Compliance Risk Management Guide: How to Manage Compliance Risk?

Compliance risk management is one of the most important factors influencing business success. However, a lot of businesses neglect this part of their operations in favour of more important ones like marketing and cash flow. In this article, you will explore what is compliance risk management and how to manage compliance risk. We will also provide you with the best practices for managing compliance risks efficiently. 

What is Compliance Risk Management?

Compliance risk management means understanding the risks associated with non-compliance with rules and regulations. The objective of compliance risk management is to reduce legal penalties, losses and any financial impact. It also includes identifying applicable regulations, assessing non-compliance risks, assigning responsibilities for managing the risks, adopting controls, and continuous monitoring for improvement. 

In simple words, compliance risk management helps businesses stay compliant, reduce risks, and avoid any negative consequences. 

Importance of Compliance Risk Management

Now that you know the compliance risk management meaning, here is what makes it important:

• It ensures compliance with the government, regulatory requirements and industry standards.
• It protects business reputation by ensuring all employees follow ethical business practices.
• It assists in maintaining trust with the customers, suppliers and all the stakeholders involved in the business processes.
• It helps to minimise the risk of financial losses caused by non-compliance or failure to follow the regulations.
• It helps businesses gain a competitive advantage with improved efficiency and optimised processes that compliance risk management can bring.
• It provides assistance in detecting and responding quickly in case there is any compliance issue and enables businesses to create monitoring practices.

Compliance Risk Management Process

Compliance risk management includes several steps essential for following regulations and reducing risks. Let’s break down each step:

1. Know where your compliance stands: Get to know about where your business stands in terms of compliance. Conduct an evaluation of all the processes, systems, and rules that apply to your operations for gauging your current compliance level.
2. Identify risks: Assess all the compliance risks that are faced by your business. Look at the likelihood and the potential impact of these risks and prioritise them based on their severity. This will enable you to focus your efforts effectively.
3. Set up policies and procedures: Once the compliance risks are identified, start developing a clear plan by creating new policies or updating the existing ones. You must also ensure that everyone in your organisation understands these changes through effective training and communication.
4. Implement necessary controls: To ensure that the compliance tasks are completed, assign responsibilities and deadlines. You must also establish internal controls like monitoring systems to maintain consistent compliance.
5. Track and improve: Keep monitoring your compliance efforts and report on the progress regularly. Improve your compliance processes with this information and identify areas of enhancement. Regular reporting will also help in keeping the stakeholders informed and engaged in the compliance journey. 

Framework for Compliance Risk Management

Compliance risk management framework comprises standards, internal controls and procedures that are important for stakeholders for maintaining organisational compliance. It enhances oversight, risk control, culture, ethics and covers all the aspects of conduct by integrating compliance into daily operations. There are established frameworks such as COSO ERM and ISO 31000 used by many businesses. Also, irrespective of the chosen framework, it should streamline the process from setting the objectives to identifying and eliminating risks.

Compliance Risk Management Policy

A Compliance Risk Management Policy outlines an enterprise’s commitment to identifying, assessing, mitigating, monitoring, and reporting compliance risks. This is done in order to ensure adherence to the relevant laws, regulations, and internal policies. The compliance risk management policy establishes a framework for managing risks, detailing the procedures, responsibilities, and controls to prevent non-compliance, address incidents promptly, and continuously improve compliance practices. 

The policy further aims to protect the organisation from legal, financial, and reputational repercussions by promoting integrity and accountability while supported by leadership, employee engagement, and tech-based solutions.

Compliance Risk Management Examples

Here are a few compliance risk management examples that demonstrate the need to adhere to industry standards:

• Privacy or data security: T-Mobile experienced a major data breach in 2022 and it exposed the personal data of over 77 million people. This data breach resulted in a $350 million fine and highlighted the importance of strong data security measures.
• Corrupt/illegal activities: The former CEO of Novus Hospice was convicted in 2022 for healthcare fraud. This case led to a prison sentence as well as an order to pay billions of dollars in damages, highlighting the need for ethical business practices.
• Social impact: After ten former employees won a lawsuit against Glow Networks Inc. in 2022, the business was ordered to pay $70 million for damages. This suit was about racial discrimination and a hostile work environment. It also highlighted the importance of an inclusive workplace. 

