Common Compliance Risks And Its Management

Common Compliance Risks And Its Management


A business is one of the most complicated endeavors that an individual could ever dream up. Humans operate it who are all biased, flawed, and stubborn beings. Even though these people are the ones who put blood, sweat, and tears into this entity to make it what it is today- it can be hard for them to remember that they do not own the company altogether.

However, it always falls back on the person who started the company or started a branch. So, it is upon him to make sure that all his employees are acting within the law. Let us discuss in detail the various common risks that are encountered in most businesses.

Table Of Contents:

What Is Compliance Risk?

It refers to the risk of the business or its branches not complying with the law. It can be interpreted in many ways. Since each business has its inner workings and peculiarities, one cannot make a general theory.

It means that no matter which industry you work in and what position you hold in it- there is a possibility that you might be involved in a violation of some sort. Compliance risk arises when something goes wrong. When someone makes an error or falls short in their duty, they do not follow through. For this reason, you should establish a clear policy on how the organization deals with this situation.

Generally, all business organizations have policies that cover specific areas of their operations. However, many do not understand how to apply the rules within their own company. They think and implement rules without any form of checks and balances. These policies can lead to many problems, which we shall discuss in the following sections.

How To Categorize Compliance Risk?

Different categories of compliance risks are as follows

  • Legal impact
  • This fundamental risk covers the legal implications of an event or practice. It is the most crucial aspect of compliance risk since it directly affects the bottom line.

    It includes potential fines, penalties, and other disciplinary actions that directly impact your company's profitability. The most common areas where companies encounter legal risks include tax issues, environmental concerns, product liability, defamation or slander lawsuits, and allegations of racism, among other things.

  • Reputational impact
  • It includes the impact on the perception of your brand among potential customers and other stakeholders. Your customers can be negatively affected by adverse news reports. At the same time, investors will lose confidence in the company if any part of it is committing any allegations of financial mismanagement or other illegal activities.

  • Financial impact
  • It is a core business risk that directly impacts the profitability or revenue of a company. This type of risk can come in various forms, from share prices to payments from creditors, investors, or even customers.

    In addition to the direct loss of revenue, companies must also consider the indirect cost of complying with regulations. 

  • Operational impact
  • This risk area focuses on mitigating potential operational problems that could arise from implementing policies, guidelines, or any other form of procedure.

    It is one of the most underestimated compliance risk areas for many organizations. They do not always think about how their compliance program will affect their day-to-day operations.

    Common Types Of Compliance Risks

    The type of compliance risk can be affected by how companies run, the scope of their operations, the number of employees working within it, or the nature of what they are doing.

    However, few types of compliance risks are encountered frequently in different organizations. We shall discuss them below:

    Environmental Risks

    These are risks that arise from the operations performed by an organization. For instance, a company that deals with chemicals may have to deal with potentially hazardous incidents. 

    Often, the companies that deal with chemicals do not think about the implications of these chemicals on their workers and surroundings.

    Workplace health and safety

    The compliance risk that occurs, in this case, is that the workers may end up getting injured from the regular operations. The typical operations also pose a threat to the health of all those involved in them. The workers may be exposed to hazardous chemicals, gases, and dust particles.

    If not taken care of properly, these can affect the health of the workers. According to, "Studies suggest that approximately 80,000 to 100,000 workers die every year from occupational diseases and injuries."

    Employee misconduct

    It refers to the compliance risks when an employee does not adhere to the organizational policies and ethics. Additionally, this also includes the risks that may occur because of the illegal activities of an individual. 

    However, employee discrimination and harassment is also a significant source of risk, mainly when there are different work ethics or when some people are treated more favorably than others.


    It refers to corruption related to money as it can take the form of bribery and kickbacks. It is a form of compliance risk that can occur when certain principles and procedures are violated on an ongoing basis. 

    Though The Foreign Corrupt Practices Act (FCPA) regulates whole bribery and kickbacks, it is quite hard to prevent these things from happening in a country. Additionally, the bribe taken by government officials; is also the same form of compliance risk that comes up when an organization has dealings with government officials and public servants. 

    Data Management

    Depending upon the different ways the organization is run, some may be more effective than others. However, these can affect the compliance risk that comes about because of the management of data. 

    Further, how data is stored also affects this type of compliance risk. All these factors become important when data has to be kept confidential rather than shared among different departments or even if it has to be transmitted to other parties outside of an organization. 

    For instance, if a particular type of data does not belong to the organization being processed, it can become an issue.


    A product or service of poor quality would affect the company's reputation and the compliance risk that comes with it. It is more so when someone gets injured or dies because of a product of poor quality. 

    It can affect the reputation and image of an organization and seriously impact everyday operations. An example of this type of compliance risk is related to food processing, where production quotas can be affected if something goes wrong during processing.


