Bridging the Gap: Balancing Internal and External Compliance Risks

In today's complex regulatory environment, organizations face the dual challenge of managing both internal and external compliance risks. Striking the right balance and shortening the gap between these two areas is essential for gaining a holistic view of risk, maintaining operational integrity, protecting brand reputation, and driving scalable growth. 

This blog explores strategies for effectively balancing internal and external compliance risks without straining tight resources. It provides insights into best practices and key considerations.

Understanding Internal Compliance Risks

Compliance teams often face limited budgets and schedules, making it difficult to establish a comprehensive compliance framework that meets both regulatory requirements and the company’s internal ethics standards. 

Internal compliance risks arise from within the organization and are often related to non-compliant employee behavior. This can have multiple root causes, such as inadequate internal processes, burdensome and lengthy disclosure processes, a hostile company culture, to name just a few.

Such an environment can severely jeopardize even the most conservative compliance goals and lead to:

• Ethical violations
• Circumvention of internal controls
• Data privacy breaches
• Rise of conflicts of interest
• Reluctance to speak up 

Establishing a robust framework for managing internal risks is essential for every organization. Given limited budgets and resources, compliance teams rely on a well-trained, risk-aware workforce to help protect the company from exposure—to put it simply, they need employees to “do the right thing, even when no one is watching.”

Research underscores this need: when employees feel overburdened by compliance requirements, they’re twice as likely to disregard them, 60% times more likely to witness misconduct, and half as likely to report it.

Employee engagement is therefore critical to successfully implement a corporate compliance program.

Exploring External Compliance Risks

In addition to internal compliance concerns is ensuring that your external third parties, suppliers, and partners are equally as invested in maintaining responsible, secure, and ethical practices.

External compliance risks stem from factors outside the organization's direct control, such as:

• Changing regulatory requirements
• Third-party vendor relationships
• Geopolitical factors affecting supply chains
• Industry-specific regulations
• Market dynamics
• The importance of a balanced approach

Reasons for a Holistic Approach

Looking at these two areas of compliance risks separately can cause fragmentation in risk management processes and overall program goals. 

Balancing internal and external compliance risks is essential for several reasons:

Holistic Risk Management:

Addressing both internal and external risks provides a comprehensive view of the organization's compliance risk landscape.

Consistent Data:

By looking at and managing all of your data in one compliance management platform, you help eliminate duplicates, and bridge the gap between risk data points that help you assess actual exposure, something that  could easily fall through the cracks when data is treated in silos.

Resource Optimization:

By centralizing data, converging risk assessments, and bridging the gap between risk information you can streamline assessment processes and allocate resources more efficiently.

Enhanced Resilience:

A balanced approach helps organizations adapt to both internal changes and external pressures proactively and nurture a more risk and ethics-aware culture amongst internal and external stakeholders.

Improved Stakeholder Confidence:

Demonstrating a commitment to managing these risks can boost trust among investors, customers, and regulators, as well as ensuring thorough understanding and confidence within internal teams.

Strategies for Balancing Internal and External Compliance Risks

Implement a Risk-Based Approach

Adopt a risk-based compliance strategy that prioritizes both internal and external risks based on their potential impact and likelihood of incidents occurring. This approach allows organizations to focus resources on the most critical areas, regardless of whether they are internal or external in nature.

One example of taking a risk-based approach to compliance risks is in regards to disclosures like whistleblowing and incident management. Examples of internal policies and controls to put in place include:

• Implement clear policies and training on whistleblowing processes
• Establish secure and confidential reporting channels for whistleblowers
• Ensure prompt and thorough investigations of reported issues
• Enforce a strict non-retaliation policy for whistleblowers
• Regularly review and update internal control mechanisms

Establish a Strong Compliance Culture

Foster a culture of compliance that permeates all levels of the organization through transparency and a devotion to the ethics of your business. This involves:

• Clear communication of compliance expectations
• Regular training and awareness programs
• Leading by example from top management
• Encouraging employees to report potential violations

A strong compliance culture helps mitigate internal risks while also preparing the organization to better handle external challenges.

Use Centralized Technology for Compliance Management

Utilize compliance management systems and tools that help monitor both internal and external risks. These technologies can:

• Automate compliance processes
• Provide real-time visibility into compliance status
• Connect relevant data points across internal and external risks
• Generate comprehensive reports for analysis
• Facilitate collaboration between different departments

Phasing-out manual processes and systems can be an exercise in change management, but helps ensure your program can scale up and meet evolving regulatory and auditing requirements. 

Leverage Automations for Gathering External Risk Data

When AI is used responsibly, it can provide valuable insights into the activities and potential risks related to third parties, helping compliance professionals during the initial scoping and due diligence processes. 

Examples of how AI can gather this initial risk data include:

• Gathering initial third-party risk data
• Identifying sanctions or other negative news
• Vendor profile and background research
• Enable more targeted third-party questionnaires

Enhance Stakeholder Collaboration

Promote collaboration between various stakeholders, including legal, compliance, IT, finance, and operations teams. 

This cross-functional approach ensures a more comprehensive view of both internal and external risks and facilitates more effective risk management.

Develop a Robust Third-Party Risk Management Program

Given the significant external risks posed by third-party relationships, implement a comprehensive third-party risk management (TPRM) program that includes:

• Due diligence processes
• Ongoing, real-time monitoring of vendor compliance
• Clear contractual obligations for compliance
• Regular audits and assessments of third-party partners

These capabilities help teams detect potential issues early, respond quickly to emerging risks, and adapt strategies as needed.

Stay Informed About Regulatory Changes

Maintain a proactive approach to monitoring regulatory developments in all relevant jurisdictions. This involves:

• Subscribing to regulatory updates
• Participating in industry associations
• Engaging with regulatory bodies
• Conducting regular compliance training for key personnel

It’s important to prepare your organization, teams, and third parties early for any changes in regulatory expectations. Waiting until a regulation goes formally into effect can leave teams scrambling to make these changes.

Leverage a Compliance Reporting Framework

Centralized compliance management software helps teams document a structured reporting framework that provides visibility into both internal and external compliance risks. This should include:

• Regular compliance reports to senior management and the board
• Key performance indicators (KPIs) for compliance
• Trend analysis of compliance issues
• Benchmarking against industry standards

Foster a Culture of Continuous Improvement

Compliance is not a one-and-done activity; it is ever evolving and adapting. It is important to encourage ongoing evaluation and refinement of compliance processes. This involves:

• Conducting post-incident reviews
• Soliciting feedback from employees and stakeholders
• Staying abreast of best practices in compliance management
• Regularly updating policies and procedures
• Training

Of particular note is continuous education and communication, which are essential for employees to recognize and disclose potential conflicts. 

Conclusion

Balancing internal and external compliance risks and bridging the gap between them is a complex but essential task for modern organizations. By adopting a comprehensive approach that addresses both types of risks, companies can build a more resilient and effective compliance program. 

Remember, compliance is not a one-time effort but an ongoing process that requires continuous attention and adaptation. 

To learn more about how GAN Integrity helps teams implement these compliance best practices, schedule a conversation with us today.