Compliance vs Risk Management Process – Everything You Need To Know About it

According to surveys, 60% of top-level executives in the financial industry consider compliance and risk management as the two most complicated categories. Some surveys have showcased that a huge number of banks globally don’t have ideal techniques in place to maintain compliance.

There are tons of misconceptions about compliance and risk management. While both of them help businesses protect their legal structure and physical assets from fraud, both of them are unique. Most people end up interchanging the terms with each other. For businesses operating in the financial industry, the need to understand the difference between the two is crucial.

Without having an idea what compliance and risk management have to offer, it’s practically impossible to stay secure.

Business leaders can come up with strategies that take advantage of all the tools at hand. The end goal should be to comply with all laws and manage risk as much as possible.

What is Compliance?

Compliance is the process of following a set of standards, regulations, and legal guidelines. Compliance management is the process of making sure the entire organization is doing activities that help them conform to the rules. Managing compliance in businesses involves two important steps:

  • Regulatory compliance: These are the steps and changes made by an organization to comply with the set of rules, guidelines, and laws set by an external authority.
  • Corporate Compliance: These are the actions and security practices an organization implements to ensure compliance with the organization’s internal rules.

For an organization to operate smoothly, they need to comply with both regulatory and corporate guidelines. Maintaining regulatory compliance can protect businesses from external threats, and prevent fines, legal actions, and even shutdowns in some instances.

What is Risk Management?

Risk management is something an organization has to do on its own. It’s the process of analyzing, assessing, identifying, and then managing potential threats that can hurt an organization’s reputation and financial health.

These risks come from various sources, including legal liabilities, data-related issues, financial uncertainty, poor KYC and customer onboarding processes, poor vendor onboarding processes, etc.

Risk management involves building and implementing plans that can increase awareness of these threats and teach how to avoid them. 

Risk management allows businesses to predict future threats and prepare for them.

Difference Between Compliance and Risk Management

Compliance and risk management are closely intertwined. Compliance in association with industry regulations makes sure that businesses stay protected from emerging threats. Risk management, on the other hand, helps businesses prevent risks that can arise from non-compliance. Let’s break down the differences between both them:

  1. Prescribed vs Predicted

Compliance is a set of rules and regulations that are set forth by regulatory bodies (governments, industry leaders, etc). Risk management is mainly internal. Organizations have to predict for themselves the risks that can arise in the future. Based on these assessments, businesses have to come up with solutions that help manage these risks.

  1. Tactical Approach vs Strategic Approach

Not complying with industry standards and rules can lead to huge fines, penalties, and reputational damage. Businesses spend hundreds of hours worth of manpower to take a “check-box” approach to make sure the organization is complying with the rules.

Compared to that, risk management is all about building strategies as it requires carrying out decisions that minimize risks.

  1. Preventing Risks vs Creating Value

Businesses need to take a far-sighted approach to risk management. Without preparing for the future, businesses are not usually able to generate value propositions for themselves.

The compliance process ends when an organization is sure that a particular rule is followed. Out of the two, compliance is easier. But, it gets a bad reputation in the industry as it requires time, effort, and resources from employees. Instead, employees could be spending their time on other projects.

A good risk management program is a never-ending process. It requires constant changes, amendments, and thought. Risk management requires changes to strategies all the time so the organization can stay compliant with external rules. Constantly staying up to date with compliance leads to generating a great brand reputation in the market.

Can Compliance Happen Without Risk Management?

Your organization can’t have risk management without compliance. Not being able to or not wanting to comply with rules leads to fines, exposure to threats, and reputational damages. So, make sure to include the compliance process in your business.

The average non-compliance cost for a business is $9.4 million. A  good risk management plan will be able to allocate resources and time to ensure an organization is up to date with all the latest compliance laws.

Organizations can prevent hefty fines, losses due to theft, and reputational damages by simply investing in a risk management process.


Importance of Compliance Management

No business can survive without a list of rules and regulations. To maintain this compliance, businesses have to follow the rules and regulations that are related to their industry. Businesses consider “maintaining compliance” a challenge as the rules are always changing. If you fail to stay up to date on these compliance rules, it can damage your company’s reputation.

What is Compliance Management?

Compliance management is the process of monitoring and assessing an organization’s internal systems to make sure that they comply with industry regulations.

