What is compliance risk?

Definition of compliance risk

Compliance risk encompasses the legal, financial, and reputational threats an organization faces when it fails to adhere to external regulations, industry laws, and internal policies. The exposure and potential negative consequences that an organization could potentially have to deal with as a result of compliance risk are serious.  

Non-compliance with relevant legislation and regulations can have a profound impact on an organization’s operations, reputation, and overall value.

Best practices for avoiding and mitigating compliance risk include: 

• Compliance risk policy development and implementation  
  Formulate detailed policies that encompass every facet of compliance risk and schedule regular reviews to keep the policy aligned with changes in the evolving regulatory environment.  
• Cyber risk standards and frameworks 
  Apart from legal requirements, various industry standards play a crucial role in compliance risk management. Even though they are not mandated by law for non-governmental organizations, these standards are often critical for contractual commitments and best practices.
  
  These standards serve as benchmarks in the industry, providing proven guidance for robust security measures and efficient practices. Cyber risk frameworks that facilitate compliance risk management efforts are:
  • CIS Controls (Center for Internet Security Controls)  
  • COBIT (Control Objectives for Information and Related Technologies)  
  • FAIR (Factor Analysis of Information Risk)   
  • ISO / IEC 27001 and 27002  
  • ITIL (Information Technology Infrastructure Library)  
  • NIST Cybersecurity Framework (CSF) 
  • OCTAVE (Operationally Critical Threat, Asset, and Vulnerability Evaluation)  
• Employee training and compliance risk awareness 
  Every employee needs to understand the compliance risks that the organization faces and their responsibilities in upholding them. Conduct frequent training sessions and provide timely updates to imbue a culture centered around compliance risk awareness, avoidance, and mitigation. This also helps identify hidden compliance risks. 
• Incident response and reporting for compliance risk  
  Have a response plan in place for compliance incidents, which includes a defined reporting plan. This plan should detail the protocols for reporting compliance violations to the relevant authorities and notifying impacted parties to avoid compliance risk. 
• Risk assessment and analysis  
  Conduct risk evaluations to pinpoint potential areas of non-compliance within an organization. This requires the delineation of data trajectories, comprehension of regulatory stipulations for diverse data categories, and analysis of prevailing security safeguards. This systematic approach enables organizations to proactively address vulnerabilities, ensuring robust compliance and mitigating the potential for breaches. 
• Technology and tools for cyber risk management 
  Utilize technology solutions to automate tasks related to compliance risk, including sensitive data identification and categorization, generating compliance risk reports, and continuous monitoring, to improve the organization’s compliance posture and capacity to maintain stringent compliance standards.   

Types of compliance risk

Compliance risk encompasses several distinct categories. Organizations must understand the nuances of these compliance risks to ensure they adhere to all relevant regulations and standards. In many cases, compliance failures can result in hefty fines, legal issues, and reputational damage. 

Contractual compliance risk

The contractual compliance risk category includes commitments set forth in contracts, such as those with customers, employees, contractors, or vendors. For example, a cloud service provider might be contractually bound to uphold specific standards of data security or privacy. Violation of these contractual terms can subject the organization to compliance risk. 

Cross-border data transfer risk

Organizations with global operations face considerable challenges in adhering to laws regulating international data sharing, such as Standard Contractual Clauses (SCCs) or Binding Corporate Rules (BCRs) for data movement from the European Union to the United States.    

Cybersecurity policy compliance risk

Policy compliance risk is related to non-adherence to an organization’s internal policies and procedures. These compliance risk guidelines encompass diverse facets of cybersecurity, such as access control, incident management, password management, or bringing your own device (BYOD) protocols.   

Data protection and privacy compliance risk

The introduction of data protection regulations such as the European Union’s General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA), along with similar laws worldwide, has heightened the risks for organizations in handling personal data. This is a challenging compliance risk to manage, because organizations must enforce rigorous practices in data processing, storage, and management to meet the strict requirements.  

