How to Mitigate Compliance Risk in Your Business

Navigating the intricacies of various laws, regulations, and industry standards is paramount for the survival and prosperity of any business. Compliance risk, which encompasses a myriad of potential pitfalls, is an ever-present threat that can have far-reaching consequences. From legal penalties and financial losses to reputational damage and diminished employee morale, the implications of failing to understand and mitigate compliance risk are significant. 

Thankfully, this guide explores the various types of compliance risks and the steps your business can take to mitigate them from causing severe harm.

In this guide, we will delve into the following. 

• What is a compliance risk?
• What are the types of compliance risk?
• Why understanding compliance risk is important
• Our steps on how to mitigate compliance risk

What is a compliance risk?

Compliance risk is defined as a company's subjection to legal damages, financial penalties and reputational harm due to failing to comply with the relevant laws, regulations, and industry standards. It also includes an organisation's failure to comply with its internal best practices and policies. Otherwise referred to as integrity risk, compliance risk affects businesses of all sizes and industries, from public or private enterprises to profit and non-profit organisations. 

If a company fails to abide by the necessary rules and regulations, it can have a detrimental effect on its revenue and reputation. A failure to comply with regulations can result in restricting a company's ability to attract and retain customers and clients. As a worst-case scenario, compliance risks can result in a brand going out of business. 

It’s important to understand that compliance risk comes in many forms, and each one can have a significantly negative impact on your business. Scroll to discover what the various types of compliance risks are.

What are the types of compliance risk?

As we alluded to, compliance risk can cause severe harm to your business through various means - from privacy and data security risks, workplace health and safety risks to corrupt or illegal activities and more. Having an awareness of the different types of compliance risks is essential before learning how to mitigate compliance risks. 

Here are the most common types of compliance risks your business should know:

• Privacy and data security risks: These types of compliance risks arise from the failure to properly adhere to regulations such as GDPR. It also involves failing to protect sensitive and confidential data, including customer information, employee records, and financial data. A hacker can conduct a privacy and data breach through various cyber-attacks, resulting in the theft, exploitation and destruction of private data.
• Workplace health and safety risks: Companies must ensure they provide a healthy and safe work environment for their employees, which is free from risks such as hazardous materials, unsafe working conditions, and workplace violence. For example, UK businesses must comply with the Health and Safety at Work etc Act 1974, which sets out the general duties of employers, employees, and the self-employed regarding health and safety. 
• Corrupt or illegal activities: A business must enforce legal compliance to ensure its staff comply with the necessary laws and regulations. Failure to comply with regulations can result in risks, such as employees being involved in unethical or illegal activities, such as fraud, bribery, money laundering, and corruption.
• Process risks: These types of compliance risks stem from the failure of employees to follow internal procedures and processes when completing tasks. Companies must have documented processes in place to avoid errors, omissions, and other problems that could result in various compliance violations.
• Human error risks: If your business fails to train its employees in areas such as cyber security to ensure they are aware of social engineering and phishing attacks, it could result in data breaches that could put your company in grave danger. Additionally, human error could result in severe financial and reputational damages for your organisation if you use outdated technology and fail to keep up-to-date with industry regulations. 
• Environmental impact risks: Environmental compliance risks revolve around a company's environmental impact, from pollution, waste disposal, and greenhouse gas emissions. Businesses are increasingly integrating more sustainable approaches to their operations and introducing environmental, social, and corporate governance (ESG) strategies to ensure they and their employees are environmentally compliant. 
• Quality risks: If your business offers products and services, they must comply with relevant regulations and standards, including the General Product Safety Regulations 2005 (GPSR), which requires a company's products to be commercially safe. Failure to comply with regulations can result in fines, penalties, the seizure of products and the shutdown of an organisation.

With the knowledge of the different types of compliance risks, you should also have an understanding of why compliance risk is important for your business. Scroll to find out more. 

Why understanding compliance risk is important

An awareness of compliance risks is essential for companies of all sizes and operating key industries such as healthcare, finance, fintech and more. It is also crucial for your organisation to understand why compliance risk is important so you can steer clear of the negative consequences that can severely harm your business. 

From legal penalties, financial losses, reputational damage and its impact on your current and future employees, here are the top reasons why understanding the different types of compliance risks is important for your business. 

