Compliance Risk 101

Compliance Risk 101

Risk is unavoidable for any business operation, so mitigating those risks is critical to your company's survival. A common area of concern for most modern businesses is compliance risk. While global regulations and accessibility grow, compliance risks for businesses grow as well.

Depending on the sector in which your company operates, both internal and external regulations will dictate what you can and can't do. They will also determine what you need to be aware of while managing everyday business operations. Failure to comply with governmental and industry guidelines can result in detrimental effects for your business, including potential financial losses or legal penalties.

What is Compliance Risk?

Compliance can be defined as the outcome of adhering to a rule. This includes "classic" compliance with applicable laws/regulations and also adherence to ethical principles, set out, for example, in the company's code of conduct.

Compliance risk, also known as integrity risk, is a threat posed to a company's financial, organizational, or reputational standing resulting from violations of laws, regulations, codes of conduct, or organizational standards of practice.

Compliance risk often results from:

  • Insufficient control systems
  • Lack of due diligence
  • Lack of training
  • Human error

What can you do to mitigate compliance risks? It's important to create a compliance program that will empower your company to do the right things and ultimately protect your business from unnecessary levels of risk. But first, you need to have a complete view of what types of risks your company faces. This is why you have to conduct a thorough risk assessment that should be focused on the identification of those compliance-related risks that can impact your company's ability to achieve its strategic objectives.

The problem with many vendor risk management programs is that many activities are handled with manual spreadsheets and emails. This is a slow and costly approach, but you can perform this work more efficiently if you choose an automated solution like START to manage all your vendors in one place.

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Compliance Risks: Common Types

Risks vary by industry and business type, so it's nearly impossible to cover every kind of risk that your company can face.

Some common compliance risks include:

Corrupt and Illegal Practices

Common compliance risks involve illegal practices and include fraud, theft, bribery, money laundering, and embezzlement. The Foreign Corrupt Practices Act (FCPA) prohibits the bribing of foreign officials or political agents by U.S. citizens, companies, and the foreign subsidiaries of American-based businesses. Your company can even be held liable for the actions of third parties outside of your direct control, as long as you are aware of a high probability that these third parties will engage in corruption.

Privacy Breaches

One of the biggest considerations for any business today is handling the enormous amounts of sensitive and confidential information they possess. Hacking, viruses, and malware are some of the cyber risks that affect organizations. You need to take measures to protect such data as intellectual property and trade secrets. Still, it's the personally identifiable information of employees and customers that must be a top priority.

Quality

Products and services must meet specific standards. Suppose a product or service fails to meet set industry or legal quality standards, such as those managed by the Consumer Product Safety Commission. In that case, a company can face significant financial penalties.

Process

Process risks relate to a failure of existing operations or deviation from the standard process, leading your business to fall short of its responsibilities to customers, partners, or vendors. Process failures can also result in reporting or accounting errors that breach the company's duties to its investors.

Environmental and Sustainability Concerns

These compliance risks are related to pollution and environmental damage a company's operations can cause. These areas are easy to overlook, but customers may have higher expectations even if you're meeting minimum government standards, so substantial compliance is a must. According to surveys, most consumers reported that sustainability is important to them when making a purchase, and many of them are ready to pay more for a sustainable product.

Third Parties

Third parties represent some of the most significant risks to companies, especially those that operate on the global stage. To protect yourself, you must develop a comprehensive vendor risk management program. It's essential to have a well-defined due diligence process to vet the third parties you plan to do business with. This includes new vendors, partners, consultants, customers, and more.

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Any due diligence system should take a risk-based approach. You need to spend more time investigating high-risk third parties, while also using technology and process to push lower risk third parties through the vendor approval process.

It's also essential to be connected to a broader risk framework. You should align your due diligence process with your organization's broader risk framework and communicate your company's risk tolerance. It’s also imperative to be transparent with your third parties on your risk approach.

Doing due diligence assessments requires a resource-heavy investment. That's why it's important to use technology to identify and manage red flags in the most efficient manner.

Consider using automation tools like START to reduce the workload and boost efficiency of compliance teams.

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With START, you can automate your third-party risk management program even if you have to manage thousands of partners with a very small team. START can help you streamline the risk assessment and vendor onboarding process and gain a comprehensible vendor lifecycle. You'll be able to adjust controls and questionnaires to the vendor types and establish a consistent vetting process for new vendors to reduce risk and stay in control.

What Is Compliance Risk Management?

Compliance risk management is the process of identifying, assessing, and mitigating potential losses that may arise from a company's non-compliance with laws, regulations, standards, and both internal and external policies and procedures.

Compliance risk management should be focused on three tiers:
Regulatory compliance is the greatest concern for many organizations because non-compliance with regulatory obligations can bring significant monetary penalties and painfully high investigation costs. For example, financial institutions must comply with regulations set by the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC), and some other regulatory agencies. The healthcare sector must comply with many regulations, including the Health Insurance Portability and Accountability Act (HIPAA), which governs the handling of sensitive patient information.

Industry standards, such as the International Organization for Standardization (ISO), are the next tier of compliance risk. They are based on best practices rather than laws, but compliance isn't necessarily voluntary. Industry groups might declare that member companies should certify to specific standards.

Internal policies are the third tier of compliance risk. Regulations and standards often require companies to create written documents that govern corporate activities, for example, a policy against bribery. If workforce members don't follow those written policies, the organization isn't meeting its compliance obligations.

Management practices aim to help companies maintain compliance with different laws, regulations, industry standards, and internal policies. Organizations may develop compliance risk management policies and procedures that serve as the framework and mechanisms that are implemented to control compliance risks.

Compliance risk management must be a consistent, continuous process that involves monitoring changes in the regulatory environment to ensure that a company's compliance is up to date. It's critical to regularly review compliance policies, procedures, and training materials in light of new policies and regulations because external and internal factors are constantly changing.