How to Use Tech Start-Up Data to Reduce Costly Compliance Risks

March 6, 2019

Emerging technology startups can reduce expensive compliance risks and significant potential financial losses by marshalling resources already at their disposal—their own data scientists. But how? By building a data analytics system to increase internal transparency and better monitor high risk activities.

The Start-Up Compliance Conundrum

  • When starting a brand new company, things can move very quickly. Small companies often have no internal lawyer, or one lone lawyer responsible for everything from managing transactions to regulatory oversight to corporate compliance. When wearing so many hats simultaneously, there often isn’t time for company counsel to identify and catalogue all of the varied compliance risks that might emerge from a new project or deal.
  • In addition, a major project will often require all hands on deck, pulling company personnel away from their normal responsibilities to address more pressing matters. These kinds of developments can make it difficult for start-up counsel to properly monitor other ongoing matters that require oversight.

The Answer: Build a Smarter System

  • Enter the age of smart tech. If you secure and monitor your home with smart technology, why not secure and monitor your company’s activities with the same? And if your startup is built around utilizing data analytics and machine learning, your ability to harness the power of automating compliance monitoring just increased exponentially.
  • Let’s start with the potential benefits. Automating monitoring of invoice processing, approval of new vendors, expenses charged to company credit credits, and reported employee misconduct can help corporate counsel catch problems at the earliest phase, before they create significant company losses or exposure.
  • By automating monitoring of these transactions, you can reduce the risk of fraudulent payments, corrupt transactions, and abuse of company funds. Such monitoring can also help corporate counsel identify problem employees in locations where company counsel is less often present to monitor firsthand, like company plants or construction sites.

How To Build It

  • To start, corporate counsel should engage in the process of risk mapping. At this stage, you should consider hiring external compliance counsel to advise you on points of common exposure where monitoring will be particularly important.
  • Once you have identified the most significant risks, identify the data sets available to the company to monitor those risks. Much of this data will likely be stored in the company’s central accounting system, but some of it may be stored elsewhere, such as in the paper files or email account of human resources personnel.
  • The next task will be creating a process through which the existing data can be digitized (if it is not already). For data that is already digitized, if it is stored in separate systems, the next task will be combining the data into one system.
  • Once the relevant data is stored in one central location, the next step is to create tailored algorithms to scan each of the datasets for red flags. This is where having data scientists on staff becomes critical. Company and external counsel will work together with your in-house data scientists to build out the appropriate algorithms and platforms to view the data. Legal counsel will provide guidance to the company on common red flags. Using these factors, company data scientists can build the appropriate algorithms to monitor the relevant data sets for data containing these red flags.

Why You Should Start Early

  • The beauty of designing an analytics-based monitoring system early is that you can design the system at the earliest stages to create a streamlined system customized to your company’s systems and data. The longer you wait to build out your data analytics system, the more separate data systems will need to be monitored and combined, increasing the cost and complexity of pulling and combining data sets.
  • For these reasons, you should consider launching a data-analytics based compliance system at the earliest possible stage of your company’s development. A small investment now can save you from major liability down the road. In an era where your smart phone can notify you when your dog poops in your baby’s crib, shouldn’t your company’s compliance monitoring be just as smart?

Additional Resources

Further information on this topic can be found in articles below.



Kara L. Kapp