This article will explain how compliance risk management works. We will learn why risk management matters and how managing risk varies between industries. Readers will learn about compliance risk best practices, and how to use frameworks to simplify the risk management task. The result will be a solid grounding in:
What risk management is and how it relates to compliance
How managing compliance risks varies
How to build compliance risk management strategies
Compliance risk management definition
Compliance risk management involves identifying, controlling, and assessing the regulatory risks that an organization faces. Risk managers must understand significant compliance risks. They must apply appropriate mitigation measures. And they need to monitor risk management strategies to ensure that controls function effectively.
Potential risks of non-compliance
Compliance refers to following industry regulations. Rules and regulations are usually set by governments and legally enforced. But some sectors use private compliance frameworks. In all cases, regulations set standards for companies to follow. And they penalize organizations that fail to comply.
Non-compliance involves violating regulatory guidelines. And being in a situation of non-compliance has serious consequences. For example, non-compliant companies could experience:
Regulators levy financial penalties or other sanctions on organizations that do not meet required standards. And these punishments can be significant. For example, healthcare company Anthem received a $16 million fine under the Health Insurance Portability and Accountability Act (HIPAA) in 2018.
Financial companies must also comply with international sanctions and anti-money laundering laws. Non-compliance penalties in these situations can be extremely large. For instance, the Dutch government fined ING $897 million in 2018 for breaching anti-money laundering laws. And BNP Paribas had to pay an $8.9 billion fine in 2014 for breaching US-imposed sanctions.
The cost of penalties is not limited to regulatory fines. Companies that violate regulators must spend money on remediation work. This includes legal and auditing costs or the price of bringing in expert consultants.
Non-compliant companies suffer a loss of trust among customers and partners. And this can be devastating for the organization concerned. One 2021 study by Okta found that 88% of respondents would stop buying products from a company that exposed their data. In competitive marketplaces, this is something few businesses can afford.
Companies cannot keep data breaches or regulatory fines secret. Customers spread the word on social media. Data loss is a major news item, and media outlets constantly carry stories about reckless data management. So non-compliance will filter through into a company's business prospects.
Non-compliance can create supply chain bottlenecks when regulators detect violations. For example, companies that ship abroad must comply with customs regulations. They must ship products safely, avoid restricted items, complete paperwork, and pay relevant duties. If not, their shipping operations can grind to a halt.
Failure to comply with regulations can also damage general business efficiency. Cybersecurity regulations enforce high standards of data and network protection. Non-compliant companies often suffer network downtime due to poor security. And poor network management may lead to inefficiencies in other areas.
In some cases poor compliance risk management can lead to prosecution and imprisonment. Not all regulations carry criminal penalties. But breaches of HIPAA or the Sarbanes-Oxley Act (SOX) can lead to prison terms.
The consequences listed above all lead to financial damage. Calculating the exact cost of non-compliance is not simple. But experts suggest the cost of non-compliance averages $15 million per company. Putting in place compliance strategies costs money. But these investments tend to outweigh the costs of not complying.
What are industry-specific compliance risks?
Compliance is not a one-size-fits-all challenge. Regulations differ between industries. This means that compliance risks vary as well. Let's look at some important sectors and explain their core compliance risk management concerns:
Financial institutions have to deal with a complex array of regulatory risks. Compliance regulations affecting the financial sector include:
The Gramm-Leach-Bliley Act (GLBA)
The Dodd-Frank Reform and Consumer Protection Act Act
The Bank Secrecy Act (BSA)
The Anti-Money Laundering Act (AMLA)
The Investment Companies Act
Financial companies must also follow guidelines laid down by the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), and the Office of Comptroller of the Currency (OCC). And they are also covered by credit card handling regulations such as PCI-DSS.
