Glossary

Compliance Risk Assessment

A compliance risk assessment is an audit or evaluation of the risks associated with an organization’s activities, processes, or policies. This assessment aims to identify and analyze potential issues arising from non-compliance with relevant regulations, laws, or other legal requirements. Failure to comply can cost millions of dollars, so the evaluation and correction of risks play a critical role in protecting a company’s interests.

The Main Compliance Risks Affecting Organizations

Managers must take a multi-faceted approach when evaluating the risks their companies might face. They must consider the types of compliance failures and the many ways those failures can impact the business.

Financial Impact

Financial penalties and other costs associated with failure to comply with financial regulations may include fines, higher taxes, or even termination of business operations. For example, the SEC reported $6.4 billion in penalties for the fiscal year 2022. Economic and political experts expect this figure may increase as the government promises to pay closer attention to business operations, particularly in the financial sector.

Reputational Damage

Poorly managed data breaches, fraud, and other compliance issues are some of the most common causes of reputational harm. Organizations will only retain customers if they can meet their expectations and maintain a good image. For example, in 2018, CNN projected a loss of $93 billion in customer deposits after reports of fraud at Wells Fargo. The bank has struggled to rebuild its image since then and recently faced yet another scandal.

Legal Ramifications

Organizations must adhere to local, state, and federal laws to protect their assets from legal action due to non-compliance. For example, the Health Insurance Portability and Accountability Act (HIPAA) sets specific privacy and security standards for companies that handle protected health information (PHI). If a breach of PHI occurs, the organization may face costly fines, penalties, or lawsuits.

Business Impact

Organizations might also lose productivity and other business opportunities if they violate compliance regulations. For example, the Department of Labor requires employers to provide a safe and healthy work environment. If an organization fails to do so, local authorities may shut down operations until the company resolves the issues that make it non-compliant.

The Compliance Risk Assessment Process

A compliance risk assessment typically involves an in-depth review of policies, procedures, records, and internal and external audits. Managers should understand the compliance regulations that affect their business operations and any potential risks associated with those regulations. Here are some steps for accomplishing this.

1. Identify the Risks

Organizations must first identify the risks associated with their operations. This step requires an assessment of the organization’s regulatory requirements, processes, and procedures to determine where potential problems could arise. Managers should also ascertain whether regulations have changed.

2. Evaluate the Risks

Once organizations have identified the possible risks, they need to evaluate them in terms of probability and impact. This process helps them determine the most severe risks and what parties might be directly affected.

3. Evaluate Current Control Measures

How well do the existing control measures address the risks you identified? Do you see gaps in their ability to maintain compliance? What can you do to fill these gaps? These are some questions you might need to ask when evaluating your current state of affairs.

4. Develop Strategies

Organizations must prioritize the highest-impact risks and create a plan to address them. Strategies may include the following:

  • Training employees on regulatory requirements
  • Implementing new policies and procedures
  • Utilizing automated systems for monitoring compliance

5. Monitor Progress

Organizations should monitor their progress in addressing identifying and correcting compliance gaps. This helps them ensure they remain compliant and avoid potential penalties, public scandals, data breaches, and business disruptions.

Why Complete a Compliance Risk Assessment

Over the past few years, Wells Fargo has weathered repeated scandals. The first prominent claim arose in 2013 when customers saw millions of fraudulent accounts opened in their names. This led to public distrust, the withdrawal of customer deposits, and a cap on the bank’s assets. The company also paid billions to customers who filed class-action lawsuits.

Knowing the potential downsides of non-compliance is critical, but the benefits of regular assessment are also important:

  • Provides the opportunity to take a proactive approach to compliance
  • Provides proof that the bank took steps to remain compliant and detect fraud
  • Keeps the company abreast of changing regulations
  • Protects customers and other key stakeholders
  • Preserves the bank’s reputation

The Role of Message Capturing and Archiving in Compliance Risk Assessment

Client communication poses a compliance risk and should therefore be carefully assessed. Financial regulators such as FINRA, SEC, or ESMA require firms to keep a record of client conversations conducted over digital channels. This includes communication through new channels, such as messaging, which may not have been explicitly authorized. It’s important for financial institutions to have the proper infrastructure in place to capture and archive all client communication, regardless of the channel used.

LeapXpert is a leading provider of automated message capturing and archiving services. We make it easy for organizations to streamline and capture everyday communications. Book a demo to see our product in action.