Compliance

Compliance with the LkSG and the CRDDD

The German Supply Chain Due Diligence Act (LkSG) is an important law that obliges companies to fulfill human rights and environmental due diligence obligations along their supply chains. This law, which came into force on January 1, 2023, aims to strengthen the responsibility of companies to comply with human rights and environmental standards in their global supply chains.

The LkSG applies to companies based in Germany that generally employ at least 3,000 employees. From 2024, this threshold will be lowered to 1,000 employees. Companies are obliged to identify and assess risks in their supply chains and take appropriate measures to minimize or eliminate these risks. This also includes setting up a complaints procedure that enables affected persons to report violations of due diligence obligations.

A central component of the LkSG is the obligation to prepare an annual report documenting the measures and results of the due diligence obligations. This report must be made publicly available and is reviewed by the competent authorities. Companies that violate the law face severe fines and sanctions.

The CRDDD (Corporate Responsibility Due Diligence Directive) is a planned EU directive that pursues similar objectives to the German LkSG, but at a European level. The CRDDD is intended to ensure that companies throughout the EU comply with human rights and environmental due diligence obligations along their supply chains. The directive is expected to contain stricter requirements and more comprehensive reporting obligations than the German law.

The introduction of the LkSG and the planned CRDDD mark an important step towards more responsible and sustainable corporate governance. Companies are now required to make their supply chains more transparent and actively contribute to improving working and environmental conditions worldwide. This not only represents a legal obligation, but also offers the opportunity to strengthen consumer confidence and remain competitive in the long term.

By complying with these regulations, companies can make a significant contribution to the promotion of human rights and environmental protection and at the same time improve their own reputation and market position.

Another significant advantage is the use of professional compliance advice. Such advice helps companies to understand and implement the complex requirements of the LkSG and CRDDD. Compliance consultants have the necessary expertise and experience to develop customized solutions that meet the specific needs and challenges of a company. They help to identify risks at an early stage and take appropriate measures to minimize them. In addition, they can support companies in preparing and reviewing the necessary reports and ensure that all legal requirements are met. This not only contributes to legal security, but can also help to increase the efficiency and effectiveness of company processes.

ESG compliance

ESG compliance is becoming increasingly important as a result of the Corporate Sustainability Reporting Directive (CSRD), as the directive places companies under a comprehensive sustainability reporting obligation. In addition, there is the Taxonomy Regulation (Taxonomy Regulation), which classifies economic activities according to their environmental impact and promotes sustainable investments. The new omnibus package of EU supplements, which is currently in the EU legislative process, will improve these regulations with regard to the transparency and comparability of ESG data. Companies must adhere to these requirements in order to remain competitive in the long term and secure the trust of stakeholders.

However, the omnibus package amends the CSRD and the Taxonomy Regulation. As a result of the change to the criteria in the CSRD, only large companies with more than 1,000 employees and a turnover of more than EUR 50 million or a balance sheet total of more than EUR 25 million will be required to report in future. However, companies that no longer fall under the CSRD can voluntarily report in accordance with a new simplified standard.

In addition, the application of the CSRD for large corporations has been postponed by two years to 2027, while small and medium-sized capital market-oriented companies do not have to apply the CSRD until January 1, 2028.

The scope of application of the EU Taxonomy Regulation is also geared towards large companies and contains a reduction in reporting obligations for SMEs. In addition, due diligence obligations will be limited to direct business partners and civil liability will be removed.

In addition, the omnibus package introduces a new de minimis threshold. The CO2 border carbon adjustment mechanism (CBAM) will only apply from an annual import volume of 50 tons of CBAM-relevant products. These changes are aimed at reducing the bureaucratic burden for companies and simplifying reporting obligations. This should benefit small and medium-sized companies in particular by relieving them of excessive regulatory requirements.

With these complex and ever-changing regulations, expert advice is essential. Experts can help companies understand and implement the new requirements in order to minimize legal risks and maximize reporting efficiency. Professional advice also helps to develop customized solutions that meet the company’s specific needs and structures.

Credit or liquidity risk compliance

In the business world, it is inevitable that companies will occasionally encounter customers who are experiencing liquidity problems or even have to file for insolvency. Such situations can pose significant risks to your own business. In this article, we will highlight the key strategies and measures that companies can take to minimize these risks while maintaining a fair and professional relationship with their customers.

Early detection and risk assessment

The first step in dealing with customers in financial difficulties is to recognize them early on. Companies should regularly monitor the financial health of their customers. This can be done by analyzing financial reports, credit scores and payment histories. Early warning signs such as late payments, frequent requests for payment deferrals, the arrangement of installment payments or a deterioration in creditworthiness should be taken seriously.

