five-year probation period, during which she had to fund independent environmental audits to verify compliance with a new environmental plan and the Lacey Act. Companies need to be aware of their compliance risk at multiple levels, not just from the perspective of the Chief Compliance Officer (CCO). While the OCC and other compliance staff are responsible for reviewing all aspects of the organization`s compliance risk, including legal, regulatory, financial and technical risks, compliance risk extends to all levels of the organization, including information technology (IT). For this reason, the organization`s IT department must be involved in managing compliance risks. The Canadian wood industry has consistently faced challenges related to regulatory risks. Here, we look at how Canfor Corporation has been affected by regulatory changes and how it has overcome them. The mountain pine beetle (MPB) infestation has plagued the western Canadian wood industry for over a decade. The infestation has damaged the pines, reduced production and reduced product quality. In addition, the impact of the infestation on the wood supply has also led to regulatory changes in the allowable annual cut rate (AAC). The CAP rate determines the allowable harvest rate to ensure a sustainable harvest in Canada. The above factors reduced supply and led to the closure of the Canfor Quesnel sawmill.
In January 2019, Indonesia`s Supreme Court upheld a $69 million ruling against PT National Sago Prima, a sago-producing subsidiary of Sampoerna Agro, for the 2015 Riau wildfires. The decision set a legal precedent for similar damages actions against other companies. In October 2019, the Palangkaraya court ordered palm oil company PT Arjuna Utama Sawit to pay fines and damages equivalent to $18.6 million for fires that destroyed 970 hectares of forest in Central Kalimantan province. 3) Geopolitical competition and trade disruption A growing gap between what the public expects and what governments deliver creates tensions within and between societies. This widening gap indicates greater political volatility and country-specific approaches to economic and regulatory governance. Managing regulatory risk requires forward-looking strategic thinking and careful oversight of public opinion and the regulatory process in a particular sector. Compliance risk, on the other hand, requires knowledge of existing laws and regulations and a more systematic approach to verifying that the company is complying with all. As you can see, many of the above examples can represent regulatory risks that can have a direct impact on a company`s bottom line. In some cases, the effect is not easily observed, as with prescribed holidays and sick days. Sometimes regulatory changes can benefit investors or businesses. Minimum wage increases can be a critical source of regulatory risk, as they have a significant impact on businesses, especially if they hire large numbers of low-skilled workers.
Small businesses, in particular, suffer greater losses because they do not have access to economies of scale. Regulatory risk is the risk that a change in laws and regulations will have a material impact on a security, company, sector or market. A change in laws or regulations by the government or a regulator can increase the cost of operating a business, reduce the attractiveness of an investment, or change the competitive landscape in a particular industry. In extreme cases, such changes can destroy a company`s business model. Government and regulators often issue new regulations or update old ones. Examples of regulatory changes that may impact businesses or industries include: We have helped our clients make changes to organizational culture by developing and training compliance and risk management strategies and programs that have increased risk awareness and controls. To do this, we work within your operational infrastructure with existing staff and, where appropriate, external consultants to help you implement new systems and controls. We regularly advise publicly traded and private companies on enterprise-wide risk management and regulatory compliance issues that impact their business, including: Thank you for reading the CFI`s regulatory risk guidelines. Corporate Finance Institute offers a range of courses and resources that can help you expand your knowledge and advance your career! Check them out below: Lawsuits and legal claims filed by employees are on the rise, according to the Equal Employment Opportunity Commission (EEOC). Employees and applicants are protected from unfair treatment or harassment based on race, color, religion, sex, pregnancy, national origin, age (40 years of age or older), disability, or genetic information. It is also illegal to take revenge on an employee who complained of unfair treatment or participated in an investigation or prosecution.
The best strategy is usually to resolve customer disputes as quickly as possible – before they become legal headaches. It is becoming clear that regulatory risks and associated uncertainties were a major factor in the price decline observed between 2015 and 2016. Both companies faced risks in the form of potential tariffs and annual reductions in authorized reduction rates.
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