Don’t get stung by the true cost of regulation enforcement

From concerted efforts to clamp down on greenwashing claims, to increased fines for water contamination or tighter controls on hazardous chemical use, governing bodies are taking steps to empower enforcement agencies to hand out stronger punishments for violations. But fines and criminal charges aren’t the only potential repercussions for non-compliance – public scrutiny, ‘cancel culture’, and investment withdrawal are risks for companies that don’t adhere to legislation or meet societal expectations. 

In this article, we’ll explore examples of regulation changes aimed at making companies more accountable for non-compliance, the types of enforcement being used, and the impact these can have on organizations. 

Times are a-changin’: The evolving regulatory landscape

When it comes to the repercussions of compliance failure, historically there has been some degree of leniency, with companies served with ultimatums and deadlines to get things in order, rather than punitive enforcement as a first course of action. But according to announcements from various agencies around the world, this is likely to change. Initiatives, such as the EU proposal for a directive on green claims and increased water pollution fines in the UK, are distinct examples of how governing bodies are taking definitive action to motivate organizations to take a more proactive view of their operations. 

Organizations are experiencing increasing scrutiny of their operations, with calls for more inspections and firmer enforcement. Fines, such as those the EPA issued to RSCC and Seal Shield in 2023, illustrate agencies’ hard stance against compliance violations. Similarly, new initiatives and directives are laying the groundwork for further rigorous action — as in the case of the US Office of Environmental Justice’s One Clean Houston initiative. 

How are regulations enforced?

There are several ways in which regulating bodies can enforce legislation, with varying impacts. Here are some examples of the most common and significant ways non-compliance can affect organizations.

Fines

Serious regulatory infractions can result in fines for businesses. The size of these can vary, depending on several factors: 

• The size of the organization 
• The nature of the non-compliance 
• The severity of the infraction 

Failure to report and/or comply with the EU’s Corporate Sustainability Reporting Directive (CSRD), for instance, can result in fines of up to EUR 10 million, or 5% of the company’s annual revenue. In January 2023, the US Occupational Safety and Health Administration (OSHA) increased the maximum penalties for serious violations from $14,502 (to a maximum of $145,027) to $15,625 (to a maximum of $156,259). 

Criminal charges 

While less common, criminal convictions that may involve prison sentences can be — and have been — handed down. In one case in 2022, after repeated air and water emission violations, one US manufacturing organization was penalized with approximately $8 million in fines, while several of its senior managers were sentenced to prison terms ranging from 6 to 70 months for environmental crimes. 

This may be a relatively extreme case, but it’s certainly indicative of the serious risks prolonged non-compliance can entail for businesses and individuals alike. 

Reputational damage 

In the business world, reputation is everything, or so they say. While this may not be entirely true, it undeniably plays a huge role in the success of a company, particularly regarding growth. Depending on the type and extent of an infraction, a company can potentially see a crippling impact on its reputation, especially if it gets picked up by mainstream media or goes viral on social media. 

For business-to-customer (B2C) and business-to-business (B2B) organizations alike, PR and public scrutiny are major influences on success. B2C companies can expect drops in sales or subscriptions, potentially an exodus of current clients, and may in extreme cases even experience a boycott — something that has been made far more actionable, effective and impactful in the ‘cancel culture’ of the digital age, as evidenced by the staggering number of active boycotts listed by Ethical Consumer. 

While B2B organizations may not experience such aggressive responses from the public, other companies could dissociate from them in fear of becoming embroiled in scandal, or to maintain their own ethical and compliance standards — especially if the relationship was, or would be, as part of a supply chain. Regulatory non-compliance by association (for example, receiving parts or solutions that are non-compliant in one way or another) is fast becoming the next issue businesses need to tackle, after resolving their own potential difficulties. 

Costly reparative measures 

Often, the initial result of regulatory enforcement is an order to fix the problem. This may involve making changes to processes, policies or products, or it may require something more immediate, such as issuing recalls. All of these repercussions carry a cost -– some greater than others. In most cases, orders for changes will be given a strict deadline and be followed up with rigorous inspections to ensure compliance with them. 

In 2018, several South Korean children’s product manufacturers had to recall 60 products — largely toys and clothing — due to exceeded substance levels, immediately pulling them from the market. The implications of such a drastic move is self-evident: production has been completed and paid for, but the products can’t be sold. Not only that, but there’s also the costs of retrieving unsold items and reimbursing sold ones, then destroying or disposing of the items. Production processes then need to be addressed to avoid a repeat violation.  Lastly, production can start again, but potentially at a greater cost, depending on the new process. 

More recently, the US Consumer Product Safety Commission (CPSC) announced they’ll be adopting a recent update to the ASTM F963 toy standard safety. Declared on 18 January 2024, this update incorporates new restrictions of five phthalates identified in children’s toys. The revised law details the requirements for specific chemicals used in the materials of toys. Due to take effect from 20 April, this update will supersede the 2017 version of the rule, and will therefore become the mandatory standard for toy development. Recalls of many children’s toys will skyrocket, as this revision to the original 2008 law will force companies to withdraw long-standing merchandise to comply with the changing regulations in the health and safety of chemicals and chemical products. This can represent huge financial losses for businesses.  

Avoid enforcement — take preemptive measures

Put simply, the only way to avoid regulatory enforcement is to know the regulations you need to comply with — and comply with them. 

A proactive approach means having a robust compliance management program that spans across an organization, covering every jurisdiction and facility, from the directorate to management, to finance, administrative, and facilities. Every department is involved, with transparent policies and procedures that can be understood and followed by all. 

Companies need to have a clear view of the current regulations that affect operations and how these are being addressed across the business, but it’s also vital to stay informed of changes — both immediate and on the horizon. Keeping on top of everything that’s happening, as well as understanding the implications and how they might apply to your business, is a seemingly gargantuan task. But with expert insights on the latest regulatory news, concise interpretations of legislative changes, and comprehensive professional development, you can ensure your business has all the knowledge and guidance it needs to maintain regulatory compliance.