Regulations require finance companies to:
Ensure transparency and provide accurate reports to government agencies
Prevent criminality within the banking sector
Put in place protection for banking depositors and clients
Protect client privacy and ensure data security
Separate parts of financial businesses according to law
The critical regulation for healthcare companies in the USA is the Health Insurance Portability and Accountability Act. HIPAA seeks to protect patient privacy and defines clear standards for companies that handle private data.
Health insurers must also follow reimbursement regulations such as the Affordable Care Act. And they may need to respond to guidance from the Centers for Medicare & Medicaid Services (CMMS) that administers the Medicaid program.
E-commerce and retailers
Merchants must comply with regulations designed to protect cardholder data. Payment Card Industry Data Security Standards (PCI-DSS) are the most significant regulations for merchants. The major credit card processors administer PCI-DSS standards. They require strict data protection policies and controls. And breaches lead to damaging fines or suspension from payment processing systems.
Food and beverages
Producers of food and beverages must comply with Food and Drug Administration (FDA) regulations. The FDA administers a range of regulations relating to food safety and quality. The US Department of Agriculture (USDA) also regulates meat, egg, and fish producers.
Pharma companies have strict compliance obligations to ensure consumer safety. In some cases, drug producers must comply with HIPAA rules. The FDA regulates the labeling of consumer pharmaceuticals. It also manages the approval of new drugs and ensures that pharmaceutical companies test them thoroughly before they enter the marketplace.
Industrial manufacturing and energy
Large-scale industrial companies must comply with environmental regulations. Examples include the Clean Air Act and the Clean Water Act. Both regulate the emission and discharge of dangerous substances into the environment. And both laws are administered by the Environmental Protection Agency (EPA).
Industrial organizations must consider health and safety compliance risks as well. These risks are managed by the Occupational Safety and Health Administration (OSHA).
Types of risk management
Risk management is a diverse field, and compliance risk management is just one variety. Other types include:
Enterprise Risk Management (ERM) identifies risks that apply across an entire organization.
Financial Risk Management (FRM) only looks at risks that affect an organization's financial health.
Operational Risk Management (ORM) examines risks to routine operations and processes.
Strategic Risk Management (SRM) assesses risks that affect a company's strategic goals.
Reputational Risk Management (RRM) identifies and mitigates risks to a company's brand reputation.
Risk management strategies usually include two or more of the above approaches. For example, a compliance risk management plan might supplement an ERM strategy. Compliance risks also feed into RRM and SRM strategies.
Compliance is an overarching corporate challenge. Companies cannot protect their financial health or reputation without ensuring compliance. And long-term strategies must include compliance with emerging laws and regulations.
Compliance risk management best practices
Risk management must be systematic and comprehensive. But managing risks can be challenging. Follow these risk management steps to control compliance risks and avoid gaps in your strategy.
Establish clear lines of oversight. Officers at management level should supervise compliance risk management. Managing risk requires the authority to change processes and technology in all parts of the business. And it also requires resources to make those changes. Only executive-level management can ensure this happens.
Create risk management structures. Effective risk management requires a structured approach. Use a risk management approach involving flow diagrams, project milestones, and post-project auditing. Assess risks with risk mapping and key indicators. Use this information to identify the controls required to meet regulatory goals.
Take time to determine key risks. Good risk management strategies connect mitigation measures with the most important compliance risks. Risks could include data breaches, system failure, malware infection, or even health and safety violations. Create a matrix containing each critical risk. Prioritize risks according to their potential consequences. Decide what controls are necessary. And create processes to implement and assess those controls.
Ensure information flows are smooth and effective. Managing risk relies on a free flow of information between employees and managers. Compliance teams should provide regular reports to managers. Whistleblowing and complaint systems should allow anonymous feedback from staff members.
Bring in outside testing experts. Companies are not always the best judge of their compliance status. Bring in external auditors and certified testing experts to verify that systems comply with regulations.
Following these best practices will help you create effective compliance risk management processes. Organizations should structure these processes around a carefully planned compliance risk management program.
What is a compliance risk management framework and how can you use it?
