What are the Different Types of Compliance Risk?
Risk is part of every business, but minimizing risk is essential to a company’s growth and survival. Compliance risk refers to the legal and financial penalties that may arise when companies fail to comply with laws and regulations in their industry and within the company.
Taking compliance seriously is important both for the company and its customers. Avoiding fines and legal trouble is not the only reason for this. Compliance is also closely related to gaining customer loyalty. Hence, corporate responsibility will always remain important.
Most of the time, even businesses that intend to fully comply with regulations can commit violations due to management failures. That is why conducting corporate compliance training is a must. Employees need to know and understand rules so that they can follow them properly. The following are the five most common types of compliance risk and how to avoid them.
5 Types of Compliance Risk
- Environment and sustainability
Now that the effects of climate change are felt around the world, the need for environmentally sustainable practices is undeniable. Additionally, as a 2019 survey from CGS reveals, almost 50% of customers would pay extra for a more sustainable product.
Among a company’s considerations for environmental compliance, risks are its supply chain, product disposal methods, and the company’s overall carbon footprint. Depending on where the company is located, there are minimum standards set by the government for sustainability. On top of that, customer expectations are usually higher, so your business should have strong internal compliance in the environmental aspect.
- Privacy and confidentiality
Instances of identity theft and cyberattacks are on the rise. Since the pandemic has made people more reliant on online transactions for safety and convenience, a wealth of customer data is collected, stored, and used by many companies. Unfortunately, some lawbreakers are taking advantage of this to commit fraud and other crimes, which is why government regulations are becoming stricter across the globe.
Adding security to your page is essential in ensuring that the sensitive information provided by your customers and employees are kept safe. If your firm is in the finance or healthcare industry, you might need to put up additional security measures. After all, it will be extremely difficult to regain your customers’ trust after a major data breach.
- Corruption and illicit practices
In every company, the potential for illegal practices exists, from executives taking bribes to employees conniving to commit fraud. An organization is responsible for the actions of its workers, and you cannot presume that all your employees will be honest. So, it is vital to keep an eye on your workers through compliance controls.
In relation to this, companies need to report suspicious activities to the treasury or government anti-fraud agency. An example of suspicious transactions in the finance industry is the unexpected wiring of huge sums of money in and out of a bank account. Failure to report these kinds of transactions could result in punishment for the bank.
- Workplace health and safety
Threats to the safety of your workers and customers should not be left unaddressed. The Occupational Safety and Health Administration (OSHA) is specifically tasked to make sure that workers are under “safe and healthful working conditions.” Penalties will be given to companies that fail to comply with their regulations.
Safety and health in the workplace do not only mean dealing with heavy machinery or slippery floors. If you employ drivers, you also need to check their licenses. Even in a regular office, you need to evaluate electrical devices and wiring as well as fire hazards. A clear system for reporting health and safety concerns must also be put in place.
- Process and product quality
A company should exercise due diligence so that all its products and services can meet the expected level of quality. A faulty product will most likely be recalled and the manufacturer duly punished. A drop in sales and customer confidence is also expected in this scenario.
Additionally, there are a variety of process failures that you need to avoid. For instance, you must fulfill your obligations to and maintain good relations with your customers and suppliers. One example of this is that a company should verify every new client’s identity.
Other day-to-day activities such as quality assurance checks and maintenance of IT systems and machinery are also covered by process risks. Constant quality assurance is necessary. To illustrate this point, unchecked financial reports that are incomplete or inaccurate will violate government regulations. Regular IT checkups are also needed so that company data and websites won’t be vulnerable to hacking.
Whether intentional or not, companies should strive to minimize their compliance risks in the fields of sustainability, privacy, corruption, health and safety, and products and processes. After all, customers trust and support companies that do not only provide high quality goods but also follow internal and external regulations.