Maintaining compliance isn’t just the role of top management, it comes down to everyone within the organization. The knowledge and understanding should correlate with the organization’s goals. All employees should be aware of how they can follow compliance standards. This helps in smooth working operations.

Importance of Compliance Management

As technology is becoming a major part of all sectors of our lives, legal regulations are becoming fiercer. Compliance management is crucial for every business as non-compliance can lead to legal and financial penalties, data theft, and damage to a business’s reputation.

Compliance management software or verification software can help financial institutions to keep up with compliance requirements.

Here are all the reasons why businesses need to comply with industry rules and regulations:

  1. Avoid Violations

Noncompliance with industry rules and regulations can hurt your business’s financial health. According to a recent study, it came to light that businesses without a compliance management system were imposed fines 2.71 times more than organizations with a system in place. 

These fines amounted to $14.83 million annually. The same report also stated that the annual cost for compliance management is $5.47 million. Businesses operating in financial industries especially need to comply with industry standards and regulations.

  1. Helps in Evaluate Security Risks

Complying with rules and regulations allows businesses to evaluate and manage security risks. Not just written guidelines and documents, but organizations need proper systems that can help to maintain compliance.

Risk assessments help in evaluating the level of risk an organization is facing at any given time. It also helps in uncovering potential risks. In addition to continuous monitoring, compliance management tools like KYC verification software can help you fix vulnerable parts of the operations.

  1. Protect Against Data Breaches

In case you fail to follow compliance requirements, it can lead to data breaches, and legal penalties, and it can hurt your business’s reputation. Every year, the number of data breaches is increasing, leading to the loss of millions of dollars worth of data. That’s not all. These data breaches ultimately increase the number of ID theft cases, leading to a whole new domino chain of fraud.

Challenges of Compliance Management

The reason why businesses shy away from compliance management is the challenges they face. Complying with laws and maintaining them throughout the organization is a major task. 

  1. Regular Changes in Laws

Regulatory bodies often keep changing the rules and regulations based on current fraud trends. As new cyber threats move quickly across industries, regulatory bodies have to make immediate changes to rules to help organizations protect customers.

  1. Large Enterprises with A Lot of Employees

Managing and maintaining compliance is most challenging for larger enterprises. With a large workforce, it can be tough to make sure everyone is following the compliance initiatives. This leads to complex organization systems and can increase the risk of data breaches. 

  1. Scattered Working Environments

As organizations now have both on-site and remote workforces, it becomes even more challenging to get an accurate view of compliance status. As a result, it has been challenging for most organizations to manage and monitor for risks and weak points.

Compliance Management Best Practices

Compliance management is a major process that requires a multi-faceted approach. You need to build a system that allows you to monitor all environments at the same time. Here are some best practices that you can follow for compliance management.

  1. Conduct Policy Audits

If your organization’s policy was written years ago, then most likely it needs to be added. Go through your organization’s compliance management policy, and take note of all the things that look dated. An audit will reveal gaps and weak points in your policy. Try to fix all the issues and you’ll be able to come up with a newer and stricter compliance management policy.

  1. Train Your Staff

Your staff needs to have a complete understanding of how they can maintain compliance throughout the organization. If your staff are your weakest link, then just making policies won’t solve anything. 

Training helps reinforce policies and procedures and helps you handle employee questions and concerns. You should also schedule training sessions throughout the year to make sure all the employees are up to date on compliance standards. 

  1. Continuous Monitoring and Due Diligence are the Keys

Data security and privacy legislation are some industry standards that want organizations to manage their cybersecurity standings. While privacy and security are two completely different things, they do go hand-in-hand.

The new privacy laws require businesses to consider “privacy by design” or “security by design,” and the use of continuous monitoring solutions. Businesses need to note that they should perform due diligence on third-party vendors. They can do this by using vendor bank account verification solutions.


Managing Online Payment Fraud Efficiently

Banking has become digital. The payments sector has been especially impacted by digitization. But with the growing use of digital payments, fraudsters have found a new avenue for success. According to a 2022 payment fraud study, merchants spend an average of 10% of eCommerce revenue on fraud management.

Every merchant and business needs to manage payment fraud to mitigate losses. Constant payment fraud even acts as a red flag for the organization. Preventing payment fraud can even help organizations scale at the right pace.

One of the biggest challenges of fighting online payment fraud is that interconnected networks are complicated.