Compliance risk management frameworks explain the controls and processes companies use to achieve regulatory compliance. Framework documents bring together compliance risks across the entire business environment. They allow compliance teams to:
Understand the most significant risks posed by rules and regulations
Prioritize mitigation measures to work efficiently
Assign risk management tasks to individuals within the organization
Schedule risk management projects and achieve milestones within predefined timescales
Assess risk management continuously and change strategies if needed
Comply with regulatory requirements regarding auditing and risk assessment
Every organization should use a compliance risk management framework. Companies often base their frameworks on external standards. For instance, NIST 800 is a common compliance framework for IT companies. Or companies can create their own tailored systems. All risk management frameworks should include four critical elements:
1. A comprehensive compliance process
Organizations should base their compliance process on a full-scale compliance review. This review documents existing controls and policies. It assesses whether security controls and internal policies meet compliance goals.
If you are using an externally supplied risk framework such as NIST, compliance teams can cross-reference elements of this framework with internal processes. Cross-referencing saves time and helps to implement industry best practices.
Compliance officers use the review to recommend ways to make the organization compliant. Officers consider every relevant compliance risk. They decide what action to take about that risk, including avoidance or transferral if possible. Andif controls are needed, compliance teams determine how to manage risks effectively.
The outcome of this review is the organization's compliance process. The compliance process puts compliance risk management plans into action. Steps involved generally include:
Policies that define how the organization complies with regulations.
Controls and procedures that contribute to successful compliance.
Training and auditing processes.
2. Participation from key stakeholders
Managers should be involved in agreeing and overseeing the compliance management framework. Their role should include drawing up a code of conduct and determining penalties for breaching compliance policies. Executive-level officers should sign off on the framework before it becomes operational. And they should provide the resources required to facilitate compliance processes.
3. Complaints and whistleblowing programs
Compliance frameworks should include feedback systems. Feedback from customers, partners, and employees will help companies comply with regulations. Whistleblowing is particularly important. Compliance teams must create ways for individuals to report concerns anonymously. And these concerns should be documented and acted upon.
4. External assessment
Qualified experts should audit compliance management frameworks to determine their effectiveness. Auditors must carry out compliance audits annually. These exercises check compliance processes and compare them with regulatory demands. Managers should be involved in the audit project. And they should provide the resources needed to make changes the external assessor recommends.
How to use risk management frameworks
Companies can implement risk management frameworks by using specialist risk management technology. For example, risk management software automates basic tasks like scheduling document submissions or creating task management calendars.
Risk management software combines elements of the compliance strategy, including policies, controls, and risk spreadsheets. All identified risks will be visible and easy to manage.
With everything under central control, compliance teams can quickly check progress. They can add new tasks as regulations change. And they can assign resources based on priority or risk profiles.
Using centralized risk management software also encourages continuity. Risk management should be a continuous process. Compliance teams can maintain the flow of the compliance process via regular audits, risk assessments, and management consultations.
How do risk management and compliance management differ?
At this stage, it's important to differentiate risk management from compliance management. The two concepts are closely related but slightly different.
Risk management deals with all risks faced by the organization. This could include natural disasters, employee accidents, client privacy breaches, or even toxic chemical leaks. As we noted earlier, there are many forms of risk management.
Risks may not be covered by regulatory rules. But companies might still want to consider them to meet corporate goals. For instance, a footwear manufacturer may see using animal products as a business risk if their audience is mainly vegetarian. But this isn't a regulatory risk.
Compliance management deals with meeting regulatory requirements. Compliance risk assessment only seeks to comply with rules and regulations laid down by external authorities. This is a more focused approach than general risk management.
Conclusion: use compliance risk management as part of your risk assessment strategy
Compliance risk management is part of the wider risk assessment process. Companies need robust processes to determine compliance risks and minimize the chance of legal penalties. But risk management is not solely about meeting regulatory requirements. Companies have diverse goals and priorities. And each organization will minimize risks in a way that suits its business needs.