Establishing legal readiness can be burdensome for any business, especially with the fast-moving requirements. Failure to comply can result in serious repercussions, ranging from operational disruptions to substantial fines. Such penalties for non-compliance not only cause costly legal issues but also impact the overall stability of the business.
In this article, we will explore what does legal compliance mean, the legal requirements of compliance, and the evaluation steps to help businesses stay legally compliant.
What is legal compliance?
Legal compliance refers to the act of an entity adhering to the laws and policies that are significantly relevant to the sector. This often requires companies to conduct their businesses in accordance with the local, national, or global laws. On top of that, the legal compliance definition calls them to adapt to the changing laws and maintain compliance at all times.
Staying legally compliant typically requires companies to conduct audits across all departments on a regular basis. This also minimises negligence and legal penalties that come if one does not follow the laws. Not complying with legal rules can expose a company to the chance of legal fines, or worse, temporary termination of trading licenses.
Why is legal compliance important?
It is widespread knowledge that non-compliance with laws results in various legal consequences. Failure to comply can cause operational shutdowns, financial fines, reputation damage, and, in some instances, even lead to criminal charges. This is why everyone — from small businesses to multinational corporations — must make sure they stay legally compliant.
Specifically, other reasons why legal compliance is important include:
- Preserves the rights and interests of the organization and the individuals within it.
- Minimizes financial exposure by avoiding statutory fines, civil penalties, and compensatory damages.
- Protects the company’s assets from seizure, forfeiture, or freeze orders issued under statutory authority.
- Maintains social order and stability to prevent any conflict or disputes.
- Ensures proper execution of compliance-related contract clauses, preventing indemnification claims or liquidated damages.
- Promotes ethical and responsible behavior within the organization, while fostering trust in relationships and transactions.
- Reduces litigation risk by creating a defensible record of regulatory conformity and due diligence.
Legal Compliance vs. Regulatory Compliance: A Comparison
In general, compliance refers to the process of ensuring that a business adheres to any legal and regulatory requirements. While related, there are distinct differences between legal compliance and regulatory compliance.
Legal compliance is the process of adhering to applicable laws and internal policies, while regulatory compliance focuses on meeting industry-specific standards or rules by regulatory bodies. Here’s a comparison table for you to understand their differences better.
| Aspect | Legal Compliance | Regulatory Compliance |
|---|---|---|
| Source of Authority | Statutes, acts, and codes that are enacted by a legislative body (e.g., U.S. Congress, UK Parliament). | Standards, rules, and directives issued by government agencies or industry regulators under legislative authority. |
| Scope | Broader scope that covers all obligations imposed by law, such as criminal, civil, labor, and so on. | Narrower scope that focuses on sector-specific operational or procedural requirements. |
| Enforcement Body | Judicial system: courts, prosecutors, and law enforcement agencies. | Regulatory authorities: U.S. SEC, FDA, OSHA, UK FCA, etc. |
| Penalty for Non-Compliance | Criminal prosecution, civil lawsuits, statutory fines, injunctions, or imprisonment. | Administrative fines, operational restrictions, license suspension or revocation, mandatory remediation orders. |
| Change Process | Requires formal legislative amendment, which is often slow, politically driven, and subject to multiple review phases. | Updated or revised by the issuing agency within its delegated authority, which allows for more rapid amendments. |
| Documentation | Codified law in national or state legal codes. | Agency regulations, compliance frameworks, and enforcement guidance. |
What are the legal requirements of compliance?
Legal compliance is typically not a one-size-fits-all. Companies may face unique laws and policies, depending on the nature of their services or products, the country or state they operate in, or even the data they handle. Below are some legal requirements that companies often encounter.
1. Compliance Management Practices
Legal compliance is not just about obeying external laws, but it’s also about creating internal systems for risk management. Drawing from the U.S Department of Health & Human Services (OIG) guidance, some structural elements to note are:
- Documented standards, policies, and procedures
- Dedicated compliance administration team
- Screening processes for employees, vendors, and agents
- Effective communication, training, and education
- Continuous monitoring, internal reporting systems, and audits
- Disciplinary procedures for violations
- Investigations and remediation protocols
Legal compliance also generally requires written policy documentation like manuals and handbooks, as well as internal governance policies and actual business practices.
2. Audit, Monitoring, and Risk Mitigation
Internal and external audits are crucial as they assess how well a company fulfils statutory and policy obligations. An audit lifecycle typically follows:
- Planning (defining scope)
- Fieldwork (collecting documentation, system analysis)
- Reporting (documenting gaps and findings)
- Remediation (addressing non-compliance and tracking improvements)
Some external providers offer legal and compliance audits across industry-specific laws (or those relating to data privacy or financial regulation). Working with such experts can help in identifying legal risks and implementing corrective controls.
