8 Types of Compliance Risk You're Guilty Of


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Thursday, June 8, 2023

Compliance risks come in many forms, and it's easy to overlook some of the less obvious issues that could lead to breaching the rules.

Article 9 Minutes
8 Types of Compliance Risk You're Guilty Of

Compliance is something no business can afford to have a casual attitude about. In today's environment, corporate responsibility is more important than ever, for both customers and investors, so any enterprise that isn't taking this seriously is likely to see a range of negative consequences.

This isn't just limited to attention from regulators and the potential for large penalties. In fact, regulatory compliance is only one part of today's risk management picture. Companies also need to prove that they're setting and sticking to their own internal compliance rules to remain safe.

Despite this, many businesses are still failing to adequately define and identify all the various compliance and operational risks they may face. This could be partly because there's such a wide range of issues to be taken into consideration, from keeping up with new privacy rules to meeting voluntary sustainability goals.

Why you should pay attention to compliance risk management

With so many requirements and potential dangers to be aware of, most businesses have something to gain from effective compliance risk management. It can help you identify potential threats and issues that could expose the organization to regulatory or legal action, putting you in a better position to mitigate or avoid them, or deal with them when they do arise.

It's important that your strategy is unique and tailored to your company. Every business is different, so the approach you take to managing compliance risk needs to be unique too.

One of the first and most significant steps in this process is educating yourself on various types of compliance risk and how they can affect you. Here are eight types of risk to focus on:

1. Privacy breaches

One of the biggest considerations for any business today is how they handle the huge amounts of sensitive and confidential information they possess. While data such as intellectual property and trade secrets need to be protected, the personally identifiable information of employees and customers needs to be a top priority.

There are increasingly strict regulations governing the usage of this, while at the same time, the public is more aware than ever of the value of this information and the risks they face should it be compromised.

Some organizations, such as those in the finance industry or the healthcare sector, may have especially tough external compliance requirements in this area, but it's something that every firm needs to focus on. Aside from the threat of fines, companies that don't take good care of their customers' most personal details will find it very hard to build and maintain trust.

2. Environmental and sustainability concerns

Sustainability and an organization's environmental performance are key concerns for a growing number of people. According to IBM, nearly 8 in 10 consumers said that sustainability is important to them, and more than 70% would pay a premium for products that are sustainable and environmentally responsible.

There are a wide range of issues associated with this:

  • How sustainable is your supply chain?
  • What are the environmental impacts of your products when used or discarded?
  • How much CO2 do your employees generate when traveling for business?
  • What should you be doing to reduce the carbon footprint of your organization?

These areas are easy to overlook, but even if you're meeting minimum government and industry standards, customers and stakeholders may have higher expectations, so strong internal compliance is a must in this area.

3. Corrupt and illegal practices

How you deal with the potential for illegal activity within your organization is another important factor. This can come in a wide range of forms, from executives taking or offering bribes to insiders committing fraud or siphoning funds.

You can't assume this won't happen to you, or that all your employees will be honest or loyal enough not to engage in such practices. Ultimately, you're responsible for everything that takes place in your business, so you need strong internal controls in place to monitor your operations for any suspicious activity.

4. Process risks

Process risk management covers all the various day-to-day activities that go on within the business, from quality assurance checks to maintenance of critical machinery or IT systems. There are a range of things that can go wrong within these areas that can result in compliance breaches.

For example, human error could lead to essential financial reporting being incomplete or inaccurate, which can leave you in violation of various industry or government regulations. On the internal compliance side, failure to follow specified steps for activities such as IT management or repair schedules can leave businesses more vulnerable to hackers, or result in greater risk of equipment failure.

5. Health and safety

Potential threats to the safety of your workforce or your customers can be particularly damaging if you don't keep a close eye on this area. Regulators such as OSHA have significant powers when it comes to penalties, not to mention the reputational harm this can have.

