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Compliance Risk Management

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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