To avoid this type of risk, organizations must obtain explicit user consent, minimize the amount of data collected and stored, and ensure users’ rights to access their data and request its deletion. 

Emerging and evolving technology compliance risk

The rapid introduction of new technologies, such as artificial intelligence (AI) and the Internet of Things (IoT), is a source of increased compliance risk. Measures must be put in place to assess new technologies for vulnerabilities and carefully implement cybersecurity safeguards.   

Industry-specific compliance risk

Failure to adhere to regulations or standards specific to certain industries creates compliance risk. Each industry must comply with a number of unique standards and laws.  

For instance, organizations that process cardholder data must comply with the Payment Card Industry Data Security Standard (PCI DSS), while healthcare organizations are bound by the Health Insurance Portability and Accountability Act (HIPAA) to safeguard patient health information. 

Legal compliance risk

The legal compliance risk category focuses on the dangers of not adhering to legislative regulations concerning data protection, privacy, and information security. Regulations such as the GDPR and CCPA set strict rules for handling personal data with stringent data protection and privacy directives. Compliance includes ensuring data processing and storage align with user consent, maintaining minimal data retention, and providing rights for data access and deletion. 

Third-party and vendor risk

As organizations increasingly depend on third-party vendors and service providers, the compliance risk related to these partners’ actions escalates. It is imperative that organizations ensure that their vendors adhere to applicable regulations. 

Assessing compliance risk

Understanding compliance risk is a key first step to addressing it with prevention and mitigation strategies. Key components of assessing compliance risk include the following.  

Identify compliance requirements and deficiencies. 
Conduct a thorough review of existing security policies, processes, and controls against applicable regulatory requirements. Identify areas where the organization’s practices do not align with compliance obligations or should be strengthened.  

Be sure to assess the compliance posture of third-party vendors and partners, especially those who handle or have access to sensitive data. This includes reviewing their security policies, conducting audits, and ensuring contractual agreements include compliance risk obligations. 

Measure the impact and probability of compliance risk factors. 
Develop a compliance risk matrix that charts the likelihood of a risk becoming an issue (i.e., highly likely to unlikely) and the associated consequences, such as operational disruption, fines, legal actions, and reputational damage.   

Prioritize compliance risks. 
Evaluate compliance risks based on the impact / probability matrix. This should take into account the complexity of the compliance obligation and the effectiveness of existing or new controls. 

Document the compliance risk assessment. 
Create a report that documents the results of the compliance risk assessment. This should include the process, the findings at each step, and the rationale behind the final decisions. 

Compliance risk examples

Breach of payment card data 

Organizations processing card payments do not meet the security and privacy requirements of the Payment Card Industry Data Security Standard (PCI DSS) risk losing access to payment processing services and fines.   

Corruption

Compliance risk can manifest in the form of corruption resulting from illicit activities (e.g., fraud, theft, bribery, and money laundering). This is often the result of malicious insiders’ unlawful behavior or failures in organizations’ cybersecurity measures. 

Infringement of personal data privacy rights

The GDPR and CCPA impose rigorous mandates on the handling of personal data. The consequences of non-adherence are often precipitated by insufficient data protection strategies, opaque data processing operations, or failure to respect data subject rights. 

Unauthorized disclosure of protected health information (PHI)

Healthcare organizations that fail to ensure that protected health information (PHI) is securely managed face compliance risks related to HIPAA regulations.   

Successfully navigating compliance risk

Compliance risk can be managed and controlled, if organizations make it a priority and commit to a multi-layered strategy. This means keeping a vigilant eye on the ever-changing regulatory environment and aligning their technical controls and internal policies accordingly. This process entails not only meeting external legal and regulatory standards but also adhering to internal company policies.  

Conducting frequent risk assessments, audits, and staff training is key to recognizing and addressing compliance risks. Ultimately, the effective handling of compliance risk goes beyond merely avoiding legal and financial consequences. It can strengthen an organization’s security framework, secure its IT assets, and maintain. 

You might also be interested in: