Category Archives: Regulatory Risk

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4 Steps to Help Organizations Embrace Risk from Emerging Technology

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As companies continue to navigate the changing work environment brought on by the pandemic, it has become clear that business leaders will need to get comfortable revising and adapting their strategies to deal with disruption brought on from new technologies and new regulation. As risk management professionals, these rapid changes have made our job more important than ever to our organizations.

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Yet the majority of our organizations—particularly in C-suites—remain far from giving risk management experts the seat at the table they need to effectively safeguard against enterprise threats, digital or otherwise.

Data from PwC’s Global Risk Survey 2022 shows that executives are starting to recognize these risks: 79% of executives report that they view the breakneck speed of digital transformation as a significant risk management challenge. Moreover, this renewed focus is translating into increased funding, as 65% of organizations are increasing their spending on risk management technology and 56% said they planned to invest in risk culture and behavioral risk in 2022.

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Unfortunately, the survey also found that too many organizations are treating the risk function as an add-on or incorporating risk leaders into strategic conversations too late. Only 39% of business leaders reported adding risk professionals to decision-making processes early, which should be an essential step for executives seeking to minimize risk from the outset. On a broader scale, executives seemed to lack confidence in risk managers, with only 47% of respondents saying they feel “very confident” in their risk function’s ability to build a more risk-aware culture, a key element of any successful risk-focused company.

Particularly as companies invest in emerging technologies, business leaders need to listen more to their risk and compliance functions and integrate them into conversations about how those technologies will be implemented. Artificial intelligence is a great example: when companies rush to implement systems to accelerate efficiency and analyze trends, they risk creating disproportionate bias and violating personal privacy through data sourcing. Risk professionals need to be at the table from beginning to end to make sure that an evolving regulatory environment and other pitfalls are fully accounted for in the organization’s implementation process.

While investment in risk management technology is helpful, it is insufficient without making structural changes to the organization to prioritize the risk function company-wide. Particularly as companies consider adopting emerging technologies, the following steps should be considered not just by risk management professionals, but across the C-suite:

  1. Identify, categorize, and prioritize technology risks across the company. This should be done on a regular basis by a dedicated risk management team, married with the best tools available, with findings routinely reported back to senior leaders. Companies are on the right track here: 65% plan to increase their technology spend this year across data analytics and process automation to support detection and monitoring of risks. This initial step will lay the framework for the establishment of cyber threat intelligence, systems monitoring, and incident response protocols.
  2. Adapt IT governance to the emerging technologies being adopted. Risk professionals should work with IT teams and company leadership to create governance structures that integrate seamlessly with corporate strategy, allowing for alignment of day-to-day operations, effective decision-making, a framework for best practices, and promotion of investments that enhance business objectives.
  3. Update leadership often on the emerging tech regulatory landscape. Whether across data privacy rules, cyber reporting requirements, or other complex technology challenges, a robust compliance program should keep leaders across the company updated as new technologies are implemented. Otherwise, companies risk run-ins with legal authorities and the erosion of trust from their clients and customers.
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  4. Set expectations with leadership that not all risks are one and the same. Understanding the context around each piece of technology will become imperative to understanding its specific risks and the appropriate response strategy, including the maturity and complexity of the business processes to determine true risk to the company. Inherent in this case-by-case evaluation is an understanding of the company’s risk appetite and criteria for acceptable level of risk.

When adopted purposefully, emerging technologies can make companies more efficient, more profitable, and better stewards for their employees, clients and communities. Risk is often unavoidable for early adopters of emerging technologies, but it can be mitigated if C-suites equip their risk functions with a holistic strategy and a voice in key business decisions. As C-suites and organizations seek to adapt to a changing world, their success will hinge on the extent to which risk management is incorporated into their strategies.

Managing Sanctions Risk from Russia’s War on Ukraine

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Since Russia began attacking Ukraine on February 24, thousands of people have been killed and over a million people have had to flee their homes, presenting one of the largest refugee crises Europe has ever experienced. In addition to the tragic human losses, the Russian invasion of Ukraine has triggered wide-ranging economic impacts. Among them, the European Union, United Kingdom, United States, Canada, Japan and others have enacted sweeping financial sanctions on Russia in an effort to pressure President Vladimir Putin to end the conflict. These sanctions have targeted Russia’s financial system and its international financial connections by restricting transactions between Russian banks and those in other countries, most notably through the SWIFT global financial network.

The economic impacts of these sanctions will likely affect many industries around the world, whether organizations deal with Russia directly or indirectly through third countries. In a briefing yesterday, global risk consultancy Control Risks discussed some of the risk management considerations and steps companies need to take as the sanctions landscape continues to evolve. According to panelist Henry Smith, partner and head of business intelligence and due diligence in EMEA at Control Risks, there are five key areas risk professionals should focus on to address the risk facing their companies as a result of these sanctions:

  1. What are your nexuses to Russia (including outside Russia)? Organizations need to look at their touchpoints with Russia, including investors and shareholders, lenders and banks, direct and indirect clients, contractual counterparties, and goods and services sourced directly or indirectly from Russia.
  2. Which sanctions apply to your organization?
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    The applicability of sanctions will vary based on your sector, the nationality of the people within the organization, and the currencies you use. It is helpful to note that, currently, there is greater consensus among various sanctions regimes so you may not have to parse through conflicting degrees of severity—consistent sanctions against Russia are being imposed, at least across most Western countries.
  3. What risks are you exposed to? Conduct a risk assessment around which sanctions you are exposed to and whether there are any business activities, relationships or practices you need to end or change in some way. This involves regularly screening Russian counterparties against sanctions lists and undertaking detailed analysis of higher-risk relationships.
  4. How do you respond? Review the implications of any decisions on employees and on contractual obligations, both with direct and third-party clients. Consider any impact winding down activities in one area may have on other business areas. Be sure to engage with regulators, enforcement agencies, banks and insurers for guidance.
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  5. What do you do as sanctions regimes evolve? Sanctions will change in response to security and political developments over the coming weeks and months, so it is important to stay informed of any communications from authorities.
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    Review and read guidance from regulators, enforcement agencies, banks and insurers, and benchmark with industry peers to make sure you can still operate effectively.

Overall, when deciding whether to continue doing business with Russia, companies will need to consider both reputational and ESG-based perspectives as well as practical issues around your ability to do business, such as maintaining the working capital required to continue operations and ensuring that goods and services can still move through the supply chain.

Experts expect that the Russia-Ukraine crisis will have a long-term impact on the global economy and many effects of these sanctions may not be felt for weeks or months. Companies will need to remain vigilant in order to stay ahead of the risks.

A TechRisk/RiskTech Reading List from Risk Management Magazine

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Last week, the RIMS TechRisk/RiskTech virtual event featured two days of education content on some of the biggest challenges and opportunities in modern risk management, focusing extensively on cyberrisk as well as risktech—the latest technology tools and techniques for managing risk. As the presentations made clear, technology introduces some of the greatest risks to organizations, but also some of the most promising innovations to introduce or enhance risk management.

“We all know that, ‘As fast as a business develops a strategy to protect their organization’s digital assets, cyber predators have already figured out their next move,’” said Patrick Sterling, vice president of legendary people and risk management at Texas Roadhouse Restaurants and 2022 president of RIMS. “So, risk professionals must do what risk professionals do best: We must adapt. And we must adapt quickly.”

“We can’t forget about the risks that preceded this pandemic, and top on that list stands technology,” Sterling added in his address during the event. “Cyber gets a bad rap—when we talk about risk, we must remember risk can lead to positive outcomes. While greater dependency on technology has opened the door to more threats, it also allows us to improve processes, keep employees safe, boost efficiencies and engage our customers in a whole new way.”

As a RIMS virtual event, the content from TechRisk/RiskTech will be available for attendees or new registrants to view on-demand for the next 60 days, and you can check out the sessions here.

Following the TechRisk/RiskTech event and last Friday’s international Data Privacy Day, risk professionals who want to learn more about cyberrisk and risktech topics can also check out a wealth of related articles from Risk Management Magazine. Whether you would like to keep up the education after attending TechRisk/Risktech or just want to catch up on topics like cyberrisk, ransomware, cyber insurance, risktech, artificial intelligence, the internet of things and connected devices, and other technology that can help manage risk, here’s a roundup of recent Risk Management articles on cyberrisk and risktech:

Tech Risk (Cyberrisk):

Risktech:

RIMS TechRisk/RiskTech: Emerging Risk AI Bias

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On the second day of the RIMS virtual event TechRisk/RiskTech, CornerstoneAI founder and president Chantal Sathi and advisor Eric Barberio discussed the potential uses for artificial intelligence-based technologies and how risk managers can avoid the potential inherent biases in AI.

Explaining the current state of AI and machine learning, Sathi noted that this is “emerging technology and is here to stay,” making it even more imperative to understand and account for the associated risks. The algorithms that make up these technologies feed off data sets, Sathi explained, and these data sets can contain inherent bias in how they are collected and used. While it is a misconception that all algorithms have or can produce bias, the fundamental challenge is determining whether the AI and machine learning systems that a risk manager’s company uses do contain bias.

The risks of not rooting out bias in your company’s technology include:

  • Loss of trust: If or when it is revealed that the company’s products and services are based on biased technology or data, customers and others will lose faith in the company.
  • Punitive damage: Countries around the world have implemented or are in the process of implementing regulations governing AI, attempting to ensure human control of such technologies. These regulations (such as GDPR in the European Union) can include punitive damages for violations.
  • Social harm: The widespread use of AI and machine learning includes applications in legal sentencing, medical decisions, job applications and other business functions that have major impact on people’s lives and society at large.

Sathi and Barberio outlined five steps to assess these technologies for fairness and address bias:

  1. Clearly and specifically defining the scope of what the product is supposed to do.
  2. Interpreting and pre-processing the data, which involves gathering and cleaning the data to determine if it adequately represents the full scope of ethnic backgrounds and other demographics.
  3. Most importantly, the company should employ a bias detection framework. This can include a data audit tool to determine whether any output demonstrates unjustified differential bias.
  4. Validating the results the product produces using correlation open source toolkits, such as IBM AI Fairness 360 or MS Fairlearn.
  5. Producing a final assessment report.

Following these steps, risk professionals can help ensure their companies use AI and machine learning without perpetuating its inherent bias.

The session “Emerging Risk AI Bias” and others from RIMS TechRisk/RiskTech will be available on-demand for the next 60 days, and you can access the virtual event here.