At the same time, monitoring helps ensure compliance across the company remains effective over time. Generally, this involves tracking of regulatory obligations, internal controls, and operational processes—all supported by periodic control testing.
Lastly, risk mitigation is another requirement a company shouldn’t skip. It is recommended to conduct risk assessments, classify risks by severity, and implement preventive or corrective measures. Documented risk treatment plans and escalation protocols are essential to reduce liability exposure and ensure compliance with legal standards.
3. Operational and Structural Requirements
Businesses are generally required to meet both external (e.g., filing taxes, government forms) and internal (e.g., corporate minutes, operating agreements) compliance needs. Corporations are expected to:
- Hold regular shareholder and director meetings
- Document meeting minutes
- Maintain bylaws and track stock or membership interest transfers
For example, federal grants, such as those from the National Endowment for the Arts (NEA), extend operational and structural requirements into the funding context. Accepting grant funds isn’t just a financial transaction but also a legal obligation for a company to maintain governance structures.
Legal Compliance Requirements by Industry
Legal compliance requirements may also vary depending on the industry a company is in, and different statutes govern each. To stay legally compliant, here are some regulations that companies should comply with:
1. Healthcare
- HIPAA (Health Insurance Portability and Accountability Act) — Protects patient health information through privacy, security, and breach notification rules.
- CMS & Medicare/Medicaid — Involves regulations for accurate billing, reimbursement, and fraud-prevention.
- Food and Drug Administration (FDA) Regulations — Governs pharmaceuticals, medical devices, and clinical trials.
2. Financial Services
- Sarbanes-Oxley Act (SOX) — Requires accurate financial reporting and internal controls for public firms.
- Dodd-Frank Act — Establishes consumer protections and financial stability oversight.
- Bank Secrecy Act (BSA) / Anti-Money Laundering (AML) — Requires transaction monitoring and reporting of suspicious activities.
3. Technology and Data Privacy
- General Data Protection Regulation (GDPR) — Involves EU-wide privacy and data protection rules.
- Cybersecurity Standards (NIST, ISO 27001) — Provides risk management frameworks for data protection.
4. Nonprofits and Grant-Funded
- Internal Revenue Service 501(c)(3) Rules — Involves tax-exempt status requirements, prohibits certain political activities, and mandates annual reporting.
- Federal Grant Compliance (e.g., NEA, NIH, NSF) — Requires recordkeeping, financial reporting, and compliance with cross-cutting statutes (e.g., Drug-Free Workplace Act, labor standards).
- Office of Management and Budget (OMB) Uniform Guidance (2 CFR 200) — Establishes administrative requirements, cost principles, and audit standards applicable to recipients of federal awards.
5. Construction and Real Estate
- Occupational Safety and Health Administration (OSHA) Construction Standards — Mandate safety controls for construction sites, including fall protection, equipment operation, and hazard communication.
- Environmental and Zoning Laws — Govern land use, building permits, and environmental review processes to ensure lawful and sustainable development.
Overall, the scope of requirements is broad and multidimensional. For insurance, businesses generally must comply with frameworks like labor laws, tax codes, environmental statutes, or data protection acts.
How to Evaluate Legal Compliance for Businesses
Legal compliance evaluation is essential for every company aiming to avoid costly legal penalties. Besides ensuring your company operates within the law, this action significantly helps in maintaining effective corporate governance. Here are the steps in evaluating legal compliance for your business.
1. Understand the relevant legal framework
One thing that every company needs to remember is that legal compliance is not universal. It varies across jurisdictions (EU, U.S.), industries (healthcare, finance, manufacturing), as well as activities like data privacy, environmental law, anti-corruption, and so on.
It is also ideal to look into different authoritative resources, such as:
- ISO 37301:2021 is a Type A international standard that outlines concreate requirements and guidance for creating and continuously improving a compliance management system.
- The U.S. Department of Justice’s Evaluation of Corporate Compliance Programs (ECCP) also outlines principles the DOJ utilizes to assess corporate compliance, from design to implementation.
Before drafting any policies, it is also recommended to compile a map of relevant obligations. For instance, GDPR and HIPAA for data protection, or the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act for anti-corruption.
2. Create internal policies and procedures
The next step is to operationalize those legal rules into written policies and procedures in your company. Think of it as translating legalese into day-to-day guidance that everyone in the organization can fully understand and adhere to.
International standards like the ISO 37301 provide structural elements like scope definition, roles, documentation, procedures, and risk-based control — all tied into the PDCA (Plan–Do–Check–Act) cycle. As for a GDPR-aligned data protection policy, it is advised to include:
- Personal data categories
- Retention periods
- Data subject rights handling
- Breach reporting (e.g., 72-hour timeline)
3. Implement regular compliance audits
Compliance policies can only become meaningful if they are consistently followed. This is why implementing regular compliance audits is imperative and typically required. For instance, a financial entity might conduct quarterly anti-money laundering audits to comply with the Bank Secrecy Act.
