Compliance is a framework built to ensure an organization or law enforcement agency complies with various rules and regulations governing a specific industry and how your company operates.
A compliance management structure is created to keep the compliance framework functioning. It’s a process that helps you generate policy manuals, manage professional development and training, and compile proof of compliance for government regulators and accrediting agencies.
The compliance management structure uses tools and methods like third-party audits, internal audits, reports and documentation, technology applications, and security controls. Also, it relies on a team of professionals who understand the whys and hows of compliance and work to ensure their organizations run smoothly.
What Is Compliance Management?
Compliance management is regularly monitoring and evaluating systems and networks to ensure they adhere to security and industry standards and regulatory and corporate policies and requirements.
Compliance management helps organizations mitigate compliance risk. Compliance risk is the probability of a corporation suffering legal or financial penalties, operational disruptions, or reputational damage because of regulation and industry-standard violations. This happens when an organization doesn’t adhere to the applicable rules and regulatory requirements, including those related to anti-money laundering, data privacy, labor practices, and environmental protection.
Companies must create robust compliance management systems that include procedures, policies, training, controls, reporting, and monitoring mechanisms to mitigate compliance risks. Also, they need to stay up-to-date with industry best practices and changes in regulatory requirements and adopt a risk-based strategy to prioritize their compliance efforts.
Compliance management is essential because noncompliance might result in penalties, loss of certification, cybersecurity breaches, or other damages to your organization. Staying on top of compliance updates and changes prevents operational disruptions, saving you money.
Key Components of Effective Compliance Management
With more robust anti-bribery, data privacy, anti-money laundering, whistleblowing, anti-corruption, and other laws and more focus on environmental, social, and governance (ESG) indicators, the degree of corporate compliance is more multi-faceted.
While many differences exist in frameworks, statutes, standards, and their related application, seven common components make up a robust compliance management program. These include:
- Policies and Procedures - A robust compliance management system is based on written policies and procedures that outline the organization's expectations. A good example is the code of ethics or code of conduct, which is widely applicable to all employees of the organization, including the Board of Directors. This is an essential part of any compliance management system, and through this, organizations can create operational standards applicable to all through their own compliance program.
- Compliance Management Committee - All compliance management frameworks have a governing board, which compliance managers lead. These boards or committees comprise the CEO, the board of directors, and senior members of the organization. System oversight is one vital task undertaken; often, the board tracks the overall success of the procedures.
- Risk Assessment - Evaluating risk is the first step in formulating a robust compliance management program. Risk assessment isn’t a one-time process but a continuous one that helps businesses identify risk-posing areas. Appropriate risk assessment over time can help a compliance manager and their team identify urgent risks and prioritize their mitigation.
- Standards and Controls - Organizations must have set standards of operation for smooth operation. Without that, many vulnerabilities will be at play, which could cause a violation or breach. However, creating these internal controls and standards is crucial to an effective compliance management program. Implementation entails defining and articulating standards and controls that must be laid out for every policy or procedure in effect. Internal controls are also vital in ensuring procedures are implemented as expected. Thus, creating practical standards can validate that your organization’s compliance management framework is active and living.
- Communications and Training - Training is a fundamental part of an effective compliance management system. From employees to company officers and third parties, every person who’s part of a company internally and externally must be informed about compliance. This includes relevant rules and regulations, barred conduct, and corporate policies. To conduct training, compliance management programs have set protocols to ensure organization efforts succeed. From audience mapping to audience response, compliance management programs must have well-defined procedures for every step. Organizations can lose touch with their objectives without a systematic approach provided by a dedicated compliance program.
- Reporting - Often, the HR team handles all compliance matters. Although this can work, complete compliance requires active feedback across the entire company. An effective compliance management program, through internal controls and the committee, aids this type of reporting. Internally, within a company, it promotes using reporting hotlines to report compliance issues. Besides that, a robust compliance management program must have provisions allowing anonymous reporting, fostering a culture of non-intimidation.
- Monitoring and Audits - Regular monitoring is a crucial aspect of most compliance frameworks, and organizations benefit from it significantly. It’s a vital part of risk assessment, ensuring timely discovery of potential risks. Further, periodic audits are a key part of the protocol. These enhance existing internal controls and standards, facilitating accountability among employees.
Benefits of Compliance Management
A comprehensive compliance management program ensures that a company’s policies and procedures adhere to their compliance standard and addresses employee training, monitoring, customer complaint responses, and corrective action.
A compliance management system also offers various benefits to organizations, including:
- Risk Management: Regardless of what your company sells, there exist many operational, compliance, and strategic risks that need to be addressed. When an organization adheres to all government laws and regulations, risks are minimized, optimizing successful outcomes in the compliance process.
- Improves Quality: An effective compliance framework reduces the potential for risks or at least spots potential risks early enough, reducing failures. Detecting risks early enough also saves money and time in the long run.
- Enhances Process Efficiency: Efficiency is closely tied to quality. A robust compliance framework benefits companies across various industries by improving efficiency.
- Improves Brand Trust and Reputation: Think about your vendors, contacts, customers, and other key stakeholders. Once they know your company is taking steps to ensure compliance, you’re communicating a long-term dedication to your company's success. Consumers want to do business with brands that are proactive, ethical, and committed to compliance with industry standards and government laws. Complying with relevant rules and regulations will improve brand trust and reputation. Further, employees are more likely to want to work for organizations with these characteristics.
- Protecting Against Data Breaches: Not following compliance requirements can lead to a sticky situation, like when Photo Center was hacked, allowing access to customers’ credit card details and other personal information. This data breach cost the company $1.3 billion in legal fees, compensation, and account tracking fees.
