Lack of Risk Visibility Leads to Customer Rejection and Financial Loss for Companies

A lack of risk visibility is causing companies to reject customers and potentially lose money due to fears of violating anti-money laundering and sanctions regulations. Research published on June 10 by business data firm Dun & Bradstreet (D&B) reveals that this opaque risk environment has led over half (53 percent) of surveyed businesses to reject potential customers. Additionally, 61 percent admit that excessive compliance checks force them into “reactive firefighting” instead of proactive risk management.

D&B’s research also indicates that compliance teams have experienced a 28 percent increase in demand on their time over the past year, despite 55 percent of businesses having no additional budget. Stuart Swindell, D&B’s strategy director of third-party risk and compliance for the U.K. and Ireland, noted that compliance teams are increasingly hampered by “a lack of harmonization and increasing regulatory demands, coupled with inadequate technology,” resulting in excessive time and effort spent on manual tasks. “This not only reduces their efficiency but leaves them vulnerable to errors and oversights which could otherwise be avoided,” he added.

The D&B poll, conducted in April, is based on the views of more than 1,300 compliance decision-makers across nine European countries, including the United Kingdom, Germany, and the Nordic countries. Businesses face an increasingly complex risk landscape, where changes in regulation are matched by changes in enforcement appetites. For instance, Moody’s latest Grid risk database found a nearly 14 percent rise in the number of organizations and individuals added to sanctions watchlists over the 14 months ending in June, along with a 22 percent increase in human trafficking events from 2022-23.

Given the liability for failures to report and mitigate issues of noncompliance with cross-border legislation such as Germany’s Supply Chain Due Diligence Act and the U.K.’s Economic Crime and Corporate Transparency Act, it’s unsurprising that nine out of ten respondents to Moody’s survey rate entity verification as “essential” or “important.”

Experts agree that many companies are struggling with risk visibility. Peter Wood, chief technical officer at tech-based recruitment firm Spectrum Search, explained that the refusal of new customers can seriously impact income and lead to long-term ramifications. “When risk perception is faded, companies often play it safe, which unfortunately leads to missed customer interactions,” he said. “It also births a culture where dodging risk becomes second nature, causing businesses to become defensive rather than opportunistic. Over time, this can chip away at a company’s competitive edge and robustness, leaving it exposed to larger disruptions.”

Wood suggested that investing in AI and tech solutions for basic compliance checks can help if organizations have the budget. However, he added that some effective measures have practically no costs attached. For example, “joining hands” can be beneficial. “Connecting with industry networks and sharing insights on risk management can pave the way for better practices and innovative solutions. By learning from peers and rivals, companies can gain a deeper understanding of risk elements and mitigation strategies,” he said.

Jackie Fessler, director of risk management at risk software provider Fusion Risk Management, advised companies to “hedge” risky client relationships through better insurance cover, tightening minimum standards in contracts, better ongoing monitoring, and opting for short-term agreements. “You need to mitigate your risks, but there are many ways to do that other than the extreme measure of not engaging at all,” she said.

Fessler emphasized that the first step is to realistically assess the company’s risk tolerance: “Is it the fear of the unknown, or are there specific red flags that are driving decisions?” She added, “The goal is to truly understand what risks a potential customer may bring to your organization and not to dismiss them out of hand because their risk program is not up to your standards. Look for customers who are willing to take your suggestions and have a desire to improve. An organization that wants to do the right things, even if it doesn’t have its risks codified, may be a better long-term customer than another organization that has 500 pages of documented policies that it doesn’t actually practice.”

By fLEXI tEAM