Corporate compliance is a phrase that has made waves in the mainstream media over the past several months. Legal professionals that represent law firms or in-house corporate counsel have always understood the importance of corporate compliance. The phrase has become more common in non-legal settings ever since the collapse of cryptocurrency exchange FTX.

The charges levelled against former FTX CEO Sam Bankfam-Fried include several counts of fraud that could see the 31-year-old face several years in prison. Nestled within the indictments are statements about the lack of organizational hierarchy within the FTX ecosystem. Prosecutors allege that FTX was devoid of structured leadership, organizational charts, and ownership charts for the deliberate purpose of allowing SBF to misappropriate client funds.

What’s the purpose of organization charts and ownership charts?

Corporate compliance refers to a series of laws, regulations, and standards that apply to corporations and the industries from which they operate. Compliance as a practice includes the internal policies and procedures to comply with federal and provincial/state laws that mitigate risks of fraud or other illicit activities.

Organizational and ownership charts help corporations abide by jurisdictional laws. They also shed more light on corporate transparency.

Organization charts inform key business decisions that include things like mergers or acquisitions, tax liabilities or, yes, corporate regulatory compliance in certain jurisdictions. In-house counsel can also use organization charts to connect with the appropriate executives regarding those key decisions. The charts even enable external auditors or regulators to connect with the appropriate party to discuss any compliance issues with the organization.

Ownership charts serve a similar function. They break down what percentage of the company is owned by each shareholder. The charts also distinguish preferred shareholders from common shareholders, and they can also summarize the voting rights (if any) awarded to each owner. They allow key votes regarding the future of the organization to proceed in a structured and organized manner.

Why organization charts and ownership charts matter

The FTX case is a perfect real-world example of why organization charts and ownership charts matter. The lack of corporate governance meant no internal executives were monitoring the flow of cash in and out of the FTX exchange. SBF allegedly used this haphazard organizational structure to defy corporate compliance policies. According to the indictments, he fraudulently used money from customer accounts to finance FTX’s sister company, Alameda Research, his trading firm.

Another great example is a fictionalized account of non-compliance. Fans of the Sopranos will know that the character of Tony Soprano was a silent partner in a garbage collection firm called Barone Sanitation. He used the legitimate business as a front to launder profits from his illegal businesses. The money was later returned to Soprano in the form of a paid salary from Barone Sanitation, hiding his ill-gotten gains from federal scrutiny.

While many corporate executives legitimately operate their businesses, there are bad actors out there (in real-life and on TV) who will manipulate companies that fail to abide by the rules of corporate governance. organization charts and ownership charts maintain accountability and transparency across the organization to prevent bad actors from implicating entire business entities in criminal activity. Internal counsel and external regulators can use these charts to enforce good corporate compliance and governance throughout the entire entity.