If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business.” – Gary Cohn
Businesses in today’s Tanzania have myriad concerns, not the least of which is improving profitability and growth in an economy that’s characterised by constantly changing laws and regulations amid tight liquidity conditions.
However, a business’s financial success is of minuscule effect if a Tanzanian government regulatory authority slaps the business with heavy fines, or compels closure of the business for non-compliance with the relevant laws and regulations.
As the business landscape changes; as legal and regulatory compliance requirements become more complex; and as the level of consumer rights awareness increases, it can be easy for businesses to find themselves on the wrong side of regulatory surveillance and exposed to regulatory fines, litigation and even outright closure.
Since the closure of Twiga Bancorp in 2016, how many banks has the central bank, the Bank of Tanzania, moved to shut down?
The challenge for businesses across all sectors of the economy is gaining a full and thorough grasp of the compliance requirements and the potential risks and protecting themselves in 2019 and beyond.
Businesses therefore must lay the foundation for ongoing legal and regulatory compliance and risk management programs by conducting comprehensive legal health checks.
A legal health check is a process by which legal counsel screens a business to determine its compliance to pertinent constitutional documents and national and international laws, regulations, guidelines and standards that govern the business.
The purpose of a legal health check is to evaluate the existing exposures and identify potential problem/risk areas and the appropriate measures to prevent or reduce the risk of liability and disputes to the business.
It also helps to ascertain any steps that should be taken when the business achieves profitability; hires and trains more employees; or reaches other specific milestones. A legal health check is critical if a change in the management of a business occurs, especially in the face of legal impropriety, such as fraud.
Most businesses conduct financial audits, yet too few ensure that their legal affairs are in order by performing a legal health check—the importance of which is further exemplified by the auditor’s interest in fraudulent acts that cause a misstatement of financial statements, although fraud is a broad legal concept.
The scope of a legal health check includes business structure and governance; assets, liabilities and financing; commercial contracts and partnership agreements; compliance with tax laws; intellectual property protection; distribution and marketing methods; pending and threatened lawsuits; labour and employment practices; competition law issues; product liability and environmental law issues; and compliance with a host of specific-sector regulations.
All too often, not every new business can afford to retain good legal counsel. A legal health check is therefore an excellent way to establish precisely where the business is at from a legal and regulatory standpoint and what needs to be done going forward.
Taking into consideration the nature of the business and its sectoral posture, the initial step starts with key employees completing a questionnaire and responding to document requests to generate data which is reviewed by legal counsel.
Next, legal counsel prepares a draft report of preliminary findings and shares it with senior management for discussion and feedback.
After obtaining the management’s feedback, legal counsel finalizes the report detailing the compliance level of the business and the appropriate measures to take which may include training the relevant employees in order to address the particular problems and issues uncovered.
You might ask, “Should a legal health check be conducted every year?” No, but it should be conducted periodically. Neglecting to do so could lead to weighty problems for the business and its owners and managers. For example, under section 65 of the Tax Administration Act, 2015, if a business entity fails to pay tax, the managers are jointly and severally liable with the entity unless they can show that they acted with care and diligence in preventing the failure to pay tax.
By conducting periodic legal health checks, businesses can avoid potential problems and operate more profitably, efficiently and with minimal legal and regulatory risks.