An auditing process must follow standards such as ISO 19011:2018, which covers audit planning, evidence collection, and reporting. As for high-risk areas like cybersecurity or third-party onboarding, it is ideal to have quarterly audits. Annual audits are recommended for lower-risk domains.
4. Develop compliance violation actions
Another critical step is to establish predefined responses for when violations occur. No compliance system is perfect, so a company must be able to know how to respond to violations, not just detect them. It is advisable to have escalation tiers, from retraining for minor breaches to regulatory reporting for serious infractions.
In general, different severities of violations require specific actions, may it be verbal or written warning, performance review, or suspension. In terms of escalation, it can go from compliance or HR review, executive involvement, to reporting to the regulator. For instance, if you’re in the pharmaceuticals sector, failure to follow Good Manufacturing Practices (GMP) should be reported to authorities like the U.S. FDA or the European Medicines Agency.
5. Leverage technology to manage compliance
Many companies now utilize technology for compliance management or to help with oversight. There are Governance, Risk, and Compliance (GRC) platforms that can automate regulatory change tracking, policy acknowledgements, audit scheduling, and incident management workflows.
Additionally, there’s board management software like Convene board portal that can support better oversight by streamlining secure document management and providing real-time visibility into compliance dashboards or risk reports. In fact, the 2024 revision of the DOJ’s Evaluation of Corporate Compliance Programs (ECCP) stresses that compliance functions should be well communicated and accessible.
6. Regularly check compliance measures
Lastly, keep in mind that compliance evaluation is an ongoing cycle. Laws and regulations evolve, and so must internal measures. Implement continuous monitoring and regular program reviews. Your key performance indicators may include average resolution time for compliance incidents and percentage of audit findings closed within target deadlines. This helps your compliance program be effective in practice. After all, continuous improvement is a formal requirement in ISO 37301 Compliance Management Systems.
Frequently Asked Questions About Legal Compliance
Is it necessary to document compliance efforts?
Yes. Documenting compliance efforts is essential as courts and regulators don’t just care whether your business “intended” to comply. They typically look for tangible evidence that compliance activities were performed. For instance, in employment law disputes (e.g., harassment claims), having signed disciplinary records can demonstrate “good faith efforts”, which may help reduce penalties or liability. Some examples of compliance documentation are:
- Written policies and procedures
- Training completion logs and sign-in sheets
- Internal audit reports and risk assessments
- Incident response logs
- Vendor due diligence records
Can outsourcing functions transfer legal compliance responsibility?
No. Outsourcing does not transfer legal liability. For instance, even if your company’s payroll is outsourced, you (as employer) are still legally responsible for accurate tax filings. Errors by the vendor can still result in IRS penalties for the company. Also, in data protection laws, your business (as data controller) remains legally responsible during data mishandling even if you contracted a cloud vendor to store such data.
Can ignorance of the law ever be a valid defense?
Generally, no. Courts apply the principle of ignorantia juris non excusat (ignorance of the law is no excuse). Limited exceptions may be present, particularly when a rule is vague or no clear guidance exists. Courts may then reduce penalties.
Convene Board Portal: Your Partner to Stay Legally Compliant
With fast-evolving laws and stricter legal requirements, staying legally compliant has become increasingly complex for businesses today. Legal compliance pushes organizations and boards not just to make the right decisions, but also to ensure every process—from documentation to record-keeping—is handled with accountability. This is where board portal solutions come in.
Convene, a top board portal software, aims to help boards establish an auditable and legally compliant framework for board activities. Say goodbye to fragmented manual systems, and say hello to streamlined compliance tasks. Convene offers advanced board portal features that can help you with:
- Tired of chasing accurate meeting records? Convene takes care of it for you. Automatically generate meeting minutes and store them in a secure, centralized hub — a built-in audit trail you can trust.
- Worried about safeguarding sensitive files? With our enterprise-grade encryption and granular access control, Convene board portal locks down your board documents to reduce the risk of breaches and leaks.
- Need to prove accountability? Get a crystal-clear record that satisfies legal requirements through Convene’s e-signature and secure voting tools.
- Drowning in multiple document versions? Convene’s Live Edit and version control keep everyone on the same page, literally. Directors always work from the latest document version.
- Struggling with retention rules? With Convene board portal, it’s now easier to archive and customize retention policies, keeping you aligned with jurisdiction-specific requirements.
Want to know more about Convene board portal and how it can help you maintain legal compliance? Book a demo with our team today!
Jielynne is a Content Marketing Writer at Convene. With over six years of professional writing experience, she has worked with several SEO and digital marketing agencies, both local and international. She strives in crafting clear marketing copies and creative content for various platforms of Convene, such as the website and social media. Jielynne displays a decided lack of knowledge about football and calculus, but proudly aces in literary arts and corporate governance.
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