Communication and transparency

Open and transparent communication is crucial when a customer gets into financial difficulties. Companies should proactively seek a conversation and understand the customer’s situation. This makes it possible to work together to find solutions that are acceptable to both parties. Clear communication also helps to avoid misunderstandings and maintain trust.

Adjustment of payment terms

In some cases, it may make sense to adjust the payment terms to help the customer meet their financial obligations. This could include extending payment terms, agreeing installment payments or granting discounts for early payments. However, such measures should be carefully considered to ensure that they do not place an undue burden on your own company.

Collateral and guarantees

To minimize the risk, companies can demand collateral or guarantees from customers in financial difficulties. This could take the form of sureties, liens or other security instruments. Such measures provide additional security in the event that the customer is unable to meet its payment obligations.

Cooperation with debt collection agencies

If a customer is unable to settle their debts despite their best efforts, working with a professional debt collection company can be a sensible option. Debt collection agencies have the necessary resources and expertise to collect outstanding debts efficiently. This allows your own company to concentrate on its core business.

Legal steps and insolvency proceedings

In extreme cases, if all else fails, it may be necessary to take legal action or participate in the customer’s insolvency proceedings. However, this should be considered as a last resort, as legal disputes can be time-consuming and costly. In such cases, companies should seek the assistance of an experienced legal advisor to determine the best possible course of action.

Risks of insolvency avoidance for a company

Insolvency avoidance is a legal instrument that enables insolvency administrators to reverse asset transfers that took place before the opening of insolvency proceedings and could disadvantage creditors. This can entail considerable risks for companies that have done business with an insolvent company or a company in crisis.

Repayment risks

A significant risk of insolvency avoidance is that companies may be obliged to repay amounts that they have received from an insolvent business partner. This applies in particular to payments that are closely related to the insolvency or are suspicious for other reasons. This includes, for example, payments made as part of installment payment agreements or following a default summons.

Liability risks

Business partners of an insolvent company can be exposed to considerable liability risks. In particular, the insolvency administrator examines outflows of assets that have occurred in close temporal connection with the insolvency. If such payments are classified as unlawful, this can lead to considerable financial burdens for the company concerned

Long-term contestation periods

Insolvency avoidance can affect payments made up to ten years before the insolvency application is filed. This means that companies can also be held liable for transactions that took place a long time ago, which increases uncertainty and financial risk.

Complexity and legal uncertainty

Insolvency avoidance is a complex legal matter that is characterized by a large number of court decisions. This can lead to legal uncertainty, as companies may not know exactly which transactions are contestable and which are not. This requires careful legal examination and advice for which Complianceberater.team can provide the necessary expertise.

Monitoring legal changes as a compliance task

Adequate and effective legal change monitoring is crucial for companies to ensure that they always act in accordance with current legal and regulatory requirements. The requirements for such monitoring cover several aspects:

1. Comprehensive coverageMonitoring must cover all relevant areas of law that are of importance to the company. This includes national and international laws, regulations, directives and standards.
2. Early detectionAn effective monitoring system must be able to recognize planned or already adopted legal changes at an early stage. This enables the company to take measures in good time and prepare for the new requirements.
3. Analyzing the impactOnce legal changes have been identified, it is important to analyze their potential impact on the company’s business processes. This helps to identify compliance risks and plan appropriate measures.
4. Integration into company processesThe results of the monitoring must be integrated into the existing company processes. This can be done by adapting internal guidelines, training employees and making changes to business processes.
5. Documentation and traceabilityAll monitoring steps, from detection to implementation of measures, must be documented. This ensures that the company can prove at any time that it is meeting its compliance obligations.

Importance of effective monitoring of legal changes

Effective monitoring of legal changes is very important for several reasons:

1. Legal certaintyAn effective monitoring system enables companies to ensure that they always act in accordance with current legal requirements. This reduces the risk of legal violations and the associated sanctions.
2. Competitive advantageCompanies that can react quickly to legal changes have a competitive advantage. They can adapt their business processes in good time and thus avoid potential disruptions to business operations.
3. Trust and reputationA company that demonstrably fulfills all legal requirements enjoys the trust of its customers, business partners and supervisory authorities. This strengthens the company’s reputation and can contribute to a positive image in the long term.