Every single transaction could be a potential attack point for the organization. Regardless of the threat, an organization has to provide a seamless payment experience.

There are a lot of moving parts that customers have to care about, such as interfaces, websites, apps, and back-end services. On top of all of this, additional services such as ID verification, authentication, transaction monitoring, and more.

Banks need to be highly careful about the ever-changing nature of the payments industry, and the new techniques being used by fraudsters. Maintaining a safe and seamless payment environment for customers is becoming increasingly challenging.

Fortunately for banks and financial service providers, preventing payment fraud doesn’t need to be super complicated, expensive, or time-consuming. The best way to move forward is to take a risk-based approach that covers your specific needs and aligns with your organizational goals.

Knowing Your Customers is Crucial

Regulated industries have been struggling with fraudulent transactions. Since they have to fight fraud all the time, they have better fraudulent transaction handling. Businesses in these industries have well-established procedures to identify customers and understand the risks that come along.

KYC procedures are made to design and prevent money laundering and offer intelligence into the nature of the customer. You need to know who the customers are, and if they are real.

KYC happens during the customer onboarding process. You need to ensure that fraudsters can’t even create an account. While these processes tend to weed out fraudsters, they can also hurt genuine customers. Your fraud prevention process should not create unnecessary friction in the customer onboarding process.

You absolutely need to implement seamless, effective ID verification solutions. It is the first-ever step in managing payment fraud.

Understanding Payment Flows

While it is possible that every single transaction is fraudulent. Businesses still need to monitor, flag, and analyze transactions to provide ongoing intelligence and add another level of risk management.

As payments are becoming faster, the increasing speed of payments requires faster payment information processing. Latest innovations such as real-time payments will require solutions that are incredibly sophisticated.

Financial institutions need solutions that can help them understand who their customers are, and whether the information provided to them is accurate or not.

In the EU, legal obligations require strong customer authentication for multiple transactions. Two-factor authentication such as confirming a text, email, or in-app notification, is an authentication technique that businesses can deploy.

A new verification method has come out called 3D Secure 2.0, and it is backed by all the major credit card providers.

Some other dynamic fraud detection tools same as transaction monitoring can also help in risk mitigation. Some online fraud mitigation processes can help in:

  • Spikes in activities
  • Exceeding thresholds
  • Out-of-area or unusual cross-border activities
  • Changing purchase patterns
  • Consumer alerts
  • Credit reports
  • IP address discrepancies
  • Fraudulent patterns

Integrate Security into the Process

Managing payment fraud should be a natural part of the process. It should not feel like an additional task that you have to manage. Security is a crucial part of running a successful digital company and it contains a lot of factors. If there are a lot of weak points in your security, that’s the place where fraudsters will target.

There are some methods and solutions that every business needs to have to prevent fraud:

1. Tokenization

The best way to protect customers from a data breach is to tokenize the information. In the case information is stolen, it won’t mean anything to anyone other than the transaction and the retailer. If the retailer is hacked, the hackers won’t be able to gain anything from all the data.

What’s even better is that the Payment Card Industry promotes this practice and it works with almost all existing POS systems. It replaces the actual 16-digit credit card number with a 16-digit token. It doesn’t add anything to the payment process, and it cuts down on compliance costs.

2. Encrypt the Information

For all major retailers, end-to-end encryption is a great option to prevent fraud. PCI standards don’t allow storing credit card information after a transaction, and converting that data via an algorithm protects the data while still allowing authorized use. But you need to keep one thing in mind: encryption is an expensive process that doesn’t work well for small and mid-sized companies.

4. Address Verification

Currently, all the eCommerce address verification checks are done using the Address Verification System (AVS). AVS can check the address on the credit card file to the data provided by the customer.

AVS checks the zip code and the street number of a billing address and it compares those numbers to the zip code and street number of the credit card owner. Visa, MasterCard, and American Express support AVS in the U.S., Canada, and the UK.

But, the AVS isn’t perfect. Customers could have moved to a new location, or they may be ordering things online for someone else. In these situations, the AVS just falls apart. What works better is the address verification solution offered by DIRO. DIRO address verification can verify customer addresses straight from government sources, thus eliminating the risk of payment fraud.


What is Good Standing Verification and Why Does Your Business Need It?

