Risk Management: Managing legal risks in 2020 and beyond
Businesses in today’s Tanzania have myriad concerns, not the least of which is improving profitability in an economy that can be characterised by constantly evolving laws and regulations and tight liquidity conditions.
However, a business’s financial success is of minuscule effect if a government regulatory authority slaps your business with crippling fines or outright compels you to close down the business for non-compliance with relevant laws and regulations.
As the Tanzanian business landscape changes, as legal and regulatory compliance requirements become more complex, and as regulatory scrutiny and awareness of consumer rights increases, it can be easy for businesses to find themselves exposed to regulatory fines or penalties, litigation and even dissolution.
The challenge for businesses is gaining a full and thorough grasp of the compliance requirements and the potential risks and protecting themselves in 2020 and beyond.
Businesses therefore must lay the foundation for ongoing regulatory compliance and legal risk management programs by conducting comprehensive legal health checks.
A legal health check is a process by which a business is screened to determine its compliance to pertinent constitutional documents and national and international laws, regulations, guidelines and standards. It is done by an in-house or external legal counsel.
The purpose of legal health checks is to evaluate the existing exposures and identify potential problem/risk areas and the appropriate measures to enhance opportunities and prevent or reduce the risk of liability and disputes to the business when it operates.
Moreover, it helps to ascertain any steps that should be taken when the business reaches a specific milestone (e.g. achieving profitability, hiring and training more employees, etc.). A legal health check is critical if a change in management occurs, so that past legal problems and issues are not ascribed to the new management.
Most businesses conduct financial audits, yet too few ensure that their legal and regulatory affairs are in order by performing a legal health check.
The scope of a legal health check must include business structure and governance; assets, liabilities and financing; contracts and partnership agreements; compliance with tax laws; intellectual property protection; distribution/marketing methods; pending and threatened lawsuits; labour and employment practices; competition law issues; product liability and environmental law; and compliance with a host of specific-sector regulations, guidelines and standards.
All too often, not every new business (start-up) can afford to retain good legal counsel. A legal health check is 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. For instance, a trade mark of the business name may not have been registered yet.
So, how does the process work? The initial step starts with the legal counsel preparing a legal health check plan which has to be discussed with, and approved by, the senior management.
Key staff answer questionnaires and document requests to generate data which is reviewed by legal counsel. A draft report of preliminary findings is shared with senior management after which a meeting is held to discuss management feedback on the findings.
Then, legal counsel finalizes the report detailing the compliance level of the business and the recommendations. If possible, training can be rendered to the relevant staff so as to address the particular problems and issues uncovered.
Neglecting to conduct a legal health check could lead to weighty problems for the business and its owners and managers.
Section 65 of the Tax Administration Act, 2015 provides that the managers of an entity and the entity are jointly and severally liable for the entity’s failure to pay tax.
Does a legal health check need to be conducted every year? No, but it should be conducted periodically. Every legal health check is unique depending on, inter alia, the nature of the business and the legal counsel performing the health check.
However, one thing is clear: by conducting periodic legal health checks, businesses can avoid legal potential problems and risks.
For the New Year 2020, it’s not too late to engage good legal counsel to conduct a legal health check on your business and recommend effective solutions to help your business operate more profitably, efficiently and with fewer legal risks.
Paul Kibuuka is the tax director and chief executive of Isidora & Co. The views expressed here do not necessarily reflect those of Isidora & Co.