Cost of monitoring legal changes

The effort required for effective monitoring of legal changes can be considerable and covers several aspects:

1. ResourcesComprehensive monitoring requires the use of qualified personnel who have the necessary legal knowledge and skills. This may include internal staff or external consultants.
2. TechnologyThe use of specialized software solutions can make the monitoring process more efficient. These solutions can provide automated notifications of legal changes and support impact analysis.
3. TrainingEmployees must receive regular training to ensure that they are informed about the latest legal requirements and their impact on their work.
4. DocumentationContinuous documentation of all monitoring activities and the resulting measures requires time and care.
5. CostsImplementing and maintaining effective legal change monitoring can involve significant costs. These include personnel costs, technology and training costs and possible external consultancy fees.

Effective monitoring of legal changes is therefore an investment in the future of the company that pays off by avoiding legal risks and ensuring compliance.

Risk analysis and risk management as a compliance task

In an increasingly regulated business world, risk analysis and risk management as a compliance task is crucial. Companies must ensure that they not only comply with legal requirements, but also identify and mitigate potential risks to protect their reputation and business continuity.

Definition of the risk analysis

Risk analysis is a systematic process for identifying and assessing potential risks that could affect an organization’s ability to meet regulatory standards. This process includes several key components, starting with effective risk identification methods such as audits, surveys and stakeholder interviews.

Risk management in the compliance context

Risk management in the compliance context refers to the systematic identification, assessment and documentation of potential risks that could affect the company’s reputation and have legal consequences. It focuses on four key aspects:

1. Identification of risks
2. Assessment of risks
3. Implementation of countermeasures
4. Monitoring and reviewing risks

Steps for conducting a compliance risk analysis

1. Identification of compliance risksThis includes identifying potential risks through audits, surveys and interviews with stakeholders.
2. Assessment of risksBoth qualitative and quantitative assessment methods are used to prioritize these risks based on their potential impact and probability of occurrence.
3. Implementation of countermeasuresAfter the assessment, suitable measures are implemented to mitigate the identified risks.
4. Monitoring and reviewOngoing monitoring and review of compliance risks is necessary to ensure effective risk management and compliance with laws and regulations.

Challenges in compliance risk analysis

Conducting a compliance risk analysis can present various challenges, including

• Complexity of regulatory requirementsThe constantly changing regulatory requirements can make it difficult to identify and assess all relevant risks.
• Resource constraintsPerforming a comprehensive risk analysis requires significant resources, both in terms of time and expertise.
• Technological integrationThe use of technology, such as AI and automation, can improve the efficiency and accuracy of compliance risk analysis, but requires careful implementation and monitoring.

The role of technology in compliance risk analysis

Technology plays a crucial role in improving the efficiency and accuracy of compliance risk analysis. By using AI and automation, companies can identify and assess potential risks faster and more accurately. This helps to optimize overall risk management strategies and ensure regulatory compliance.

Conclusion

Risk analysis and risk management as a compliance task are essential components of an effective compliance management system. By systematically identifying, assessing and mitigating compliance risks, companies can not only protect their assets, but also promote a culture of responsibility and ethical behavior.

TAX compliance in the digital era: challenges and opportunities

Digitalization has revolutionized almost all areas of business life in recent years, and accounting and tax returns are no exception. While digital transformation offers numerous benefits, it also brings with it significant challenges, particularly in the area of TAX compliance

1. data integrity and security:

Digitalization means that large amounts of financial data are recorded and stored electronically. This increases the risk of data loss and cyberattacks. Companies must ensure that their data is protected by robust security measures and that they comply with legal data protection requirements. With its expertise, the compliance consultant team not only stands for classic tax compliance, but also for data protection, IT security, etc.

2. complexity of the tax regulations:

Tax regulations are often complex and subject to constant change. Digitalization requires companies to regularly update their systems to ensure that they always comply with the latest legal requirements, such as the principles of proper accounting (GoBD) and their supplementation with the introduction of e-invoicing. This can be particularly challenging for small and medium-sized companies that may not have the necessary resources.

3. automation and susceptibility to errors:

While automation makes many processes more efficient, there is also a risk that errors in the automated systems can go unnoticed. A small error in the software can lead to significant problems with tax returns. It is therefore important to carry out regular checks and audits to ensure the accuracy of automated processes.

4. integration of different systems:

Many companies use a variety of software solutions for different aspects of their accounting and tax returns. Integrating these systems can be complex and requires careful planning and implementation to ensure that all systems work together seamlessly and that data is consistent and accurate. Despite these challenges, digitalization also offers numerous opportunities for accounting and tax returns:

5. increase in efficiency:

By automating routine tasks, companies can significantly increase their efficiency. This allows employees to focus on value-adding activities instead of spending time on manual processes.

