Compliance – Definition and Fundamentals

3 min read
Aug 9, 2023 12:21:00 PM

Compliance refers to the adherence to all legal regulations and internal guidelines of a company and its employees. Businesses must take necessary measures to meet the established regulatory standards. By doing so, they gain the trust of stakeholders and maintain it. The importance of compliance in the business world cannot be emphasized enough.

What is Compliance?

KYC translates to “Know Your Customer”. Within the scope of KYC, companies collect legally relevant data about their customers. Ideally, this data is continuously reviewed to ensure its accuracy and up-to-dateness. Through KYC, companies gain a more comprehensive understanding of their customers, their identity, and their business history.

The term “Compliance” translates from “to comply with” as adherence to the law or conformity to rules and refers to the observance of applicable rules and laws within a company. It includes country-specific laws, guidelines from regulatory authorities, and internal company policies. Adherence to compliance can be supported by a multitude of instruments and processes. The goal is to identify, clarify, or prevent misconduct or violations at an early stage.

Legal and Ethical Compliance

Compliance encompasses various aspects that are crucial for businesses. One can differentiate between legal and ethical compliance.

  • The legal aspect of compliance refers to the adherence to laws and regulatory provisions. Companies must ensure that they respect all applicable laws, whether on a national, regional, or international level. This also includes that companies transparently disclose their business practices to ensure the accuracy and reliability of their financial reporting.
  • The ethical aspect of compliance refers to adhering to ethical standards and values. Companies should act responsibly and ensure that they do not support unethical practices such as exploitation or discrimination.

Who is Affected by Compliance?

Compliance affects every company, regardless of its size or industry. The responsibility lies not only with the management but also with the employees. However, the management is responsible for setting guidelines and ensuring that they are understood and followed by all involved. Employees must act daily according to applicable rules and regulations. External stakeholders, such as customers, suppliers, investors, and regulatory authorities, are also affected by compliance. In other words, everyone associated with a company must adhere to legal and ethical standards.

Adherence to Compliance Requirements

Companies must ensure they have suitable processes, guidelines, and control mechanisms in place to ensure compliance with compliance requirements and to create a responsible business environment. Compliance tools and compliance management systems assist companies in adhering to compliance requirements.

Compliance Tools & Compliance Management Systems

Compliance tools refer to specific software or applications that assist companies in implementing compliance measures. These tools offer solutions for individual compliance requirements, such as documentation, monitoring, training, or reporting. Compliance tools help businesses automate compliance-relevant processes, manage data, and keep an overview of compliance activities.

While certain compliance tools provide specific solutions to support individual compliance tasks, a Compliance Management System (CMS) offers a holistic approach to guide and monitor the company’s compliance strategy. Thus, setting up a CMS goes beyond the use of individual tools and encompasses the entire compliance infrastructure, including the organization, communication, and monitoring of compliance activities.

The effectiveness and efficiency of a CMS are closely linked to the choice of powerful and tailor-made tools to meet individual requirements. When set up correctly, it unfolds its full potential and becomes a valuable tool for the organization.

Example – Anti-Money Laundering Compliance Tool

Money laundering is one of the illegal activities where illicitly obtained funds are channeled into the legal financial cycle. By not adhering to money laundering regulations, companies risk serious consequences such as prosecutions, fines, or loss of reputation.

An effective solution for meeting anti-money laundering compliance requirements is the compliance tool “Transaction Screening” by Pythagoras Solutions. Financial industry companies use this learning AML software to compare their payment data with defined reference data, thereby identifying suspicious transactions. The software continuously monitors recurring partners for changes in the reference data and allows the application of special rules to usage texts. By checking transactions in real-time before they are executed, the tool helps identify and address potential money laundering activities.

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