Compliance Risk: Understanding and Managing it Effectively

As global regulations and accessibility grow, so does compliance risk for businesses. Depending on the sector in which you operate, both internal and external rules and regulations will dictate what your business can and can’t do, as well as what you need to be aware of while managing everyday operations.

Failure to comply with such regulations can result in detrimental effects for your business, ranging from financial penalties and can go even so far as imprisonment. That’s why, when it comes to compliance risk, ignorance is certainly not bliss.

Coming Up

1. What is Compliance Risk?

2. Key Elements of Compliance Risk

3. Common Types of Compliance Risk

4. Compliance Risk Management

5. How to Conduct a Compliance Risk Assessment

6. Best Practices for Managing Compliance Risk

7. How to Manage / Implement Compliance Risk Based on Your Current Situation:

8. Wrap Up

What is Compliance Risk?

Compliance is defined as the outcome for adhering to a rule. Compliance risk captures the legal and financial penalties for failing to act under internal and external regulations and legislature. To be able to comply, the rules and regulations must be clearly defined, and the following must be considered:

• Regulation or act
• Penalties for non-compliance
• Obligation and invested parties
• Risk rating
• Compliance status

Key Elements of Compliance Risk

Understanding the key elements of compliance risk is crucial for any organization aiming to safeguard itself from potential threats. Compliance risk can manifest in various ways, each with its own set of consequences. These elements highlight the different areas where non-compliance can significantly impact an organization.

Legal Impact:

Regulations and laws that can be used against the organization with failure to comply which could result in fines, imprisonment, product seizures, penalties or debarment.  

Financial Impact:

Outcomes that affect the business’ bottom line, loss of investor confidence, share prices or potential future earnings.

Reputational Impact:

Results that affect customer perception of a brand via bad PR decreased employee confidence or customer trust.

Business Impact:

Factors that affect a business’ ability to operate like a plant shutdown or a trade embargo.

Common Types of Compliance Risk

The most common types of compliance risk are aspects of the operation that affect most businesses. Examples of compliance risk include:

Regulatory and Political Uncertainty:

Political parties greatly influence regulation and put into place laws that can change how business must be conducted. When the climate is uncertain, it means that the types of rules that may take effect are also unknown, which can cause stress on a business’ operations.

Data Protection:

With the rise of data storage and the expansion of technology, rules around privacy and protection are growing. Take for example new regulations like GDPR. The speed of technology is moving rapidly that changes must be put into place to protect customer information.

Conflicts of Interest:

This concern particularly plagues the financial industry as investment brokers must steer clear of acting in their own best interest with insider information or placing their customers’ money in places that may cause a conflict of interest.

Market Risk:

Institutional managers must remain aware of what’s happening in the overall market to gauge risk, especially when it comes to “safe alternatives” like electronically traded funds (ETFs).

Conduct Risk:

Compliance risk doesn’t only deal with outside forces, but it also requires that employees remain aware and in line with codes of conduct. For example, sexual discrimination and harassment issues have internal and external consequences that cannot be ignored.

Corruption:

Businesses are responsible such that their employees don’t engage in or are not harmed by bribery or fraud.

Quality:

Product qualities and services must be created and offered according to specific standards, and failure to comply could result in penalties, product seizure or business shut-down.

Human Error:

When employees aren’t fully trained or aware of the signs of phishing and social engineering, your data is at risk for a breach. The same could be said about outdated software systems that are in place with inadequate security measures.

Lack of Monitoring:

For many compliance regulations, oversight and internal control are required. With monitoring, organizations are able to keep abreast of threats and remain aware of data breach alerts. Active monitoring helps to reduce the severity of a potential breach, and thus, reduce the legal and fiscal consequences of one.

Compliance Risk Management

Compliance risk management is the business process of identifying, assessing, and mitigating compliance risk. Organizations may put compliance risk management policies and procedures into place which lay out the framework by which they address and control compliance risk.

Since regulations and laws are constantly changing and being updates, compliance risk management policies and procedures should follow suit. Everyone within an organization should be made aware of the risk management policies for them to properly practiced.

One of the simplest ways to ensure these policies take effect is to implement automation software solutions that have these compliance rules built into the business processes. We’ll touch more on this shortly.

How to Conduct a Compliance Risk Assessment

To effectively manage compliance risk, organizations should follow these key steps:

1. Involve Your Team:

Collect cross-functional input from various departments, as each faces its own compliance risks. Consult with risk owners to build credibility into your risk assessment policies and enhance understanding of department-specific risks.

2. Leverage Data:

Utilize data and software analytics tools to manage, assess, and protect against risks. These tools can ensure accurate customer data, flag suspicious activities, and automate reporting to minimize human error.

3. Establish Ownership and Define Responsibilities:

Clearly define which individuals are responsible for managing each type of risk. Ensure every employee understands their role in protecting against compliance risk. This establishes accountability and clarity across the organization.