    Similar to quality, the compliance risk associated with an organization's process is also a significant risk to consider. If the process is not what it should be, things can go wrong. The processes need to be appropriately documented and must have specific timelines attached to them. 

    The risks because of the processes are usually related to skills being used to develop products or services or even because the company does not appropriately follow specific procedures. 

    For example, if a company is not following a process correctly, it can cause severe damage to an organization.

    Social responsibility

    Although not typically associated with compliance risks, social responsibility can affect an organization and come under this category. Often, the products and services that an organization creates can cause harm to people or animals in some form or the other. 

    Similarly, it is also the responsibility of organizations to take care of their employees. It is considered as a form of compliance risk because when an organization does not follow the necessary procedure to take care of its employees, the government can take legal actions against them.

    The Most Effective Method To Assess Compliance Risk

    After discussing the different types of compliance risks that can affect an organization, we shall now discuss how to assess the compliance risk that is present in an organization.

  • Identifying the risks
  • The first step in assessing any compliance risk is identifying the risks that are present in an organization. It must start by determining whether any known or unknown issues may affect the conducted procedures or operations.

  • Extending the investigation
  • Once the compliance risk is identified, the next step would be to assess it using defined procedures. Some of these procedures can include interviews with stakeholders, evaluating business processes, understanding legal issues, and evaluating the organizational culture. 

    The compliance risk assessment will help ensure the organization is not exposed to any legal risks.

  • Prioritizing the risks
  • Once the compliance risk is understood, one should then prioritize the risks that are present. The company must do it by outlining all known threats to different stakeholders in the organization and then carrying out assignments on these specific risks. 

    The person should then be able to determine which of these risks poses more significant harm. The person should also ensure that the implementation of programs and processes requires enough resources.

  • Implementing the compliance risk program
  • The best way to ensure that compliance risks are prevented from happening is by implementing a compliance risk program. It is a structured and systematic way of treating the various risks that may occur. 

    It may also include the process of managing the risks that an organization identifies. The program usually includes policies, processes, and procedures that develop to address specific risks.

  • Routinely reviewing compliance risk management strategy
  • The organization should also ensure that it is regularly reviewing its compliance risk management strategy. It will help them understand if the current program is operating effectively or not. 

    The organization can, after conducting a review, make amendments to the existing program. The organization can also introduce newer ways of treating compliance risks.

    What Is Compliance Risk Management?

    Compliance risk management involves identifying, assessing, and prioritizing certain risks that may arise due to compliance failures. The aim of compliance risk management is to help an organization understand the importance of having a detailed plan in place that will prevent any legal implications from arising.  

    The primary purpose of compliance risk management is to provide a framework where the different risks are identified, assessed, and prioritized so that the organization can confidently work through these risks. 

    Compliance Risk Management Example

    A simple example related to the financial industry is an assessment that takes place when a company makes sure that it has dedicated resources to ensure that they are able to address all internal processing issues. 

    Another example is when a brokerage firm considers compliance risks related to how they handle cash. Suppose the firm does not have an adequate compliance management system. In that case, it may violate some of the rules laid down by the Financial Industry Regulatory Authority (FINRA), which involves monitoring and reporting on its activities. 

    The brokerage firm can develop a compliance risk management system that will help them manage and address any compliance-related issues that might come up.

    Key Components Of Compliance Risk Management Program

    A compliance risk management program must enable an organization to identify all legal risks that may impact their operations and address these issues effectively. An organization must do it by establishing policies that cover all aspects of operations related to law. 

    The organization must also ensure these policies are applied consistently across the board, meaning every employee should follow them. However, the following are the key components of a compliance risk management program:

  • Governance and leadership
  • Compliance risk management can only be effective if the organization takes a structured and comprehensive approach. It means that the governance and leadership in the organization must be clear and consistent for them to take appropriate steps to address compliance issues. 

    The organization must have a clear structure of who is responsible for managing compliance risks from different functional areas, i.e., legal, compliance, risk management, or combination.

  • Culture and environment
  • The compliance risk management program must be created and supported by the organizational culture and environment. The corporate culture and environment must be such that the employees and management can carry out operations that conform to the organization's compliance risk plan. 

    Without the support of the organizational culture, it may become difficult for an organization to develop a compliance risk management program that will address compliance issues effectively.

  • Policies and procedures
  • Compliance risk management also involves developing and ensuring the policies and procedures that an organization implements. The compliance risk management program must ensure that the various risks faced by the organization are addressed effectively through policies and procedures. 

    The organization should review policies and procedures regularly to assess if they effectively address compliance issues or need any changes.

  • Risk assessment
  • The organization's compliance risk management program must include a risk assessment component. The company needs to determine which compliance risks are most important and need to be addressed immediately. 

