Consequences of Regulatory Noncompliance

The regulatory landscape is constantly changing as regulators respond to new technologies and threats each time. In such conditions, business can be quite difficult. Fines and sanctions can cause severe damage to the enterprise, and lead to the business termination. In this article, we will walk you through what noncompliance is, and look at what negligence in compliance with the legal regulations that your company must operate under, can mean for your business.

What is noncompliance in business?

The meaning of what such a noncompliance is, obviously, is a confirmed fact of noncompliance by a legal entity with obligations or requirements that are dictated by regulatory documents, standards applied to this entity, or directly by regulatory authorities. A breach occurs every time a business fails to comply with a requirement. The smallest details can attract the attention of regulatory bodies, especially if the company operates in highly regulated industries such as finance, healthcare, construction, energy and transport.

A lot of laws, which, at first glance, contain only specialized provisions, also include requirements for IT departments. More specifically, in terms of information security, these can be rules for ensuring confidentiality, security of storage and transmission of information, requirements for employees and management, the availability of certain technical means and technologies, etc. Therefore, in order for a business to act within the framework of legal norms, one must be sensitive and pay sufficient attention to this.

General consequences of regulatory noncompliance

It is possible to identify the main consequences that a business will face sooner or later if regulatory requirements are not met. Let us take a closer look at them.

Penalties and fines, income loss

Companies that fail to comply with regulations may be subject to fines and sanctions. In some cases, fines can reach tens of millions of dollars. Also, the company, as a result of sanctions, may lose part of its income. At the same time, it is one of the main factors for regulatory compliance.

Damaged reputation

Neglect of regulations, loss of confidential customer or partner information, and negative media coverage can cause irreparable damage to business reputation, as well as undermine the credibility of a company or brand and limit potential opportunities. Also, the enterprise may have difficulties in attracting investments and retaining valuable personnel. These are far-reaching consequences, which, in the worst case, can lead to the business termination.

Audits

If regulators suspect any violations, they may require a thorough review of business processes, documentation and reports. An audit is always a voluminous and lengthy procedure that requires financial expenses and the attention of the employees, which in turn also negatively affects the company’s income.

Business interruption

In the best case, interruption of business processes may be partial, however, in this case, business productivity will decrease. If noncompliance with regulations occurs frequently or is of a serious nature, the company may be forced to suspend operations. Sometimes, this can be fatal to a business.

Piercing of corporate veil

Many companies are designed so that there is a legal separation between the actual legal entity, its assets and liabilities, and the owners of the business, and its management. However, if the violation of the law was serious or had dire consequences, the court may decide that the beneficiaries or the management of the company must be held personally liable.

Legal actions

Lawsuits against a business are common if the company is negligent in its obligations. As mentioned above, the court can hold the owners of the enterprise and its management liable. This liability may not be limited to financial compensation and may go as far as imprisonment.

Loss of business

Due to noncompliance with legal norms, regulators can take such drastic measures as ordering the organization to stop its activities, and completely liquidate the business. This can happen if the company has serious problems with the law, or often commits offenses.

Consequences of noncompliance with certain specific laws and standards

GDPR

The GDPR is a very complex piece of legislation that is strictly enforced in the EU. In case of noncompliance with the GDPR, the consequences may be as follows:

1. Warning — in case of a potential violation;
2. A fine of up to 20 million euros, or 4% of the total annual business turnover worldwide, a reprimand or a ban on data processing — if an offense has been committed.

In this case, in the case of an offense, the consequences can be combined. For example, in addition to a ban on the processing of personal data, a fine may be imposed as an additional measure of legal protection. It is also worth noting that the law takes into account that companies can be organized as a group. Therefore, the entire group can be fined if one of the enterprises violated the GDPR. Accordingly, the size of the fine will take into account their total annual turnover around the world.

If your business operates within the scope of the GDPR, please consult with cybersecurity experts to find out if your business is compliant or confirm it. Please note that ESKA experts have special tools that allow you to automate and simplify the process of collecting evidence of GDPR compliance.

PCI DSS

Fines for noncompliance with PCI DSS requirements can range from $5,000 to $100,000 per month, depending on the size of the company and the extent and severity of the violation. The credit card companies, which, in fact, introduced this standard, charge fines. Interestingly, even if a company fully complies with all the requirements of the standard, this does not guarantee it full protection, and card issuers can still fine the company, albeit to a lesser extent.

In addition, additional sanctions may be applied, for example, an increase in rates charged by payment systems and banks, compensation to customers, etc. Also, one should not forget about indirect consequences that do not go beyond the requirements of the standard, such as worsening relations with banks, loss of confidence and negative impact on the company’s reputation.

HIPAA

Noncompliance with HIPAA requirements can result in fines ranging from $100 to $50,000 per violation. The maximum fine is $1.5 million per calendar year of violation. The law clearly defines how the amount of the fine varies, there are four tiers in total:

1. First tier: the company did not and could not know about the violation. In this case, the amount of the fine ranges from $1,000 to $50,000 per incident.
2. Second tier: the company knew about the incident, or showed insufficient diligence, acted with deliberate negligence. The fine varies from $1,000 to $50,000 per incident.
3. Third tier: the company acted with willful negligence. The fine also varies from $1,000 to $50,000 per incident.
4. Fourth tier: the company acted with willful negligence and did not correct the violations. The minimum fine is $50,000.

Noncompliance in the healthcare sector is usually legally punished quite severely. In all cases, the maximum fine can be up to $1.5 million.

SOX

The Sarbanes-Oxley Act, in addition to provisions relating to finance departments, accountants and auditors, also contains requirements for IT departments. Sanctions for failure to comply with these requirements may include fines as well as delisting the company from public stock exchanges and cancellation of D&O insurance policies. Also, under the law, senior company officials who provide incorrect documentation for SOX compliance certification can be fined $5 million and imprisoned for up to 20 years.

ISO 27001

Since ISO 27001 is a voluntary standard, it does not provide for any significant penalties for noncompliance with the requirements of the standard. However, if a company has achieved ISO 27001 certification and does not comply with the requirements of the standard, it may be deprived of the certificate. In doing so, the auditors describe the nonconformities, provide evidence of the problem, and summarize what actions the organization should take in order to regain certification.

This can happen unintentionally, for example, if a company implements new security policies or tools, or hires employees, and does not provide them with skills training in accordance with the standard.

To prevent this from happening, you can hire experienced professionals to check how your security system is organized. By the way, ESKA specialists use automated tools that speed up and facilitate the certification process. Also, our team can prepare your company from scratch for an audit and obtaining an ISO 27001 certificate.

How to stay compliant?

Due to the fact that modern laws governing the activities of companies often contain a huge number of requirements, it can be difficult for enterprises to understand the legal field. In particular, this applies to highly regulated industries. However, business participants must clearly understand their obligations in order not to fall into even more difficult conditions. As we said above, the consequences can be varied, significant and severe. Multimillion-dollar fines for information leakage and noncompliance in banking and finance are normal.

Therefore, regardless of the size of your business, you need to take care to mitigate risks and make sure that your information security practices and approaches are comprehensive and reliable. Regularly check the degree of information security of your company, and stay up to date with the latest changes in the legal field, as well as in the field of information technology.

You can also enlist the support of specialists to solve problems related to cybersecurity. If you still have any questions, please contact us in any way easy for you, or leave your contact details in a special form on our website, so that we can set a convenient time for a consultation.