Most business leaders know that their companies may face fines if they miss a regulatory requirement. They’re also aware of potential lawsuit damages and related costs. But many have not heard of debarment.

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Debarment can stop your business

Debarment is the legal loss of certain privileges. For businesses, debarment typically refers to the right to interact with the government in various ways. For instance, a company that violates federal regulations might find itself barred from bidding on federal government contracts. Many companies rely on such contracts, and debarment would cause serious hardship.

The Food and Drug Administration debars businesses and individuals in a variety of ways. A company could be barred from importing or producing food or drugs, or from selling them to the government. An individual scientist might be excluded from working with clinical drug trials. When a federal crime is involved, the debarment may be mandatory and permanent, effectively meaning that the business or individual can no longer work in the industry in the U.S.

For lesser violations, temporary debarments may be ordered. But even temporary debarments are a red flag for future business partners and employers. And even a temporary debarment could devastate a business.

The FDA is only one example of agencies that can order debarment. There are a wide array of federal agencies that may regulate your business; state governmental agencies may also have debarment penalties.

Companies may have money set aside to deal with fines or damages. But if your business relies on a specific agency or on government procurement, debarment could be a far worse consequence. Staying on the right side of the law is the right thing to do…but it’s also the best thing for your business.

Stacey Supina, Executive Fellow, Center for Ethics in Practice, and faculty member, Opus College of Business, University of St. Thomas