6. better data analysis:

Digital systems enable a more comprehensive and accurate analysis of financial data. This enables companies to make more informed decisions and optimize their tax strategies.

7. real-time transparency:

With digital solutions, companies can access their financial data in real time and thus react more quickly to changes. This improves transparency and enables proactive tax planning.

8. early identification of liquidity risks for customers

The improved analysis of its own data and the greater transparency of financial data also provide a good basis for dealing with customers in financial difficulties and the associated risks of payment disputes in the event of the insolvency of such customers. Here too, the Complianceberater.team is well positioned thanks to a specialist lawyer for insolvency law as a member.

9. cost savings:

By reducing manual processes and improving efficiency, companies can save costs in the long term. This is particularly important in a highly competitive environment where cost efficiency can be a key competitive advantage. Given the complexity and ever-changing requirements of TAX compliance, the advice of compliance specialists can be invaluable. These experts have in-depth knowledge and experience of the relevant legal requirements and can help companies optimize their compliance strategies.

10. individual advice and customized solutions:

Compliance specialists offer individual advice tailored to a company’s specific needs and challenges. They help to develop customized solutions that meet legal requirements while improving the efficiency and effectiveness of accounting processes.

11. risk minimization:

By identifying potential risks and implementing appropriate risk mitigation measures, compliance specialists can help to reduce the likelihood of breaches and the associated penalties. This protects the company from financial losses and reputational damage.

12. topicality and adaptability:

Tax rules and regulations are constantly changing. Compliance specialists keep abreast of these changes and ensure that a company’s systems and processes always meet the latest requirements. This enables the company to remain flexible and adaptable.

13. training and further education:

Compliance specialists provide training and education for a company’s employees to ensure that everyone involved has the necessary knowledge and skills to meet compliance requirements. This promotes a culture of compliance and contributes to long-term adherence to legal requirements.

Requirements for the business organization and the importance of compliance in insurance companies

Requirements for the business organization

The business organization of insurance companies is subject to strict regulatory requirements designed to ensure that these companies operate properly and efficiently. These requirements are set out in various statutory and supervisory regulations, including the German Insurance Supervision Act (VAG) and the Delegated Regulation (EU) 2015/35 (DVO). A key document in this context is BaFin Circular 2/2017 (VA), which describes the minimum requirements for the business organization of insurance companies (MaGo).

The essential requirements include:

1. overall responsibility of the management:

The management bears overall responsibility for the proper and effective business organization of the company. This includes the implementation of an effective governance system.

2. proportionality principle:

The requirements must be met in a way that reflects the nature, scope and complexity of the risks associated with the company’s activities.

3. risk management system:

Insurance companies must implement a comprehensive risk management system that identifies, assesses, monitors and controls all material risks.

4. internal control system:

An effective internal control system is required to ensure that all business processes run properly and efficiently.

5. key functions:

The establishment and monitoring of key functions such as risk management, compliance, internal audit and actuarial services are of central importance.

6. emergency management:

Insurance companies must have an emergency management system in place to ensure that they remain capable of acting even in crisis situations [1].

Importance of compliance

Compliance plays a crucial role in the business organization of insurance companies. It involves adhering to all relevant laws, regulations and internal guidelines in order to minimize legal and financial risks and ensure the trust of customers and supervisory authorities.

1. legal basis:

The compliance function advises the Executive Board on compliance with the laws, regulations and regulatory requirements applicable to the operation of the insurance business.

2. avoidance of liability and penalty risks:

By implementing an effective compliance management system, insurance companies can minimize liability and penalty risks.

3. protection of the company’s reputation:

A strong compliance program helps to strengthen the trust of customers and the public in the company and to protect the company’s reputation.

4. promotion of a compliance culture:

Fostering a culture of compliance within the organization is critical to ensure that all employees understand the importance of compliance and act accordingly.

5. monitoring and reporting:

The compliance function monitors compliance with the regulations and reports regularly to the management and supervisory authorities [1].

Conclusion

The requirements for business organization and the importance of compliance in insurance are closely linked. A proper business organization forms the basis for effective risk management and regulatory compliance, while a strong compliance program helps to minimize legal and financial risks and strengthen the trust of customers and regulators.

Members of the Complianceberater.team have corresponding expertise in the development of compliance management for an insurance company. We have supported several insurance companies from the time they were licensed by BaFin and performed the compliance function or the function of data protection officer for them.