From Regulation to Implementation: A Critical Evaluation of LLM-Assisted Regulatory Compliance in Industry

Large Language Models (LLMs) are increasingly adopted for compliance and legal reasoning tasks, yet their outputs often lack explicit grounding in legal logic and evidence. We present Code-as-Auditor, an LLM-based framework that extends the model's reasoning capability toward structured and evidence-grounded compliance assessment. The framework translates regulatory information into (1) formalized checklists and executable decision trees, encoding regulations and conditions as interpretable code structures. During inference, each checklist item is (2) dynamically expanded into factual and counterfactual questions, guiding the model to reason over case-specific evidence and potential violations. This process establishes a reasoning pipeline that proceeds from evidence identification, through rule application, to final decision-making, while a self-verification loop improves the logical consistency of the generated code and the traceability of outcomes. Experiments on privacy and data protection scenarios demonstrate that Code-as-Auditor delivers more accurate and evidence-backed evaluations, enabling automated compliance regulation checking grounded in explicit regulatory criteria.

Organizations and regulators increasingly consult large language models (LLMs) for regulatory-compliance questions, yet a wrong statutory citation can silently propagate into legal advice, compliance documentation, and policy decisions. We introduce a bilingual benchmark of 120 questions probing whether freely accessible LLMs fabricate article citations for two data-protection instruments: the EU General Data Protection Regulation (GDPR) and the Saudi Personal Data Protection Law (PDPL). The benchmark pairs direct citation retrieval questions with false premise verification probes and deliberately unanswerable "trap" questions -- including questions about a repealed article and about deadlines that exist only in implementing regulations, not in the law itself. Every question is posed in both Arabic and English, and all scoring is fully automatic against a manually verified gold reference. Evaluating three freely accessible models (Gemini 2.5 Flash, GPT-OSS-120B, Nemotron-3-Super-120B), we find a dramatic jurisdiction gap: near-ceiling citation accuracy on the GDPR (94-100% on direct retrieval) against majority fabrication on the Saudi PDPL (60-77%), invariant to query language; the highest fabrication rates (67%) arise from statute-vs-regulations confusion, and 91% of fabricated citations are asserted with confidence >= 0.8. Fabrication tracks the jurisdiction of the law, not the language of the query, and model confidence provides no protection -- indicating that verbatim-verification safeguards, rather than model self confidence, must gate any institutional reliance on LLMs for compliance screening.

Large Language Models (LLMs) have been used in various industries. However, ensuring their compliance with complex laws and regulatory frameworks remains a great challenge. Existing evaluation paradigms mainly rely on static benchmarks that suffer from three severe limitations: First, the compliance rules being used do not comply with the requirements of Artificial Intelligence (AI) laws and regulations; Second, they only handle apparent, explicit compliance risks, leaving implicit and covert compliance risks undetected; Third, they fail to track the systematic propagation of risks along logical dependency chains or evaluate compliance within nuanced, context-based real-world scenarios. To bridge this critical gap, we introduce EADC, a novel advanced evaluation benchmark of LLMs based on an AI compliance knowledge graph and AI compliance legal experts. By mapping abstract legal rules into structured logical multi-relational graphs, our framework enables automated, evolving agents to distill and synthesize highly sophisticated adversarial scenarios. This compliance benchmark is reviewed and corrected by human AI legal experts throughout the whole process. The resulting dataset (4,435+ QA pairs) provides an extensive, multi-dimensional taxonomy covering critical regulatory frontiers, including bias and discrimination, fairness, personal privacy protection, and values. Crucially, our compliance dataset moves beyond shallow string-matching by incorporating contextual long-horizon interactions and logic-driven hazard chains, capturing deeply embedded compliance anomalies that bypass traditional filters. Experiment evaluations demonstrate that our framework exposes critical regulatory blind spots in state-of-the-art LLMs, offering a rigorous, AI laws and regulations-aligned benchmark to safeguard high-level and deep compliance in the application of LLMs.