    The organization can use various methods to carry out risk assessments. One of the most effective ways is by carrying out an impact analysis of any law or regulation that is not being followed. 

    The organization can then identify any legal implications arising due to non-compliance and address these issues immediately. For instance, if an organization does not have an adequate privacy policy, it may subject itself to legal risks.

  • Training and awareness
  • An organization's compliance risk management program should also focus on training and awareness. Training must be done to know the different laws and regulations that apply to their work area. 

    The training will increase the employees' knowledge about these laws, which will help them understand them better. The organization must also have a training program for senior management responsible for setting up policies that effectively manage compliance risks.

  • Communication, monitoring, and evaluation
  • The organization must make sure that it has a clear communication strategy in place. The organization should be able to communicate information related to compliance management effectively. 

    Similarly, the organization must make sure it has a policy for communicating with employees on the policies and procedures associated with the compliance risk management program. 

    The organization must also have a clear way in which they can monitor the overall performance of the compliance risk management program.

  • Continuous improvement
  • Last but not least, the organization must strive to constantly improve its compliance risk management program. The organization must continuously look at new methods that can help them improve their compliance risk management program.

    The way you manage risks is crucial to the overall success of your business, which is why you need to understand where all of your risks lie. If your company undergoes an audit by the government, they will look at how you make sure that these kinds of things are being handled in the best way possible.

    Benefits of a good Compliance risk management program

  • It reduces the chance of an organization being penalized
  • An organization that is serious about identifying and addressing compliance risks is less likely to be penalized than organizations that do not have a compliance risk management program. 

  • It reduces legal costs
  • An organization can reduce its legal costs by implementing good compliance risk management. It will make sure that all legal risks are appropriately identified and addressed by the organization.

  • It increases the organization's competitiveness
  • Suppose an organization has a robust compliance risk management program. In that case, it will effectively communicate with other businesses in this sector about the laws and regulations about their industry. As a result, they can enhance their competitiveness in this sector.

  • It increases the organization's efficiency
  • A compliance risk management program ensures that the organization sets up proper procedures to manage compliance risks effectively. It will be easier to manage if there is a clear understanding of these laws and regulations. 

    Thus, an organization's efficiency will increase as a result.

  • It increases productivity
  • Employers want to ensure that their employees are productive and get the most out of this time at work in today's competitive environment. If an organization has a strong compliance risk management program, it will be able to ensure that its employees are getting the most out of their time at work. 

    Such an organization will also be able to identify ways to increase operations efficiency.


    Overall, compliance risk is a significant risk for any organization. Thus, it's vital for an organization to understand a compliance risk and how to manage it. A compliance risk management program must effectively deal with all regulatory requirements and ensure a clear understanding of all laws and regulations that apply to the organization's sector/industry.

    Therefore, the best way to effectively manage compliance risks is by implementing a compliance risk management program.


    What are the areas where compliance risks are exceptionally high?

    There are multiple areas where compliance risks are high. One of the most common areas is employee and customer data privacy and security. Often, organizations are at risk of being fined or penalized for not ensuring that their employees and customers are aware of their privacy and security obligations.

    Similarly, there are instances where the organization is at risk of being fined or penalized for not complying with GDPR.

    How do you know if all of your compliance risks are covered in your compliance risk management program?

    Ideally, the only thing in the compliance risk management program is what the organization must comply with. However, it is essential to identify any other areas that may need to be included in the program.

    If this happens, an organization needs to make sure it has a way in which it can manage and monitor these areas as well.

    Is it easy to keep up with all of the new laws and regulations?

    It is always a good idea to check what various laws and regulations are. You can do this by consulting multiple online resources. These resources will also contain information about the different areas of work that you need to ensure you comply with.

    Is it always necessary for an organization to have an audit on its compliance risk management program?

    No, it's not always necessary to have an audit done on a compliance risk management program. However, it is always a good idea to do so. It is because an auditor can identify whether or not the program fits the purpose and if it needs to be improved in any way.

    What level of resources are required to effectively manage compliance risks?

    To effectively manage compliance risks, organizations must have the right kind of resources in place. The more people working on the program, the easier it will be to get all of your compliance risks identified and managed.

    It's also essential for an organization to effectively manage its compliance risks with the latest technologies.

    How can you manage compliance risks in a cost-efficient manner?

    Compliance risk management is a comprehensive concept, and how a company can manage it is endless. In addition to this, there is always a newer way to manage these risks better.

    To manage compliance risks more cost-efficiently, it is essential to ensure that you are not investing too much in this area. It is necessary to ensure that your resources are being managed in the best possible manner.

    Overdoing it in this area can lead to unnecessary costs and could be detrimental to the productivity of an organization.

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