- Competitive Gain: From small and medium-sized organizations to larger corporations, an effective compliance risk management system can differentiate an organization from those that don’t comply. At a time when the competitive edge is hard to come by, driving positive outcomes will differentiate your business from your competitors. Even though the legislative and executive branches of government successfully create regulations that focus on compliance, the regulatory environment will likely remain dynamic for the foreseeable future. Thus, those organizations that pay attention to the ever-increasing confluence of risk and compliance are better positioned to ensure long-term success.
RiskRecon by Mastercard can help your company set up and maintain an effective compliance framework that enables you to gain a competitive edge. This includes performing a comprehensive compliance risk assessment to discover your business's potential risks and develop appropriate mitigation measures.
Challenges and Common Pitfalls
A few challenges that can make managing compliance software daunting include:
- Constantly Changing Compliance and Security Landscapes: Cybersecurity threats and compliance issues evolve quickly, necessitating rapid response to new risks and evolving regulations.
- Supplier Management: Often, this is quite difficult because you can’t monitor supplier management in real-time. Thus, prior research at the start of a third-party and supply relationship is a must to ensure your organization’s needs are met. However, ensuring that a supplier is doing what they’re supposed to do becomes more tasking. It’s clear you can’t be there to manage the processes of your third-party service providers. What you can do is notify all third-party service providers you’re working with your compliance standards, request them to fully align with them, and provide proof of doing so.
- Large Teams and Environments: Complicated infrastructures and large teams can mess up coordination across your organization. Infrastructure and system complexity can raise the costs of data breaches.
- Assessing Potential Risks: Risk events in the supply chain can endanger an organization and its customers. Nonetheless, a risk event can occur at any point in the supply chain, jeopardizing everything. A fundamental component of compliance risk management is the identification and assessment of risks and corrective action to take.
- Distributed Environments Across Different Platforms: As systems and infrastructures become more distributed across cloud and on-site platforms, it becomes daunting to get a complete overview of your environment and any threats and vulnerabilities that may be present.
- Lack of Structured Governance: Although businesses may have substantive controls and processes in place, they often need a risk framework and structured governance that confirms risk scope and alignment of their controls and processes to regulatory requirements. The lack of documented and structured processes can result in unrationalized company architecture/controls, potential blind spots of exposure, and churn in responding to regulatory or stakeholder questions. CIOs and other compliance professionals should foster an overall governance structure that brings together enterprise architecture, information security, infrastructure, and application teams in a manner that embeds compliance risk management into technology delivery by design.
- Assigning Risk Level: This encompasses reviewing reports from regulatory and management bodies. Also, it identifies the summaries of critical data. Assigning a risk level to every potential risk or opportunity helps organizations prioritize what needs to be addressed. To become compliant, a company must evaluate its risk factors against new laws and regulations. After this evaluation, the company can create an approach to ensure it stays compliant. Organizations can monitor threats in dynamically changing landscapes with the correct third-party risk management compliance and contract compliance.
Regulatory Compliance vs. Internal Compliance
Regulatory compliance is when an organization adheres to state, federal, and internal laws relevant to its operations. The requirements vary depending on the type of business and industry.
Examples of regulatory compliance rules and regulations include the Sarbanes-Oxley Act of 202, The United States Health Insurance Portability and Accountability Act of 1996 (HIPAA), and the European Union’s GDPR (General Data Protection Regulation of 2016).
Regulatory compliance (meeting external legal requirements) differs from internal compliance, which entails adhering to internal standards and policies.
While both are crucial in ensuring ethical behavior, safety, and integrity in enterprises, it’s vital to understand the differences.
Regulatory compliance encompasses adherence to external legal requirements set forth by state, federal, and international governments. On the other hand, internal compliance involves adhering to internal requirements set forth by the organization. However, both enhance accountability in organizations.
Compliance Management Best Practices
The best way to meet compliance challenges is with a multifaceted strategy that will monitor all environments, pinpoint any regulatory issues, address those issues and bring them up to date, ensure compliance, and record all those updates.
These best practices can help your organization stay abreast of any internal and regulatory changes and keep all your systems compliant:
- Periodic System Scans: Regular scans can help you discover compliance inconsistencies and cybersecurity vulnerabilities before they affect business operations or result in delays or penalties.
- Consistent Patching and Patch Testing: Keeping systems and networks up to date can improve reliability, security, compliance, and performance. You must apply patches monthly to keep up with important issues, and you can automate patching. You must also test patched systems for acceptance before using them in production.
- Train your Employees on Compliance Policies and Procedures: Businesses can’t fully comply with rules and regulations if their employees don’t follow company policies and procedures. Training your employees as policies and regulations change is a must to ensure compliance with various rules and regulations. In addition, employees should understand and commit to the company’s culture and ethical boundaries based on specific locations and roles. Technology plays a crucial role in the legal alignment, creation, monitoring, learning management systems, and validation of ethics and compliance training. Thus, your organization must create compliance training courses to align with relevant regulations.
- Adopt a Risk-Based Strategy for Compliance Management: A risk-based strategy for ethics and compliance management entails discovering, scoring, and surfacing high-priority threats within the company. As the best approach, risk-based compliance systems enable companies to capture, centralize, and consolidate risk management based on measures, controls, and standards. By applying a risk-based strategy across the organization, compliance professionals can showcase best practices highlighting the most severe compliance risks from across the organization and demonstrate measures to reduce violations, issues, fines, and investigations actively. Based on risk rating, companies can efficiently plan control testing, safeguard the company from compliance risks, and guarantee program defensibility.
If you want to learn more about compliance management or how to develop your compliance management program, please visit our website or request a demo here.