Benefits of Effective Compliance Risk Management

Apart from the examples above, these are the benefits of effective compliance risk management: 

• Minimises financial penalties: It is less likely that your organisation will engage in non-compliant activities when there are clear procedures for managing compliance risks. It helps to reduce the chances of facing sanctions or fines from the regulatory authorities.
• Enhances company reputation: Business reputation is enhanced with a strong commitment to compliance. This helps to attract investors, customers and potential employees who emphasise an ethical business environment.
• Safeguards customers: The focus of compliance laws is always customer protection. Regulations laid down by Indian regulatory bodies such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Prevention of Money Laundering Act, 2002 (PMLA), to name a few, help in ensuring the market practices are fair and actions of investment firms are in the best interest of their clients.
• Improves strategic decision-making: Compliance risk management also helps businesses to ensure that their decisions are in line with the regulatory requirements. This helps in supporting the overall health and success of the business.
• Promotes continuous improvement: Managing compliance regularly helps in evaluating what needs improvement and what works well. This continuous process helps businesses to optimise their compliance procedures over time and ensure they remain effective and up-to-date.

Challenges of Compliance Risk Management

Let’s explore the five major challenges of compliance risk management:

• Navigating evolving regulations: The regulatory environment is constantly changing, and businesses that run their operations globally are subject to several geographical requirements, which makes it difficult to keep up with regulatory compliance. Also, where there is a discrepancy in producing the proof of compliance, the sales cycle also slows down.
• Managing resource constraints: Compliance risk management is a comprehensive task and requires human resources, technology and training materials. For small businesses, it becomes difficult to manage compliance risks due to constrained engineering bandwidth and limited budget.
• Engaging stakeholder involvement: Compliance risk management demands establishing cultural compliance at the organisational level to ensure consistent readiness. However, the challenge arises when there are conflicting interests between stakeholders. It becomes difficult to get the buy-in of the stakeholders due to the requirement of more responsibility and engagement.
• Mitigating third-party risks: Nowadays, businesses collaborate with a number of vendors, and third-party breaches have become common. This difficulty is sometimes overlooked, given the complexities of guaranteeing conformance and data security for all vendors.
• Addressing lack of visibility: Because of the intricate nature of operations, organisations frequently find it difficult to develop a continuous monitoring process, which results in a loss of visibility. In the absence of precise and detailed visibility, managing compliance risks in procedures and data processing techniques becomes difficult.

Best Practices for Compliance Risk Management

For better compliance risk management, here are the five best practices that must be followed:

1. Develop a comprehensive strategy: Make sure there is a holistic risk management strategy that integrates compliance into every function. This will facilitate better collaboration across all departments and lead to the efficient utilisation of resources. One more benefit of having an integrated strategy is that it refines all the processes at the organisational level and results in the overall improvement in the long-run. 
2. Implement ongoing employee training: It is important to conduct regular awareness programs for the employees. This will help them to better understand the regulatory changes and future compliance issues. It will also help to foster a culture of compliance and improve employee engagement and accountability. 
3. Ensure active senior management engagement: Senior Management’s involvement is key. It helps encourage equal commitment to compliance from all the stakeholders. There must be active involvement from the management such as reviewing the compliance progress, responding to any discrepancy and ensuring continuous preparedness. 
4. Adopt established frameworks: Mostly, customers demand the safety of their data. Using widely recognised frameworks such as SOC 2 and ISO 27001 can help businesses in providing guarantees at the base level and unlocking lucrative business deals. 
5. Utilise cutting-edge technology: Leveraging the right compliance tool is crucial. Make sure the tool aligns with your organisation’s goals. Also, automation can help in streamlining workflows, improving efficiency in operations, and accomplishing audit readiness in record time. 

To sum up, compliance risk management is crucial for businesses to avoid fines and keep their operations safe. By following the steps outlined in this guide, companies can navigate rules and regulations confidently, protecting their reputation and finances.