Compliance risk analysis is an essential part of any effective compliance program. By understanding the risks an organization faces and taking steps to mitigate those risks, compliance can help protect your company from regulatory penalties and other costly consequences. Compliance risk is a critical issue for organizations in all industries. Understanding and mitigating compliance risks are essential to protecting your business and your customers.
Legal and regulatory compliance is the main focus in preventing and controlling misconduct that might impact your organization. While policies and procedures can help define how to conduct business in a certain way, they cannot anticipate every possible scenario. As such, compliance needs to account for unplanned circumstances so employees know exactly what to do when faced with an unforeseen situation.
The most effective way organizations can do this is through risk analysis. Risk analysis helps identify the risks associated with your business activities, what impact these may have on your customers, and how to plan for them. Planning for compliance risks helps ensure you minimize the risk of non-compliance and develop procedures for dealing with those risks should they materialize.
Risk analysis is a process that allows you to think through possible consequences, identify vulnerabilities, and plan mitigation strategies before a problem arises. To effectively manage compliance risks, an organization must:
- Determine its tolerable level of non-compliance.
- Identify and categorize compliance risks.
- Develop procedures to minimize or mitigate compliance risk:
- With a policy: Specifying what is expected of employees and the consequences for not complying.
- With training: Training employees on expectations and new policies.
- With audits: Ensuring new policies are being followed
In this blog post, we’ll discuss what compliance risk analysis is and explain why it’s so important for businesses of all sizes. We’ll also offer tips on how to get started with your own compliance risk assessment. So read on to learn more!
What is Compliance Risk?
Compliance Risks represent the organization’s potential risks for non-compliance in any way. Regulated businesses will face fines and penalties for failing to comply with the regulations and laws. These sanctions may include penalties or disgorgements for profiting from unprofessional business practices or disciplinary action which may be costly to execute. An organization may also face legal expenses during the investigation from the governmental authorities.
The chief compliance officer will initiate a corporate compliance program that allows organizations to stay compliant with regulations, controls, and laws. The Chief Compliance Officer also identifies the compliance risks that may occur within the organization. By having a compliance program, compliance management of applicable laws creates an effective compliance program.
compliance efforts are the coordinated activities of an organization in order to comply with laws, regulations, or rules. The company must embrace a culture that fosters compliance. Starts with having a compliance department that ensures a company is in compliance with all possible standards.
Compliance standards can be enforced by the compliance department, which will ensure the organization adheres to the standard guidelines and rules. Compliance Risks are identified during a Risk Assessment process, where risk assessment is a detailed review of the risks to persons, property, information, or equipment that may arise. Most financial institutions have a compliance program.
Compliance Risks are increasing globally due to increasing government control and globalization. Globalization has led companies to do business in different cultures where laws and rules are different than their home country.
These risks are usually identified by conducting due diligence on any system which will bring about new business models or processes, creating a research business plan, market study, or any information that can be shared throughout the company
What is Compliance Risk Assessments?
Compliance officers are not the only ones who perform compliance risk analysis. Typically this is also one of the first things a compliance person can do when they see a risk or danger.
Compliance risk assessments need to identify risks, emerging new compliance risks, make a plan for action, and monitor to see how effective the actions are in dealing with the risk. Residual risks need to be at an acceptable level before the compliance department can approve.
In a risk assessment, you identify risks and determine how effective they are in your compliance program. Organizations then implement mitigation plans to decrease the severity of the risk, put controls in place to lower the risk, or transfer it to another party. The goals for these actions are to reduce the impact of noncompliance and to help the organization comply with regulations.
Compliance risk assessments vary, depending on what plans need to be made and what is being assessed. Here are a few common factors that influence how organizations create their risk assessment:
- Industry size
- Compliance function size and resources
- Type of regulation or standard being followed.
Purpose of compliance risk assessment?
As data privacy regulations become widespread and cybersecurity threats are becoming increasingly prevalent in organizations, compliance risks have increased. A compliance professional understands the need to improve compliance risks and the value of corporate stakeholder engagement. It begins with a risk assessment based on a risk assessment assessing all possible compliance hazards and identifying their severity.
- To identify and assess compliance risks related to an organization’s operations, products, services, and dealings with third parties
- To develop a compliance risk management strategy that will help mitigate those risks
- To provide a framework for ongoing monitoring of compliance risks and the effectiveness of the organization’s risk management strategy
Compliance programs are customized for a specific firm and must address every risk identified and addressed. Effective compliance programs may lead regulators to be more cautious if there is a corporate misconduct investigation. The federal government has updated a federal criminal prosecution guide for prosecutors on how they evaluate compliance programs for corporate investigations.
Difference between compliance risks assessment and other risk assessments
Risk assessment is available across various business industries including finance, government contracting, and healthcare industries. Compliance Risk Assessments are a comprehensive way to identify risks that exist if your business faces a threat from non-conformance to its regulations. Potential consequences may include fines or loss of reputation. Unlike other forms, compliance risk assessment focuses on legal and regulatory requirements that an organization must satisfy.
- Compliance risks assessment looks at a company’s exposure to specific legal and regulatory risks. Other types of risk assessments may not take these into account.
- Compliance risks assessment is often specific to certain industries or sectors, while other types of risk assessments may be more general in nature.
- Compliance risks assessment will often involve a review of a company’s policies and procedures, while other types of risk assessments may not.