Almost every business is asked to provide a good standing verification certificate. Only the state can issue the good standing certificate verification. It’s one document that every business should be able to provide when asked for it. 

Every business, LLC, or any other entity needs to have a good standing status in its records. This helps banks, financial institutions, and other businesses understand that the business is in good standing. A good standing verification certification can help in:

  • Maintain the limited liability that an entity provides.
  • Take their business into other states.
  • Acquire a loan on the basis of good standing.
  • Get rid of state-imposed fines and penalties.

Most of the time, a lender requires a good standing verification certification to offer a loan. Businesses can avoid delays in the loan approval process by maintaining good standing.

What is a Good Standing Certificate?

A certificate of good standing lets others know that the company is legally registered with the state and it complies with all the state laws, such as:

  • State registration fees
  • Required document filings
  • Legally permitted to conduct business in the state

A certificate of good standing usually contains an expiration date. This date suggests when the organizational registration is due. This renewal date could be at the end of a calendar year, or during some other time when the state’s laws require renewal or periodic filings.

This rule is similar for businesses formed somewhere else and registered as foreign entities in the state.

Most users confuse good standing as a business or occupational license, but it’s not. A company can also do business in the state it was formed, it does not need a good standing certificate to do so.

Which Businesses can Get a Good Standing Certificate?

As not all businesses need to register themselves with the state, they won’t be able to obtain a good standing certificate. Lenders, government agencies, and even other businesses can ask for a good standing certificate of a business.

If you want to get a good standing certificate, then there are two ways you can follow. The easiest ways are to register or qualify their company to transact business in another state and to open a business banking account. A good standing certificate acts as part of the compliance.

How to Obtain a Good Standing Certificate?

As mentioned above, the best way to get a good standing certificate is to register your business with a state. When you register your business, the state will offer a certificate of good standing.

The issuing entity is often the secretary of state or any one of their subdivisions. The agency has different names based on the state they are in:

  • Arizona: Arizona Corporation Commission
  • Massachusetts: Corporations Division, Secretary of the Commonwealth of Massachusetts
  • Michigan: Corporations Division, Department of Licensing and Regulatory Affairs
  • New Jersey: Division of Revenue and Enterprise Services, Department of the Treasury
  • Utah: Division of Corporations and Commercial Code, Utah Department of Commerce
  • Virginia: State Corporation Commission
  • Wisconsin: Department of Financial Institutions
  • Delaware: Division of Corporations
  • Hawaii: Business Registration Division, Department of Commerce and Consumer Affairs
  • Maryland: Department of Assessments and Taxation
  • Alaska: Department of Commerce, Community, and Economic Development

If you want particular information on how to obtain good standing certification from the state department, you’ll have to contact them for all details.

What do Businesses Need to get a Certificate of Good Standing?

Most businesses require a good standing certificate while going through a KYB verification process. Most financial institutions do incorporation verification before onboarding them. A good standing certificate is just one of the many documents that lenders ask for.

This happens when you try to open a business bank account, or set up a new credit card, or debit card. Some lenders also ask for a Good Standing certificate. If your business isn’t required to register with the state, it’s not possible for you to get a good-standing certificate. There is one absolute requirement for getting the certificate. Your business needs to be registered in the state for the good standing certificate.

When You May Need a Good Standing Certificate?

There are a number of situations when you may be asked to provide a good standing certificate. A good standing certificate even protects your business from a lot of things. Banks will want to see the certificate before onboarding you.

Here are the situations where you will need a good standing certificate:

  1. Opening a business bank account
  2. Establish business credit
  3. Applying for payment processing
  4. For improving your business credit score
  5. Securing an investor for funding your business
  6. Securing a lease for your office space
  7. To protect your business’s LLC status
  8. For renewal of business licenses and permits
  9. Applying for a loan
  10. For selling your business
  11. For getting business insurance

If you lose your good standing status, it impacts your business’s reputation and ability to do business.

Verification of Good Standing Certificates

Banks ask for good standing certificates to verify a business, and its ability to do business. But fraudsters globally have figured out a way to trick banks by forging good standing certificates. Verification of good standing certificates is really tough. For years, banks have been verifying documents manually.

Fortunately, DIRO’s document verification technology has changed that for good. DIRO helps banks, lenders, financial institutions, and other entities to quickly verify good standing certificates during incorporation verification. This leads to fewer false positives and an enhanced level of security for financial institutions.