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Compliance Risks

Regulatory Compliance Risk Management

How to Manage Regulatory Risks

The breadth and complexity of the corporate regulatory environment has made compliance risk management an essential part of mitigating losses and guarding against a business’s reputational damage. Regulatory compliance risk management refers to a business’s efforts to operate within the laws, guidelines, and agreements governing its industry. Specific regulatory concerns vary widely, depending upon the nature of a business. A financial services company will be subject to different regulations than a retail clothing store, but both businesses will need to manage compliance risk.

Types of Business Regulations

While each industry faces its own set of regulatory risks, most issues can be classified by the following risk categories:

  • Anti-Money Laundering (AML): The Patriot Act requires financial institutions to perform due diligence to verify the identities of account holders, whether they are individuals or organizations. It expanded on existing requirements set forth in the Bank Secrecy Act. Compliance with this provision of the Patriot Act is meant to prevent money laundering, by making it more difficult for criminal or terrorist organizations to hide their identities.
  • Anti-corruption: Myriad laws and regulations seek to stamp out corruption in business. In the United States, the Foreign Corrupt Practices Act (FCPA) can be used to prosecute US citizens for bribing foreign officials. In this way, the FCPA effectively extends the Justice Department’s jurisdiction beyond the borders of the United States. Identifying businesses or stakeholders who have been involved in corruption enables companies to make sound decisions about working with these entities.
  • Financial Liquidity: The financial services industry is one of the most heavily regulated sectors of the US economy. Banks and investment firms are subject to oversight from multiple government agencies, particularly in terms of their financial health, and the penalties for non-compliance can be severe.

    For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ushered in a slew of regulations aimed at curbing dubious practices within banks and financial institutions. Banks can be subjected to “stress tests” to determine whether they have enough capital on hand to survive an economic downturn. The government has the power to break up financial institutions that fail these reviews. It is critically important to financial institutions that they remain compliant with relevant provisions of Dodd-Frank.
  • Taxes: Complying with complex state and federal tax laws is essential for businesses of all sizes. Even honest mistakes can bring financial penalties. In addition, the Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report on assets held by US citizens. Additionally, people with assets exceeding a certain value may have to disclose foreign accounts.
  • Labor Concerns: The Occupational Safety and Health Administration (OSHA), part of the US Department of Labor, is tasked with setting and enforcing regulations to protect workers on the job. This responsibility governs everything from lab safety to stairway railings. OSHA violations can bring stiff penalties and may also expose businesses to the risk of employee lawsuits.

How to Identify Regulatory Risks

Many corporations hire compliance and risk management professionals tasked with identifying and correcting potential violations and assuring that clear documentation of that activity is maintained. These employees walk factory floors and work facilities, review financial documents, investigate suppliers and customers, and manage ongoing auditable records in the course of their duties.

Regulatory compliance software can also help mitigate business risk. Business information databases make it easier to perform due diligence on customers, partners, and other third parties, matching their names with known entities. Such efforts can surface potential issues early on, including attempts at money laundering or other fraud. Tracing corporate family trees allows businesses to understand the full risk profile of a potential partner and its parent or subsidiaries.

Ready access to business data may also allow companies to uncover information about previous regulatory violations by a supplier or customer. Such insights can prevent reputational damage that could arise from associating with these businesses if there is a pattern of wrongdoing.

Choosing Regulatory Compliance Software

With various regulatory compliance solutions on the market, businesses should be able to address several questions when evaluating software applications, including:

  • What risks am I trying to address? Regulatory compliance software is an asset when investigating a potential business partner’s identity; but some are not as helpful in making sure your current partners are compliant ongoing. Look for solutions that provide the data you need.
  • What is the source of this data? Compliance managers must have confidence in the data they use. Ask where the business information comes from, how often it’s updated, and what protections are in place to ensure accuracy.
  • What are other users saying? Seek out reviews and testimonials to put together an objective view of how well the software performs. Is it user-friendly? Did adoption result in cost savings or risk reduction?

Implementing regulatory compliance protections is essential to safeguarding your business from both threats and penalties.

Dun & Bradstreet combines a tailored compliance process with robust, risk-based screening and monitoring that help you quickly and confidently safeguard against risk.

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