- Compliance risks assessment will generally identify specific steps that a company can take to reduce its exposure to risk, while other types of risk assessments may not.
Challenges in conducting a compliance risk assessment
- Determining the applicable compliance framework
- Gathering and reviewing the documentation
- Conducting interviews with key personnel
- Identifying and assessing risks
- Developing a remediation plan
- Gathering accurate and relevant data across all business units and geographies can be challenging
- Identifying potential risks and assessing the likelihood and impact of those risks can be complex, time-consuming, and resource-intensive
- Developing an effective mitigation strategy that balances risk against business needs can be difficult
- Implementing a compliance risk management process is a significant undertaking that requires ongoing management buy-in and support from senior leadership.
Steps in Compliance Risk Analysis
Define the organization’s compliance risk appetite
Compliance risk appetite is a management tool that organizations use to make decisions about the level of risk they are willing to accept in order to pursue their business objectives. It is a framework for thinking about and managing risks and provides guidance on how much risk the organization is willing to take on relative to its size, complexity, and risk tolerance.
Compliance risk appetite is typically comprised of two elements:
- The amount of compliance-related losses (or other negative outcomes) an organization is willing to withstand within a given time period
- The types or categories of compliance risks an organization is willing to assume
Risk appetites can be described in terms of “high,” “medium,” or Low or four components to compliance risk appetite: acceptable, tolerable, manageable, and unacceptable.
- The acceptable level of risk is the point at which the company is willing to break the law in order to stay in business,
- The tolerable level of risk is when the company experiences a financial loss but can still stay in business
- The manageable level of risk means that the company has enough resources to cover any potential fines or penalties
- The unacceptable level of risk is when a company would go out of business if they violated a regulation
Identify areas of potential non-compliance
There are a few areas where an organization could be at risk for noncompliance. Work from home policies, attendance, and time tracking are a few key areas to focus on. Make sure that all employees are familiar with the company’s policies and procedures, and that they are following them closely. Having regular audits can help to ensure compliance.
- Employees may not be aware of the company’s policies on non-compliance
- Employees may not understand what is expected of them with regards to non-compliance
- Employees may feel pressure to meet quotas or performance goals and may resort to unethical practices in order to do so
- Company culture may not be conducive to reporting incidents of non-compliance
- Management may not be taking active steps to prevent and/or detect incidents of non-compliance
- There is a lack of standardization in the way data is collected across different studies
- Not following proper safety protocols
- Allowing hazardous materials to be stored in an unsafe manner
- Failing to provide adequate safety equipment
Assess the likelihood and impact of potential non-compliance
The likelihood of a company achieving compliance is always a risk analysis question and depends on the specific facts and circumstances of each case.
There can be serious consequences for companies that are not compliant with GDPR, including fines up to 4% of a company’s global annual revenue or €20 million (whichever is greater), as well as corrective action and reporting obligations.
If a company experiences a data breach that results in the exposure of personal data, they could also be subject to enforcement actions including fines of up to 2% of global annual revenue or €10 million (whichever is greater), as well as notification requirements to individuals and supervisory authorities.
Mitigate risks by implementing controls
Implementing controls helps to mitigate risks by limiting or preventing access to certain areas or information, implementing checks and balances, and providing standard operating procedures.
Some common controls include passwords, user permissions, firewalls, intrusion detection systems, and anti-virus software.
Controls should be tailored to the specific business and its risks and should be reviewed and updated regularly.
- Implement a system of compliance controls to mitigate risks.
- Periodically audit your compliance controls to ensure that they are effective in mitigating risk.
- Keep records of your compliance controls and audits for future reference.
- Educate employees on your compliance controls and the risks associated with noncompliance.
- Enforce your compliance controls through disciplinary action when necessary.
Monitor and report on compliance status
A compliance monitoring program should be in place to regularly track and report on the compliance status of the company.
The program should include processes and procedures for reviewing and assessing regulatory requirements, as well as for identifying and addressing non-compliance. Periodic reports should be generated documenting the findings of the compliance reviews, as well as any corrective actions that have been taken.
The compliance monitoring program should be tailored to meet the specific needs of the organization and should be reviewed and updated on a regular basis.
In order to stay compliant and protect your business, it is important to understand your compliance risk appetite and identify areas of potential noncompliance. Assessing the likelihood and impact of potential non-compliance is essential in mitigating any risks. By implementing controls and monitoring your compliance status, you can reduce the chances of something going wrong.
Now that you’ve learned about compliance risk analysis, it is time to take action. If your company has not already done so, we recommend implementing a formal compliance program and performing an assessment of the risks faced by your organization. Once this step is complete, consider mitigating those risks with controls such as policies and procedures. Finally, monitor and report on any changes in noncompliance levels over time to ensure continued success for both an organization and its customers.
Compliance risk analysis is an essential part of any effective compliance program. When you understand the risks your organization faces and take steps to mitigate those risks, compliance can help protect your company from regulatory penalties and other costly consequences. If you’re serious about protecting yourself and your customers, a thorough understanding of this important topic is imperative for success in business today. Let us know if we can be of assistance with designing a compliance program that works for you!
Chris Ekai is a Risk Management expert with over 10 years of experience in the field. He has a Master’s(MSc) degree in Risk Management from University of Portsmouth and is a CPA and Finance professional. He currently works as a Content Manager at Risk Publishing, writing about Enterprise Risk Management, Business Continuity Management and Project Management.