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Compliance risk management (CRM) is the ongoing process of identifying, assessing, and mitigating potential risks that threaten an organization’s business.
These risks may stem from a company's noncompliance with laws, standards, and regulations – or be related to internal and external policies and procedures.
One way companies manage compliance risks is to track changes in the regulatory environment and make sure they comply with those regulations. Regulations to track include SOC 2, the General Data Protection Regulation, the Health Insurance Portability and Accountability Act of 1996, and the International Organization for Standardization.
Why Is Compliance Risk Management Important?
CRM helps companies detect and prevent violations that could subject them to lawsuits, huge fines that could run into the millions, and even prison sentences for individual employees.
Compliance risk management is part of the governance, risk, and compliance (GRC) discipline that helps align IT with business objectives. GRC also helps companies manage risks and meet government and industry regulations.
In part, compliance risk management helps banks:
- Combat cyberattacks: These attacks, which can include insider threats, ransomware, and other malware, can prevent banks from complying with laws and regulations and cripple their operations. Creating comprehensive CRM plans can help financial institutions (FIs) better respond to these attacks.
- Protect sensitive data: FIs have to safeguard massive amounts of sensitive financial and personally identifiable information that requires special handling. A solid CRM plan helps financial institutions keep this data safe.
What’s more, CRM helps organizations avoid the consequences of non-compliance, which can include:
- Penalties and fines – Non-compliance is expensive. In addition to the monetary penalties from regulators, organizations will pay to hire auditors, investigators, and lawyers in order to fix their mistakes.
- Reputational damage – Modern social media and the internet make it certain that non-compliant organizations will be found out. The business consequences are often swift and severe, including loss of trust and lost profits.
- Lost access to supply chains – Distributors, suppliers, and other partners will often stop working with non-compliant business partners because it increases their own risk.
How Does Compliance Risk Management Work?
Financial institutions supervised by the Federal Reserve should implement compliance risk management programs tailored to their risk profiles.
A compliance risk management program helps banks minimize risk according to their unique circumstances. Each financial institution should develop a CRM program that fits its business processes and concerns about regulatory compliance.
An effective CRM plan includes the following:
- An appropriate framework: This helps a company identify and understand its compliance obligations.
- A risk assessment: An organization should assess its potential risks, prioritize them, and allocate employees to remediate them.
- Develop policies and procedures: The organization should create policies and procedures to make sure it's meeting its compliance obligations efficiently. This includes assigning employees to develop these policies and procedures, staying on top of compliance standards, and being ready to deal with any potential risks.
- Report on compliance risk management efforts: Financial companies have to document and report on their compliance efforts regularly. They should also review policies and procedures to ensure they’re still effective and make necessary adjustments if needed. Finally, the company should also keep a record of its compliance history for auditors.
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Compliance is a crucial function for any company that moves money on behalf of their customers. Dive into the fundamentals behind key compliance processes like KYC, KYB, transaction monitoring, and more.
Compliance risk management (CRM) is the ongoing process of identifying, assessing, and mitigating potential risks that threaten an organization’s business.
Customer due diligence (CDD) is a process used at financial institutions (FIs) when working with potential new customers.
The Customer Identification Program (CIP), part of the Know Your Customer program guidelines, requires that financial institutions in the U.S. verify that customers (both individuals and businesses) are who they say they are when they open new accounts for themselves or other people.
FinCEN, short for Financial Crimes Enforcement Network, is a government bureau that aims to prevent money laundering and other financial crimes—and punish bad actors that commit them.
Know Your Business (KYB) is a set of verification procedures that helps companies avoid getting into business with criminals.
The Office of the Comptroller of the Currency (OCC) is a federal agency that "charters, regulates, and supervises" all national banks.
According to the Department of Labor (DOL), Personal Identifiable Information (PII) is any information from which a person’s identity can be either directly or indirectly inferred.
A Politically Exposed Person (PEP) is someone that might be more likely to break the law or be corrupt because of the power their position affords them.
Specially Designated Nationals (SDN) are individuals and entities tied to countries that the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) has hit with sanctions.
A Suspicious Activity Report (SAR) is a report that a bank or other financial institution must file if it suspects that a customer might be breaking the law and committing fraud, financing terrorism, or laundering money.
Anti-money laundering (or AML) compliance entails a careful adherence to rules and regulations aimed at combating illicit financial activities.
Know Your Customer or Know Your Client (KYC) is a set of guidelines for verifying the identity of a customer and gauging the associated risk of working with them.
The Office of Foreign Assets Control (OFAC) is a financial intelligence and enforcement agency under the jurisdiction of the US Treasury Department.
PCI DSS certification means your business has met the requirements laid out in the Payment Card Industry Data Security Standard (PCI DSS) to secure payment card data.
Service Organization Control 2 (SOC 2) is a voluntary auditing procedure that service providers complete to keep their clients’ data secure from cyber attacks.
Section 314(a) is part of the USA Patriot Act that enables financial institutions (FIs) and law enforcement to work together to fight money laundering and terrorist activity.
Section 314(b) and Section 314(a) of the USA Patriot Act both relate to information requests under the Banking Secrecy Act (BSA).
A currency transaction report (CTR) is a report made by U.S. financial institutions aiming to prevent money laundering.
An Agent of the Payee is a person, entity, or other intermediary specifically appointed by a payee to process and collect payments on their behalf.
Identity Verification APIs allow businesses to streamline the process of checking the identities of new users by automatically, and in some cases instantly, verifying their provided identifying information.
The Bank Secrecy Act (BSA)—also known as the Currency and Foreign Transactions Reporting Act—is a piece of legislation designed to help prevent fraud.
The Electronic Fund Transfer Act (EFTA) is a federal law in the U.S. that regulates electronic transactions to protect consumers.
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