• Legal penalties: Your business must understand the different types of compliance risks, as a failure to comply with regulations can result in your company being subject to legal penalties, such as fines and injunctions. These legal penalties could ultimately lead to extremes, such as the closure of your business and even imprisonment. 
• Financial losses: Compliance violations can lead to financial losses, such as the cost of fines, settlements, and remediation efforts. Therefore, it’s vital to understand compliance risks to ensure your business avoids putting itself in situations where it neglects to comply with financial regulations and becomes subject to financial crime. These financial losses could result in your brand's closure or lead to reputational damage, which we cover in our next point.
• Reputational damage: As mentioned above, a failure to comply with regulations can result in compliance risks that can damage your company's reputation. If your business is known for violating compliance regulations, it can lead to losing current and future customers, investors, and partners.
• Reduced employee morale: Reputational damage could extend to your employees, who may be less motivated to work for your business if it has a history of compliance violations or no process to avoid compliance risk. It could make it challenging for your company to attract and retain talent, as people are more likely to be attracted to brands with a strong reputation for compliance.

These consequences of disregarding compliance emphasise why your business needs to understand compliance risks. Now that you know the different types of compliance risks and why they’re important, you’re probably wondering how to mitigate compliance risk in your business. Thankfully, we’ll cover this in our next section. 

Our steps on how to mitigate compliance risk

There are many strategic solutions for avoiding compliance risk and ensuring your brand remains protected against legal action, financial losses and reputational harm. From conducting risk assessments, being aware of third-party risks and developing compliance risk policies and procedures to training your staff, here are our steps on how to mitigate compliance risk in your business.

Conduct a compliance risk assessment 

One of the first and arguably most crucial steps for how to mitigate compliance risk in your business is to conduct a compliance risk assessment. A compliance risk assessment is the systematic process of identifying, evaluating, and prioritising the legal and regulatory compliance risks that could negatively impact your business. 

By conducting a compliance risk assessment, your company will develop knowledge of the types of compliance risks with a higher likelihood of impacting your organisation and causing significant harm.

When conducting a compliance risk assessment, it must be emphasised that there is no one-size-fits-all method, and companies will take different approaches to them. It’s essential to rely on your compliance team or hire compliance specialists to support you in conducting an effective risk assessment for your business. They will be best placed to understand your compliance risks and help you develop mitigation strategies. 

The assessment can be used to identify areas where your organisation needs to improve its stance on compliance, as well as to allocate resources to the most critical risks. Compliance risk assessments can be conducted at least once a year or as needed when there is a change in the organisation's business or regulatory environment. 

Here are the steps you could follow to conduct a compliance risk assessment:

• Identify your company’s compliance obligations, including the laws, regulations, and industry standards it needs to comply with.
• Document the organisation's activities and processes subject to compliance risks, including identifying the areas of the business where there is a risk of non-compliance.
• Assess the possibility and impact of each compliance risk, considering the factors that could contribute to potential consequences if the risk comes to fruition.
• Prioritise the compliance risks by ranking them in order of importance based on their likelihood and impact.
• Develop mitigation strategies for each compliance risk and put measures in place to reduce the likelihood and impact of each risk.
• Implement the mitigation strategies and monitor their effectiveness with regular reviews of the compliance risks and mitigation strategies to ensure they remain effective.
  
  

Be aware of third-party risks and conduct due diligence

Next on our steps on how to mitigate compliance risk in your business is to be aware of third-party risks and conduct due diligence. When you work with third-party vendors, be it software providers, outsourced data centres or tech suppliers, to name a few, they become an extension of your business. As a result, it's essential to conduct due diligence on your third-party vendors to ensure they don't inadvertently cause you to be threatened by compliance risks.

Whether your business is partnered with a single third party or several, it's essential to screen your third parties to ensure you can trust them and that they have less chance of being exposed to compliance risks themselves. 

You should conduct due diligence to assess the vendor's reputation, security practices, and financial health ideally before considering working with a third party and certainly if you're already partnered with one. It's also essential to have a contract in place to clearly define the scope of work, the vendor's obligations, and the process for managing and resolving disputes.

Here are some tips for managing third-party vendor compliance risks:

• Develop an internal third-party risk management policy, including processes for identifying, assessing, and managing third-party vendor risk. 
• Before signing a contract with third-party vendors, conduct due diligence on them by reviewing their security practices, financial health, and reputation. You could also ask them to provide details regarding their stance on compliance risk and how they mitigate threats. Additionally, you could request this information if you're already partnered with a third party.
• Agree on specific terms and have a contract in place with each third-party vendor to clearly define the scope of work, the vendor's obligations, and the process for managing and resolving disputes. You could also share your internal policies for managing compliance risks to emphasise how important compliance is to your business.
• Finally, ensure you regularly monitor your third-party vendors on an ongoing basis, be it annually, quarterly or month-to-month. Again, this monitoring should include reviewing the vendor's security performance, financial health, and compliance with the contract you have with them.
  
  

Develop internal compliance risk policies and procedures 

We touched upon developing an internal compliance policy in our previous point, but for this point, we’ll outline it in more detail as a further way to mitigate compliance risks. 

