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Enterprise Risk Management

Compliance Risk

Who Has to Worry About Compliance Risk?Businesses of all sizes are tasked with navigating a complex regulatory environment governed by state and federal guidelines. Adhering to financial regulations, anti-corruption laws, and other rules is often costly, but violations can result in severe penalties. Learn about compliance risks facing businesses and how risk managers seek to mitigate these threats.
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Almost every business faces compliance risks. It’s true that certain industries, such as finance, are more heavily regulated than others, but many rules are far-reaching and complex. Here are several sectors paired with major compliance concerns they face.

Finance: Banks, credit unions, and other lenders face a particularly complicated regulatory environment due to the fact that they hold money and facilitate transactions across borders. Financial institutions must comply with rules meant to curb bribery, money laundering, and tax evasion. Since criminals often seek to move money around without attracting attention, financial institutions are required to perform due diligence on accountholders and certain transactions to comply with rules like the Foreign Corrupt Practices Act, or FCPA.

Healthcare: Due to the sensitive nature of their work, healthcare providers and insurance companies are subject to heavy regulation. Laws such as the Health Insurance Portability and Accountability Act (HIPAA) govern how patient information can be handled and disclosed. Penalties can be harsh and may include fines or imprisonment.

Manufacturing: Health, safety and environmental risks include concerns about hazardous materials, working conditions, and pollution. Manufacturers must also comply with product safety guidelines. For example, the United States Consumer Product Safety Commission requires toys to undergo third-party testing and earn a Children’s Product Certificate before they can go to market.

Technology: Data privacy and security regulations are still in their infancy, but legislation like COPPA, the Children’s Online Privacy Protection Act, are of interest to almost any company with a website. Web-based financial technology, or fintech, businesses may also have to comply with regulations aimed at more traditional lenders or investment firms.

Compliance Risks Cross Borders

The United States government has been aggressive in combatting financial crimes. While Congress’s jurisdiction ends at the border, many anti-corruption and tax laws apply to any transactions that originate or end within the U.S., regardless of where the company is based. This means that any business that wants to have a presence in the country needs to comply with these regulations.

Certain compliance risks may not be obvious to a business at first glance. For example, companies that make payments to firms or individuals outside the U.S. will have to consider the Foreign Account Tax Compliance Act, or FATCA, when determining the amount of tax withholding.

How Businesses Manage Compliance Risks

Businesses that can afford to do so often hire risk management professionals to ensure the company is in compliance with all relevant regulations. These experts have a variety of tools at their disposal to help them manage risk, including compliance platforms that provide a deep-dive into business ownership and connections. These databases are essential to making sure a company is aware of who it’s doing business with, and the compliance concerns that may be relevant to a particular arrangement.

Compliance risk management requires knowledgeable professionals who understand how rules affect specific industries. While it may seem burdensome to adhere to guidelines that sometimes feel arbitrary, the potential penalties are often far more damaging to a business’s bottom line.

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