Compliance risk refers to the potential for legal penalties, financial loss, or reputational damage that an organisation might face if it fails to adhere to laws, regulations, or internal policies. In the context of anti-money laundering (AML) and financial crime compliance, compliance risk is the danger that a financial institution could unknowingly facilitate illegal activities, such as money laundering or terrorism financing, by failing to meet regulatory requirements.

This risk can arise from inadequate customer due diligence, weak transaction monitoring systems, or lapses in reporting suspicious activities. To mitigate compliance risk, organizations must implement effective controls, maintain up-to-date screening processes, and ensure that their staff are trained in the latest AML laws and regulatory expectations. Proper management of compliance risk is essential to avoid fines, legal actions, and damage to the institution’s credibility.