This isn't just limited to obvious dangers such as factory floors where there's heavy machinery. Risk assessments need to cover any potential scenario. For instance, if a sales rep has to drive to meetings, you need to check their license and confirm they have no medical conditions that may put them in danger. Even in low-risk workplaces like offices, you need to prove you've done the necessary audits to remain compliant, from evaluating electrical devices to having a clear system for reporting issues.

6. Employee behavior

There are various ways undesirable and unprofessional employee behavior can raise your compliance risk. Particularly egregious instances of discrimination by managers or team leaders toward employees, for example, could make you vulnerable to legal issues. As well as creating obvious financial problems, this could have a damaging impact on your employer brand and public opinion.

Harassment, bullying and workplace violence are also serious compliance issues that should be treated with a zero-tolerance approach. You have a duty of care toward your workforce, and if you fail to uphold it, the consequences can be severe for individual employees and the entire business.

7. Payment card data

Payment card data represents a significant compliance risk that organizations must be cognizant of in today's digital landscape. The potential risks associated with the mishandling of this sensitive information can lead to severe legal penalties and long-term reputational damage, ultimately posing a considerable business risk. Organizations that fail to implement robust security measures and data management processes to protect payment card information may find themselves facing fines, lawsuits and loss of customer trust. As cyber threats continue to evolve, it's crucial for businesses to stay informed about regulatory requirements and industry best practices to mitigate the risk of payment card data breaches and non-compliance, ensuring the long-term success and stability of their operations.

8. Disaster preparation

A lack of disaster preparedness poses a significant compliance risk that organizations must address proactively. Inadequate planning can lead to the failure of internal policies, exposing the organization to financial risk and potential legal consequences. By not considering various disaster scenarios, companies may find themselves unprepared to respond effectively, resulting in operational disruptions, reputational damage and potential losses. To mitigate these regulatory risks, organizations should invest in robust disaster preparedness strategies, ensuring that internal policies are aligned with regulatory requirements and best practices. This proactive approach will not only protect the organization from potential liabilities but also enhance its resilience and adaptability in the face of unforeseen challenges.

How to manage compliance risks

Once you have a good understanding of the potential risks facing your company, you can start to develop a plan to manage them. A structured, step-by-step approach can work well if you want to be sure you're not overlooking anything.

Here are some key priorities to bear in mind:

  • Treat third parties with caution

There are various ways third parties - such as vendors, partners, contractors and service providers - can pose a compliance risk to you. If your relationship with a supplier requires you to share sensitive customer data with them and those details are compromised, you could be held liable. It's essential, therefore, to follow a strong and consistent due diligence process before entering into any third-party relationships.

  • Stay up to date with rules and regulations

One surefire way to increase your compliance risk is by falling behind with changes in legislation and rules affecting your industry. Make sure you follow clear procedures to stay up to date with the latest legal and regulatory developments. This might involve attending conferences and events, reading dedicated industry publications and using specialist compliance software.

  • Promote a culture of transparency and communication

Your workforce is one of the most valuable tools at your disposal in the mission to improve compliance risk management. If employees see things happening in the workplace that could pose a genuine legal threat to the company, such as fellow workers engaging in illegal or unsafe practices, they should feel confident about speaking up without any fear of exposure or reprisal.

  • Constantly monitor and update your risk management methods

Industry laws and compliance regulations don't stand still, and neither does your business, so your approach to compliance risk management should be constantly evolving as well. Rather than dismissing it as a one-off or simply a burdensome box-ticking exercise, you should view this process as an ongoing priority and an area where there's always room for improvement.

How can you ensure compliance in the workplace?

It's important to plan positive, proactive measures that will promote compliance in your workplace, such as:

  • Offering dedicated compliance training to demystify a potentially complex subject and explain why it's so important
  • Clearly documenting your company policies and procedures, keeping them up to date and making them easily available to all employees
  • Making compliance as easy as possible for your staff, by providing the technologies, information and support they need to maintain positive practices

By investing adequate time and resources in compliance and your risk management practices in this area, you can achieve crucial protection for your business against financial and reputational dangers.

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