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10 Most Common Compliance Risks and How to Avoid Them

Compliance is an important topic for any business.

 

Most institution leaders consider regulatory compliance the cost of doing business in the industry.

 

It’s especially important for those businesses that work with sensitive data such as financial institutions.

 

Why worry about complying?

 

Compliance risks can be costly to a company so it’s crucial to identify the most common compliance risks and how to avoid them.

 

 

What is Compliance Risk?

 

Compliance risk the institution’s potential to violate laws, regulations, and internal policies.

 

The US has a complex regulatory system with around 15 different regulators governing various business activities such as financial services, health care, or consumer protection.

 

Compliance problems can affect an institution’s reputation and its ability to transact business. 

 

It may even result in legal fines and penalties that could lead to closure.

 

 

What is Compliance Risk Management?

 

Compliance risk management involves identifying, assessing, and monitoring the institutional risks to your company’s compliance with regulations and industry standards.

 

Auditing for compliance helps to implement controls to ensure the institution is compliant and monitoring those controls to ensure they remain effective.

 

 

Why Identifying Compliance Risk is Important

 

Outside of the obvious punitive fees, penalties, and sense of obligation, there are many reasons why your institution should be doing its best to avoid common compliance risks.

 

 

Legal Concerns

 

The legal risks of not complying with regulations can be costly and time-consuming.

 

To minimize the risk, you must know what compliance means and how to comply with different laws.

 

Compliance helps to avoid additional legal issues including work freezes, lawsuits, and large legal fees.

 

 

Financial Impact

 

Outcomes that affect the institution’s bottom line, faltering investor confidence, share prices, or potential future earnings are a huge concern when developing a compliance risk management program.

 

 

Data Security

 

Proper compliance management helps protect against data breaches and other data-related risks.

 

There are several regulatory bodies such as PCI, HIPAA, and GDPR that monitor the latest risks associated with consumer data.

 

 

Business Reputation Impact

 

Any compliance findings that can affect customer perception of the institution such as bad public relations can decrease employee confidence and customer trust.

 

A breach or receiving a fine for non-compliance can be a huge blow to the reputation of your institution.

 

Letting your company stakeholders know your organization complies with relevant industry standards will help with public relations.

 

Bringing in an expert auditing team and receiving certifications is something you can put on the company website to let potential customers know.

 

This helps with customer trust, retention, and loyalty.

 

 

10 Most Common Compliance Risk Types

 

The most common types of compliance risk are aspects of company operations that can impact most businesses.

 

Every contemporary institution faces a certain degree of risk.

 

Good business leaders can identify risks related to their business and find ways to monitor and remediate them.

 

Here are the 10 most common compliance risks:

 

  1. Payment Card Data Breach
  2. Personal Data Privacy Rights Infringement
  3. Lack of Disaster Preparation
  4. Regulatory and Political Uncertainty
  5. Conflicts of Interest
  6. Market Risk
  7. Conduct Risk
  8. Corruption
  9. Quality
  10. Social Responsibility

 

 

Payment Card Data Breach

 

The PCISSC (Payment Card Industry Security Standards Council) was founded and formed by major payment brands such as Visa, MasterCard, and American Express.

 

They agreed to incorporate the PCI Data Security Standard (PCI-DSS) into their security programs.

 

This security standard is the best asset to prevent hacking payment card data.

 

You can utilize the services of a Qualified Security Assessor to help your institution ensure compliance to protect your customers’ payment and personal data.

 

 

Data Privacy Infringement

 

The GDPR took effect which set laws regarding data privacy to protect consumers’ confidentiality when making transactions.

 

More data control was placed in the hands of consumers by creating requirements that address the following:

 

  • data portability
  • data breach notification
  • data protection for children
  • right to be forgotten
  • appointment and training of data protection officer
  • easy identification and availability of data upon consumer request

 

This made carries large penalties for those institutions not in compliance.

 

Institutions uncertain with how they should address this regulation should partner with an auditing agency to mitigate associated risk.

 

 

Lack of Disaster Preparation

 

Don’t dismiss the potential of natural or manmade disasters.

 

Nobody saw Covid coming and look what it did!

 

It is more important than ever to examine different possible disaster scenarios that could affect your business such as floods, hurricanes, tornadoes, or pandemics.

 

Business continuity focuses on daily business matters during a disaster, but a proper disaster recovery plan is needed to focus on the supporting IT systems that support institution business functions.

 

The plan should lay out what processes and procedures are needed to be employed to retrieve data and restore basic operating functions.

 

Businesses are increasing storage of their data in the cloud, but must be able to perform daily tech-based duties on company premises.

 

A breach that occurs during a time of vulnerability can be penalized if preparation could have prevented it.

 

A disaster recovery plan should include:

 

  • identifying known and potential weaknesses
  • strategizing to minimize the duration of serious disruption to business operations
  • facilitating effective coordination by developing teams to implement recovery tasks
  • simplifying recovery efforts
  • performing test drills at least annually to identify and mitigate risk

 

 

Regulatory and Political Uncertainty

 

Political parties can influence regulations and create new laws that change how businesses must operate.

