Compliance is facing multiple challenges due to COVID-19, the economic downturn, as well as changing domestic and geopolitical priorities. In Asia, compliance functions might be more vulnerable to such macro-developments due to a relatively nascent culture of compliance, developing regulatory frameworks and, with few exceptions, the lack of significant enforcement.
This article addresses three topics: (I) impact of COVID-19 and the economic downturn on compliance, (II) key future challenges and (III) practitioners’ tips for maintaining effective compliance in such challenging times. The article is based on various contributions by the members of Temple Law School’s Center for Compliance and Ethics’ Asia Advisory Committee.
I. How have or will COVID-19 and the economic downturn impact compliance functions and implementation of your business?
“Postponing of compliance training is exactly the opposite of what I would recommend for any organization during an economic downturn.”[1]
At the outset, it is critical to emphasize the importance of successful compliance policies for long-term financial health. COVID-19 and the resulting economic downturn created at least three types of pressures on businesses that may compromise their compliance practices.
First, compliance budgets may come under pressure due to general financial hardship. Such budgetary restrictions may lead to pressure on compliance professionals to “accomplish the same with less.” While acknowledging the typical effects of economic downturn–halted recruitment and hiring and becoming generally “more cautious with expenses”–businesses should not reduce resources dedicated to compliance training during a recession.
Second, business challenges unique to the pandemic–such as restrictions on travel and face-to-face interaction–impact compliance procedures. “Compliance professionals have fewer opportunities to observe and interact with the workforce, which is a challenge as successful compliance practices must foresee potential issues on a real-time basis and work to prevent them from occurring.” Due diligence and corporate investigations have been and will be difficult due to challenges or delays in gathering certain information and evidence.
Third, the push to move operations entirely online within a short time-frame and amidst a recession has raised new challenges in the form of increased cybersecurity and information control risks. Ensuring compliance with data security measures will be a major hurdle for any successful compliance policy. “New issues arising from video conference tools or new technology solutions and information security control will need significant attention in the months and years to come.”
II. What key compliance challenges do you foresee in the next 3 years?
“During periods of transition, normal tracking processes are being suspended, postponed, or changed due to restructuring, transfer, and change in skills.”
Change or transition in corporate governance often creates temporary inconsistencies in enforcement and training. In the COVID-19 era, less face-to-face contact means that “training and regular interaction becomes more difficult,” and internal audits and investigations into misconduct may need to be prioritized. If some issues are put on hold, a backlog in internal investigative processes could have an impact long into the future. Last but not least, businesses may be more inclined “to cut corners” to survive in the challenging economic environment, including with respect to compliance.
In other words: “change creates opportunity to commit misconduct without being caught.” Thus, a corporate focus on “consistent messaging” throughout periods of transition will be critical to surviving these challenges. It will be necessary to coordinate between top and middle levels of management.
On the regulatory side, the burden of implementing and managing an effective compliance program is not expected to change. Although certain investigative processes may be delayed due to the pandemic response, “regulators are generally continuing their pre-pandemic investigations and pursuing the same enforcement goals.” At the same time, the EU Commission has pledged to introduce mandatory human rights and environmental due diligence requirements in 2021.[2] “It is currently unclear what exactly these requirements would be and what they would entail, however there is the expectation that the burden on compliance teams will further increase, and broaden to further encompass the E and S in addition to the G. ”
III. Tips for effective and efficient compliance in the current challenging business environment?
“COVID-19 is, in many ways, a great opportunity to consider looking back at the existing compliance framework, review priorities, and reassess the underlying risks with a fresh eye.”
Although COVID-19 has resulted in significant challenges, there may also be opportunities to reassess compliance policies and procedures in consideration of the weaknesses that have been exposed by the current business environment. There have been many uncertainties and disruptions resulting from the pandemic, but often these issues and trends have been reinforced by the “COVID-19 era,” rather than created by it.
Before COVID-19, the Japanese economy was projected to automate 27 percent of existing work by 2030, a necessary trend to combat predicted labor shortages due to population decline.[3] Now that there is even greater pressure to rethink business practices through automated processes, an organization’s failure to reassess historical policies and implement more effective compliance procedures as a result of this trend will cause major problems for long-term growth.
In addition, “corporate culture should always be a top priority to achieve efficient compliance. Organizations should leverage this challenging situation to solidify a positive and productive work culture.”
Corporate messaging should clearly and continuously encourage compliance to ensure its effectiveness. One suggestion is for a short and clear monthly communication “about desired behaviors that explicitly tell the employees what the company expects them to do […] rather than having an annual compliance conference, it is more effective to have a regular communication strategy with short monthly messages.”
Finally, it is critical to cultivate a cooperative and transparent relationship with regulators. Preemptive disclosure of any “obstacles that cannot be overcome” due to pandemic restrictions will show “thoughtfulness and effort” on behalf of an organization. Businesses must remember that “actions taken now may be judged later by regulators, without the benefit of hindsight and without clear memory of the then-extenuating circumstances.”
[1] Various members of the Asia Advisory Committee contributed to this article. Such contributions, for which the author expresses tremendous gratitude, will be provided in quotation marks without identifying specific source.
[2] European Parliament Working Group on Responsible Business Conduct, European Commission Promises Mandatory Due Diligence Legislation in 2021 (Webinar Apr. 29, 2020), https://responsiblebusinessconduct.eu/wp/2020/04/30/european-commission-promises-mandatory-due-diligence-legislation-in-2021/.
[3] Maya Horii and Yasuaki Sakurai, “The future of work in Japan: Accelerating automation after COVID-19,” McKinsey & Company (July 1, 2020), https://www.mckinsey.com/featured-insights/asia-pacific/the-future-of-work-in-japan-accelerating-automation-after-covid-19.
Alexander Dmitrenko is Head of Asia Sanctions, Freshfields Bruckhaus Deringer (Tokyo Office) and serves as the Chair of Japan Sub-committee of the Temple Law School’s Center for Compliance and Ethics’ Asia Advisory Committee, launched with the Temple Law Program in Japan last year. The Asia Advisory Committee is composed of compliance and ethics leaders from various sectors, including Amazon, Astellas Pharma, Ernst and Young, Freshfields Bruckhaus Deringer, FTI Consulting, Morgan Stanley, Olympus, Otsuka Pharmaceutical, Ropes & Gray, Sojitz, Tokio Marine Holdings, and Yahama Music. The author would like to convey gratitude to his colleagues Weronika Bukowski and Natalie Kupfer for their generous assistance with this article.