4. Make it Actionable:

Ensure that mitigation activities identified in the risk assessment are clearly defined and actionable. The output of the risk assessment should be understood by all involved, regardless of the specific compliance risk examples relevant to your business.

5. Continual Revision:

Regularly review and update your compliance risk assessment process. If a process isn't working effectively, implement business process improvements to enhance functioning.

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By following these steps, organizations can create a comprehensive and effective compliance risk assessment that involves key stakeholders, leverages data, establishes clear responsibilities, and remains adaptable to changing needs.

Best Practices for Managing Compliance Risk

Effective compliance risk management is crucial for organizations to navigate the complex regulatory landscape. Here are some best practices to help manage compliance risk effectively:

1. Conduct Regular Risk Assessments: Perform comprehensive compliance risk assessments at least annually.

2. Develop a Robust Compliance Program: Create a well-structured, adaptable program outlining policies and procedures.

3. Foster a Culture of Compliance: Promote compliance through training and clear communication.

4. Leverage Data and Analytics: Use data-driven insights to identify and prevent compliance issues.

5. Clearly Define Roles and Responsibilities: Establish accountability across all organizational levels.

6. Implement Automated Compliance Solutions: Streamline processes and reduce human error through automation.

7. Stay Informed About Regulatory Changes: Designate teams to monitor and communicate regulatory updates.

8. Conduct Regular Internal Audits: Assess the effectiveness of your compliance risk management program.

9. Establish a Robust Reporting System: Implement a system for reporting potential compliance issues.

10. Continuously Improve and Adapt: Regularly review and update your practices based on assessments and audits.

The Role of Automation and Technology

Automation and technology play a crucial role in modern compliance risk management:

1. Automated Monitoring and Alerts: Implement systems for real-time detection of compliance issues.

2. Workflow Automation: Ensure consistent application of policies and procedures.

3. Document Management Systems: Maintain easy access to up-to-date compliance information.

4. Compliance Training Platforms: Deliver and track compliance training across the organization.

5. Regulatory Change Management Tools: Automatically update your compliance framework as regulations change.

By adopting these practices and leveraging technology, organizations can enhance their compliance risk management capabilities, meeting regulatory requirements while improving overall business resilience.

How to Manage / Implement Compliance Risk Based on Your Current Situation:

Managing compliance risk effectively depends on the current state of your organization's compliance efforts. Whether you are starting from scratch or have an established process, here are tailored strategies for different compliance maturity levels:

1. Little to No Compliance

For organizations that are just beginning to address compliance risk, the following steps are essential:

1. Establish a Compliance Team
   • Form a dedicated team or assign responsibilities to key individuals to oversee compliance risk management. This team should include members from various departments to ensure a comprehensive approach.
2. Define Compliance Policies
   • Develop clear compliance policies that outline the rules and regulations relevant to your industry. Ensure these policies are documented and accessible to all employees.
3. Implement Basic Training Programs
   • Introduce basic compliance training for all employees to raise awareness about the importance of compliance and the specific regulations that apply to your organization.
4. Conduct an Initial Risk Assessment
   • Perform a preliminary risk assessment to identify the most critical compliance risks facing your organization. Use this assessment to prioritize your efforts and resources.

2. Aging Compliance Process

For organizations with outdated compliance processes, it's important to update and modernize your approach:

1. Review and Update Policies
   • Regularly review and update your compliance policies to reflect the latest regulations and industry best practices. Ensure that policies are comprehensive and address all relevant risks.
2. Leverage Technology
   • Invest in compliance management software to automate and streamline compliance processes. Technology can help with monitoring, reporting, and ensuring adherence to compliance requirements.
3. Enhance Training Programs
   • Expand your training programs to include advanced topics and practical scenarios. Ensure that training is ongoing and incorporates the latest regulatory changes.
4. Conduct Regular Audits
   • Implement a schedule for regular internal audits to assess compliance with policies and identify areas for improvement. Use the findings to refine your compliance strategy.

3. Active Compliance Process

For organizations with an established and active compliance process, the focus should be on maintaining and continuously improving compliance efforts:

1. Continuous Monitoring
   • Use real-time monitoring tools to track compliance activities and detect any deviations promptly. Implement alerts and automated reporting to ensure immediate action on compliance issues.
2. Regular Policy Reviews
   • Conduct periodic reviews of compliance policies to ensure they remain relevant and effective. Engage stakeholders from across the organization in the review process.
3. Advanced Data Analytics
   • Utilize data analytics to gain deeper insights into compliance trends and potential risks. Use predictive analytics to anticipate and mitigate future compliance challenges.
4. Foster a Compliance Culture
   • Promote a culture of compliance throughout the organization. Encourage employees to take ownership of compliance responsibilities and provide channels for reporting concerns anonymously.

Wrap Up

Regardless of the approach, you choose to employ; it should be clear why compliance risk and its management is essential to run a business properly, whether it is big or small. Compliance risk does not discriminate against business type or size, and instead, it requires necessary processes are in place to protect both customers and businesses; failure to do so can result in unwanted and potentially detrimental effects.