Compliance Risk Management: What It Is + Best Practices

March 10, 2023
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Many types of companies - such as financial institutions, payment processors, and online marketplaces - are responsible for AML compliance when conducting business. As a legal requirement, there are serious penalties (ranging from hefty fines to criminal charges) for failing to meet regulatory compliance requirements.

This puts companies at constant risk of breaching and violating compliance rules - a risk that needs to be effectively managed to keep the organization safe.

According to Brandi Reynolds, Managing Director of AML & Compliance at Bates Group, "When it comes to assessing risks in today's world, there's no one-size-fits-all approach. Instead, it's about developing policies and procedures that are adaptable, defensible, and dynamic. This kind of thorough, systematic thinking is what regulators are looking for in a sound compliance program. To ensure solid compliance, it's essential to consider risks and take preventive measures actively."

In this post, we explore the concept in more detail by covering the following:

Let’s explore what we mean by compliance risk management and the best practices for managing risk associated with compliance operations.

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What is Compliance Risk Management?

Compliance risk management is the process of identifying and mitigating risk associated with an organization's compliance operations. It involves processes, procedures, policies, and strategies that companies use to ensure they adhere to relevant compliance requirements.

Therefore, when we talk about compliance risk management, we’re referring to any efforts to ensure regulatory compliance is followed and all risk associated with non-compliance is mitigated.

Risk management in banking is a broad topic, encompassing fraud, operations, systems, and so much more. But compliance risk management is narrowly focused on managing and mitigating risk related to compliance operations and efforts within the company.

What are the Risks of Non-Compliance?

Compliance risk management is essential because non-compliance can be costly - and not just monetarily.

Below, we cover the main consequences of non-compliance:

Penalties and Fines

The most common consequences of non-compliance are monetary fines and penalties. While these can be small, major - or repeated - compliance failures can rack up substantial sums. The fine is dependent on the violation, and they can vary greatly depending on the degree of non-compliance.

In serious cases, individuals may be criminally liable for their actions and can face jail time. Organizations and individuals can also be sanctioned, which can hinder an organization's ability to conduct business effectively.

None of this factors in the costs associated with rectifying the problem, which will typically require an internal audit, investigations, and engineering updates.

Reputational Damage

Consumers expect a lot from businesses that collect, store, and manage their personal information and facilitate their transactions. They also have a lot of options when it comes to spending their money, and they will often show their pleasure (or displeasure) with businesses with their wallets.

Companies that suffer non-compliance violations are likely to suffer reputational damage. This negative publicity can potentially ruin years of carefully orchestrated brand management. In some cases, these violations can never be rectified.

Dissatisfied customers will look for an alternative, potentially never returning to your service. Employees may also feel unhappy, and choose to take their talents elsewhere, stripping your organization of its skill sets - and causing it to struggle to succeed further.

It’s crucial that organizations follow compliance regulations and avoid the fallout of failing to meet compliance standards - standards designed to protect consumers from fraud and money laundering. Employees and other members of staff must be trained and educated regarding the risk so they ensure adherence to regulatory requirements is prioritized.

Service Interruptions

Financial institutions, payment providers, and online marketplaces are heavily reliant on the partnerships they have with other vendors and service providers. If these partnerships suffer due to non-compliance, services could be suspended or taken down completely by the provider.

An online retailer, for example, relies on a KYC vendor to help with customer verification and a payment processor to facilitate transactions. If either of these were to break down, the business could suffer greatly.

If the KYC vendor cuts off their services due to non-compliance, the retailer will be forced to look for a replacement. In the meantime, they have no way of validating users, and need to shut down onboarding operations until they can perform basic KYC procedures.

If the payment processor finds the retailer isn’t upholding the agreed upon compliance requirements, they could restrict the services the online retailer has access to (i.e. they could require 5-day holds on checks rather than authorizing same-day clearing), or pull the services entirely. The retailer would have to change their service offerings, or worse, find a new payment provider (likely without any service in the meantime).

Compliance Risk Management Best Practices to Follow

By minimizing an organization's compliance risk, businesses may prevent serious financial and legal repercussions and increase credibility. Establishing a policy with clearly defined procedures guarantees the organization can successfully manage compliance and avoid risks.

The following elements contribute to an efficient compliance-risk management strategy, which is vital for a compliant organization:

Develop Clear Policies and Procedures

The foundation of any program is the policy and procedures that define it; these clearly outline guidelines to be followed and explain what should be done in different situations. The policy will dictate how actions should be taken and will guide staff on how to make - and execute - those decisions.

Policies for mitigating compliance need to be well-defined and documented; leaving little room for misinterpretation or error. The policy should be accessible to all staff, and serve as a reference guide for carrying out their duties. These guidelines should cover in detail how risks will be managed, escalated, and controlled.

Conduct Risk Assessments & Analysis

It’s important to conduct regular risk assessments of compliance programs and operations. This should be done periodically to ensure you’re still following best practices and adhering to all necessary compliance regulations

Risk assessments allow organizations to determine which compliance regulations apply based on their jurisdiction and industry. From this, teams can better understand their responsibilities in relation to compliance. This empowers teams to identify weaknesses and areas of improvement, so they can close gaps and improve overall security and protection.

Intermittent risk assessments help teams develop - and maintain - the proper internal controls to maintain compliance and achieve true safety for users.

Establishing Monitoring Procedures

It’s incredibly important for organizations to stay up-to-date on the most current regulations that apply. While this sounds easy enough, rules and regulations are constantly changing, and there are a range of different regulations to pay attention to.

Compliance officers need to make sure they know of updated regulations, and will need to monitor changes in the jurisdictions and industries that matter to their business. Monitoring for regulatory changes - and updating systems to keep up - is an essential component of any compliance program. A Regtech solution that helps with this regulatory compliance monitoring can be extremely useful to stay compliant.

Updating Compliance Framework

Compliance requirements are constantly changing and evolving, leaving companies struggling to keep up to make sure they aren’t risking a violation. Updating your compliance operations - including your policies, tech stack, and rules engine - to ensure you’re maintaining compliance is imperative.

This is especially important for organizations conducting business in many jurisdictions, who have to navigate a multitude of different compliance rules. But that isn’t enough, teams need to be able to implement the necessary changes to your tech stack, whether that requires rule creation or engineering. Without updating your system, you’ll fail compliance and expose yourself to fines and other penalties.

Risk & Compliance Infrastructure Hand Out

Maintain Regulatory Compliance with Unit21

Maintaining compliance is extremely challenging and time-consuming, especially for companies operating in multiple jurisdictions and complex industries.

To keep the organization and its users safe, companies must ensure that compliance risk management is a core component of not only their AML compliance program, but also their company culture.

According to Christina Rea, CEO at Raycor Consulting, "While it's important to identify risks and implement controls to mitigate them, establishing a healthy culture around compliance risk management is equally as important. Having the process be a collaborative, enterprise-wide effort that's proactive at the outset will save time (and dollars) throughout the longevity of your company.

Being able to stay the course, plan accordingly, and have a spirit of adaptability throughout all the changes that will inevitably come your way (market volatility, consumer trends, new laws, and regulations, etc.) will ensure your compliance and risk management program has a strong foundation on which to build your controls."

Most organizations would also benefit from implementing a Regtech solution that supports their overarching compliance goals.

Book a demo to learn how Unit21 can help your organization maintain regulatory compliance and minimize risk.

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