Compliance for Small Businesses

Compliance concerns affect companies of all sizes, but adhering to regulations and laws can be especially challenging for small businesses. These companies may not have the resources to hire dedicated compliance officers, so owners often find themselves trying to navigate such issues on their own. Key compliance issues are outlined below, along with suggested questions you can pose when on boarding a new partner.

Types of Compliance Concerns

In the US, both state and federal governments have written regulations and laws with major implications for compliance executives. These regulations are in place to prevent criminal or negligent activity, such as:

Forced Labor

Using slave labor or underage workers is against the law in most nations, but the problem persists in the United States and around the world. Your business shouldn’t be running afoul of forced labor laws, but are you certain the companies with which you do business are in compliance? Manufacturers that use forced labor often try to hide behind a less suspicious parent company. Or that supplier with the sales office down the street may contract work out to a country with weak labor protections. Small business owners who fail to conduct their due diligence may find themselves thrust into controversy if a supplier is accused of labor violations.

Corruption

Bribes and kickbacks are sometimes paid to steer contracts, expedite permitting, or otherwise curry favor with influential officials. Business owners must do their best to avoid even the appearance of impropriety. Identifying employees or associates with potentially unsavory ties to governmental decision-makers can reduce the risk of illegal payments or under-the-table deals made on your behalf. Concerns about corruption extend to business partners. Criminals want to keep their financial schemes out of the spotlight and may use complex business structures to hide their interests in your partner companies. Even if you have no intention of conducting illegal activity, a dishonest customer or vendor can put your own interests at risk. Should they be investigated or prosecuted for corruption, it’s unlikely that fulfilling their obligations to you will be a high priority. 

Money Laundering

While laws such as the Bank Secrecy Act are focused on ensuring financial institutions don’t participate in money laundering, vendors can still be hurt by customers, suppliers, or other third parties who are found to be “cleaning” cash for criminal organizations. Small business owners need to be aware of any prior money laundering by current business partners and also put safeguards in place in order to identify any future problems.

Health & Environmental

Prohibitions on the use of certain chemicals or practices can affect how a manufacturer sources materials or builds a product. It’s important to understand the specific regulations that apply to goods in your industry and how those might affect both customers and employees. Verifying the identity of a business can help you uncover areas of concern around health and product safety. Learning that a supplier owns a factory that has previously been cited for health and safety violations might prompt you to look for a new vendor. Health and environmental violations at your business or within your supply chain can cause lasting financial and reputational damage.

Business Identification: Trust, But Verify

One theme running through the compliance concerns above is the risk posed by business partners. Many businesses rely on the integrity of their customers and suppliers when it comes to compliance issues. However, it’s important to perform your due diligence. Here are several questions business owners should ask themselves when onboarding new companies or reviewing existing relationships:

Who owns the company?

It’s important to know who’s ultimately in control of a business, and this may not be as straightforward as it appears. That person or group is known as the beneficial owner (BO), and identifying them is crucial to compliance risk management. Your partner may operate as a subsidiary of a larger organization, or they may have accepted investment money from several sources who now own a percentage of the business. Many of these arrangements are transparent and legal, and they won’t raise red flags. However, a complicated business structure can also provide cover for criminal activity.

Does the company have a presence in high-risk countries?

Corruption and labor abuses know no borders, but some nations have an especially poor record in combating illegal activity. Businesses that source raw materials or labor from these countries may present a greater compliance risk than other firms. Risky geographies need to be taken into account when weighing risk.

Has the business ever been prosecuted for compliance violations?

Companies that have been penalized for illegal behavior in the past can often be identified using business information databases, legal documents, or media reports. It is incumbent upon management to do their due diligence to uncover any risky companies.

Small businesses are often hampered by a lack of resources when it comes to investigating other companies. Dun & Bradstreet collects and verifies business information that helps identify an organization’s key individuals, untangle corporate family trees, and flag potential compliance concerns. Through products like D&B Compliance, you can easily see whether partners have been found guilty of violations in the past and if they’re currently subject to any penalties or restrictions that could spell trouble for your business.

Compliance concerns encompass a broad range of issues, but small businesses can take advantage of the knowledge and resources available to them to minimize the risks to their business and livelihood.

Photo Credit: Cheggy, Twenty20