Developing internal compliance risk policies and procedures is a surefire way of ensuring your business follows the necessary laws, regulations and industry standards associated with your brand, keeping you clear of compliance violations. 

Your policies and procedures should highlight the company’s dedication and adherence to compliance while defining the guidelines and behaviours your employees must follow to ensure compliance is adhered to business-wide.  

You should also ensure that your internal compliance risk policies and procedures align with the industry's best practices and regulations. As we’ve mentioned, a failure to comply with regulations can result in severe consequences for your business. 

Regarding the development of these internal compliance risk policies and procedures, you should work on this with your compliance specialists. Their level of expertise will ensure your policies and procedures are of the best quality, with measures in place to mitigate any types of compliance risks that could threaten your business. 

Once your internal compliance risk policies and procedures have been developed, be sure to monitor their effectiveness and adapt and update when necessary.

Of course, suppose you don’t have an internal or outsourced compliance specialist to support you in developing your policies and procedures. In that case, it may be time to consider this as part of your compliance recruitment strategy. 

Train your staff on compliance risk policies and procedures

Once your policies and procedures have been established, our next step on how to mitigate compliance risk in your business is to train and educate your employees in compliance. We don’t just mean training your compliance team in your newly established internal policies and procedures. Instead, we mean you should train your staff across your whole business. 

Even if your policies and procedures look good on paper, you cannot expect them to work effectively if your wider business is unaware of them. They must be educated on how to conduct themselves to avoid compliance violations and understand the do’s and don’ts concerning the relevant laws, regulations and industry standards. 

If your staff lack this awareness and understanding, a failure to comply with regulations can result in previously discussed problems for your business. Additionally, if a compliance violation occurs from an employee who hasn’t been trained to follow your internal compliance risk policies and procedures, who’s really at fault here - the uneducated employee or you for not allocating time to teach them?

Therefore, you must conduct regular training sessions with all your employees to ensure they understand your internal policies and procedures. Figuring out the best training methods could take some time. You could run in-person or online seminars and workshops to explain your policy. These could be conducted by your senior compliance officer or a member of your leadership team.

How you train and how often you train your staff is up to you, but finding an engaging method and where your employees will take the information on board is essential. Policies can be complex to follow, with jargon other departments may not understand. Therefore, your training must translate your policies and procedures into digestible and easy-to-understand information that your employees will retain.

Speak to your staff about the training approaches they learn best from, and make sure to test them on what you’ve shown them to ensure they understand your policy. You could do this by giving them real-life scenarios, such as sending them mock phishing emails to see how they would react in a compliance risk situation. Doing so could show you whether your training has been helpful to your employees and if your policies and procedures have been understood. 

Final thoughts on compliance risks

Overall, understanding and mitigating compliance risk is crucial for the success and sustainability of your business. Compliance risk, encompassing various types such as privacy and data security, workplace health and safety, and legal and financial compliance, can have severe consequences, including legal penalties, financial losses, reputational damage, and reduced employee morale.

As we’ve discussed, to effectively mitigate compliance risk, businesses should follow a comprehensive approach:

• Conduct a compliance risk assessment: Regularly assess and prioritise the compliance risks specific to your organisation. You should take this approach to help identify areas in need of improvement and allocate resources efficiently.
• Be aware of third-party risks: When collaborating with third-party vendors, perform due diligence to ensure they align with your compliance standards. Have clear contracts in place and continually monitor their performance.
• Develop internal compliance risk policies and procedures: Establish internal policies that align with industry regulations and best practices. These guidelines should serve as a framework for your employees to follow, reducing the risk of compliance violations.
• Train your staff: Educate your entire workforce on your internal compliance policies and procedures. Regular training sessions are essential to ensuring all employees are aware of the do's and don'ts and the consequences of non-compliance. Training your staff can help create a culture of compliance within your organisation.

Incorporating these steps into your business strategy will not only help you avoid compliance risks but also contribute to a positive reputation, financial stability, and employee morale, ultimately leading to the long-term success of your business.

Now that you know the different types of compliance risks, the importance of understanding them, and how to mitigate compliance risk in your business, check out our guide on the 5 reasons why you should hire a chief compliance officer.

Seeking support from a specialist compliance recruitment agency?

If you are part of a fast-growing enterprise and are looking for the market’s brightest compliance experts to help mitigate compliance risk in your business, we can help. As a trusted compliance recruitment agency, we provide strategic solutions to support brands in key industries such as asset management, banking, consulting fintech and insurance. Our tailored approach can boost your search for the best talent in compliance to safeguard your organisation's future.

Contact us today to discover how we can support your compliance recruitment needs.