Companies risk large fines due to limited understanding of their compliance obligations

- Over 50% of businesses are unaware who regulates them

- 70% have never trained staff on diversity matters

- 87% believe the level of scrutiny has increased over the past 5 years

Companies are leaving themselves at risk of heavy fines or even the imprisonment of Directors due to a limited understanding of their compliance obligations, according to new research from law firm Nabarro.

The study shows that although companies are aware that regulators exist and that they are important, there is wide spread ignorance or confusion about the full range of the regulators and their powers. More than half are unaware that their business is regulated by the Environment Agency, the Office of Fair Trading or the Pensions Regulator, although all of these watchdogs have jurisdiction over every company operating in England.

Jonathan Warne, Partner at Nabarro comments: ìThe rapid increase in regulation and the consequent increase in the exposure to reputational and regulatory risk is one of the biggest worries for companies today. Maximising awareness and minimising risk is therefore paramount.î

The penalties for regulatory breaches are growing, with the Health and Safety Executive witnessing a doubling of the amounts fined to individuals involved in cases concerning fatalities in the workplace between 2000 and 2005. With the introduction of the Corporate Manslaughter and Corporate Homicide Act on 6th April, companies will also now face prosecution for manslaughter where their gross negligence leads to the death of individuals.

Yet despite this growing regulatory risk, the research reveals that companies are failing to train their staff about regulatory obligations. A startling 70% of companies admit that they have never run a training programme for their staff on diversity matters, in spite of the fact that employment tribunals have powers to hand out unlimited fines for discrimination cases. Financial compensation awarded at employment tribunals is increasing rapidly. For unfair dismissal, the highest fine in 2006 was 478,000 compared with just 75,000 in 2005.

Over 60% of businesses had never given their staff any training in pension regulations (60%), competition issues (68%) or environmental obligations (69%). In 2006 the Environment Agency reported successful prosecutions against companies totalling over 3.5 million in fines. This includes 29 prosecutions against individual company directors, holding them personally accountable. Two of these actions resulted in custodial sentences.

Recent cases demonstrate that companies that breach regulatory requirements will not only damage their reputation through negative publicity but also face substantial penalties. In February 2007, the German conglomerate ThyssenKrupp was fined over Ä479 million by the European Commission for its role in a price fixing scandal.

Jonathan Warne adds: ìMany regulators have the power to search premises and take away documents. In some cases, it is a criminal offence to fail to co-operate with an investigation. Businesses are therefore well advised to develop proper internal procedures to ensure that all staff are aware of the rights and obligations in these situations.

ìThe consequences for mistakes are severe and often the lapses come from employees below board level. Reputational risk is certainly a matter for board-level attention ñ and ultimately where accountability will lie ñ but it is also crucial that information is disseminated widely to staff who will, in large part, be the ones responsible for ensuring day to day compliance. It is disappointing, and perhaps surprising given recent high profile cases, that the majority of companies are still failing to train staff.î

Despite their apparent ignorance of compliance obligations, the majority of companies (87%) agree that the level of scrutiny and regulation facing them has increased over the last 5 years, often resulting in heightened workloads and a greater administrative burden because of tighter controls on internal procedures.