 

When the industry climate is uncertain, the rules that may come into effect are unknown and can cause unnecessary stress on institutional operations.

 

 

Conflicts of Interest

 

Conflicts of interest can plague the financial industry as those in charge must inhibit the urge to act in their own best interest with insider information.

 

This can also include placing customers’ assets in places that may cause a conflict of interest.

 

 

Market Risk

 

Institution managers must be cognizant of what’s happening in the industry to focus on risk.

 

This is important when it comes to what could be considered “safe alternatives” such as EFTs.

 

 

Conduct Risk

 

Compliance risk doesn’t only focus on exterior risks, but also on internal.

 

Staff must be aware and trained on company codes of conduct to mitigate conduct risk.

 

Discrimination and harassment have no place in your business and only serve as the further risk of lawsuits.

 

Despite guidelines in place, rogue staff could create more risk if their actions aren’t dealt with quickly.

 

In 2015 alone, the U.S. Equal Employment Opportunity Commission collected more than $500 million for victims of workplace discrimination.

 

An example would be to address sexual discrimination and harassment issues with punitive measures that inhibit these types of behavior.

 

 

Corruption

 

Businesses must ensure all employees don’t engage in harmful behavior that could affect the company’s integrity such as bribery or fraud.

 

Ethics training for staff could help to prevent these issues along with monitoring employee behavior.

 

Your company can be held liable for actions of third parties outside of your company control if you’re aware of high probability that these companies will engage in corruption.

 

 

Quality

 

Institution product and service qualities should be offered based on company standards.

 

Any failure to comply could result in penalties, seizures, or business shutdowns.

 

 

Social Responsibility

 

The impact your business has on its staff and the surrounding community can create financial risk.

 

In today’s society, consumers hold businesses to a higher moral standard.

 

In the current political climate, boycotts are becoming a more common tool for protesters.

 

Even if your institution attempts to stay apolitical, there is still the risk of establishing a company policy that is frowned upon by some and could end up in the news.

 

 

Have a Compliance Risk Management Plan in Place

 

Effective compliance risk management control should start with the company management team to develop your institution’s plan to achieve the company vision.

 

The risk management plan involves defining objectives and laying out clear terms to ensure compliance is met and risk is averted.

 

 

Monitor Risks and Maintain Compliance

 

Risk management control should be ever-changing and adaptive to the current industry climate.

 

Your risk management team needs to continuously monitor risks and the controls that have been set in place to achieve the institution’s objectives.

 

The key factors of the ongoing plan should include:

 

  • inform staff of their compliance-related responsibilities
  • monitor business and industry trends, data management, regulatory updates
  • change management should be handled carefully
  • internal audits should be conducted regularly

 

 

Assessing Compliance Risk

 

Looking at different types of risk and categorizing them is important.

 

You can take this process one step further by assessing the current state of your institution’s compliance risk.

 

 

Collect Cross-Functional Input

 

Leverage the compliance team to create and improve their comprehension of the risks in their departments.

 

Allow the department to provide its assessment of how big or small the risks may be, in terms of the likelihood of an event occurring. as well as its business impact.

 

 

Leverage Data

 

Your organization should be utilizing data and compliance software analytics tools to manage, assess, and mitigate risks.

 

These compliance tools can aid in ensuring customer data and information is accurate and can flag suspicious activities.

 

Data tools can be used to avoid compliance risks by providing reports and avoiding human error.

 

 

Define Responsibilities

 

Make sure all institution employees understand their roles and responsibilities by protecting and mitigating the company against compliance risk.

 

 

Continual Revision

 

If a process is not working, implement an improvement plan to enhance functioning.

 

 

Implementing Compliance Risk Based on Your Institution’s Current Situation

 

Some institutions foolishly choose to not manage compliance risk and consider fines to be a business cost.

 

Regardless of your company’s compliance risk level, here’s what you can do to manage risks at different levels.

 

 

Little to No Compliance

 

If your institution has a minimal compliance focus, you can at least create a compliance risk team to define, assess, and assign resources based on the company budget.

 

 

Aging Compliance Process

 

Utilize growth in technology to help improve and innovate current compliance methods using tools.

 

You can invest in well-rounded compliance solutions to manage various steps of the compliance risk management and assessment process.

 

 

Active Compliance Process

 

Most compliance processes require large amounts of documents that need to be reviewed.

This can be done using automation and using AI to organize paperwork related to compliance issues.

 

 

Valuable IP

 

Use digital communication monitoring systems to oversee text, emails, social media patterns, and more to manage and oversee employee communications to protect against compliance risk.

 

 

Conclusion

 

Risk management is challenging, but with the proper team behind you, your institution, stakeholders, and employees can be safe, satisfied, and profitable.

 

Regardless of the risk and approach you take to address them, it should be evident why compliance risk and management is important to run your business properly.

 

Compliance risk is present in every business, no matter the size.

 

It requires processes to protect customers and businesses.

 

Failure to address compliance risks can result in detrimental effects on your institution.

 

Contact Radd LLC for more information.