Managing complexity and risk in today’s corporate landscape requires a well-thought-out strategy that includes leveraging external expertise through outsourcing, ensuring regulatory compliance, and meticulously conducting due diligence on potential service providers.
It is true that outsourcing risk and compliance is becoming increasingly complex. The compliance function requires more skills, experience, and knowledge than ever before, particularly in light of the increasing regulatory complexity that compliance teams must understand and navigate.
Large companies often outsource the business or support activities to save money on training costs and keep the compliance team current with applicable regulatory requirements. The outsourcing arrangements involve transferring certain functions to third-party compliance companies that may have the required skills and expertise which the company does not have.
The outsourcing companies usually can handle those areas of compliance at a lower cost than the company that is outsourcing. Outsourcing companies benefit from economies of scale due to the specialization in one or two services.
Managing Complexity and Risk
Outsourcing arrangements may be related to warehouse cleaning, website development, data protection, KYC of customers, etc. Most companies delegate authority to outsourced specialist companies regarding bookkeeping, maintenance, and recruitment, which helps them to focus most of their resources on the main activity.
Outsourcing involves different risks, such as loss of control, loss of confidential information, administration, inability to gain technical knowledge, loss of security, etc. The companies that outsource their key activities and functions must identify the relevant applicable regulatory requirements to ensure that they comply with the company and the outsourcing company. Before entering into the outsourcing agreement, the companies must ensure that all applicable regulatory requirements are mentioned in the agreement for compliance purposes.
The outsourcing company must be able to implement the desired controls to ensure that data and information are protected and the applicable regulatory requirements are complied with on behalf of the organization. Outsourcing arrangements should not be entered into with companies that cannot implement the controls and ensure compliance with applicable laws and regulations. Appropriate due diligence needs to be performed before entering into the outsourcing arrangements, which may involve the services of subject matter experts such as lawyers, accountants, or compliance specialists.
The board of directors is required to:
Approve a framework to evaluate the outsourcing risks and materiality of outsourcing arrangements.
Set a suitable risk appetite to define the nature and extent of risks the company is willing to accept from outsourcing arrangements.
Lay down appropriate approval for outsourcing arrangements.
Ensure management establishes governance structure and processes for effective and sound outsourcing risk management.
Decide on activities to be outsourced.
The company manages the outsourcing risks on an ongoing basis and assesses the operational and concentration risks associated with the outsourcing arrangements. Companies may be required to inform the regulator about the significant outsourcing arrangements. The companies must assess the outsourcing risks related to business activity and ensure that the risks are adequately identified within the overall risk management framework.
The companies must internally conduct due diligence on the business activity to be outsourced to manage the risks and ensure compliance. The due diligence of the service provider shall also be performed before finalizing any arrangement.
The due diligence of the service provider encompasses the assessment of all areas, including experience, technical competence, financial position, market reputation, control structure, managerial skills, policies, reporting environment, and other areas relevant to outsourcing arrangements. The due diligence also addresses potential conflicts of interest in a case service provider is an affiliated entity or where it provides similar services to the company’s competitors. The company shall identify all potential and actual conflicts before entering into the outsourcing arrangements to identify applicable regulatory risks.
Final Thoughts
Outsourcing risk and compliance is not for everyone. Due to organizational strategies, policies, or internal beliefs, some organizations must keep compliance activities in-house. However, an increasing number of businesses are discovering that outsourcing can help them manage the growing compliance burden.
It may take guts to question the traditional in-house compliance approach, but there has never been a better time to consider outsourcing. This is due to the fact that the compliance solutions market has evolved in response to rising demand, with more suppliers than ever before and new services and tools becoming available on a regular basis.
