Legal risk

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Basel II classified Legal risk as a subset of Operational Risk in 2003. There is no standard definition, but there are at least two primary/secondary definition sets in circulation.

Mcormick, R. 2004 Legal risk is the risk of loss to an institution which is primarily caused by:- (a) a defective transaction; or (b) a claim (including a defense to a claim or a counterclaim) being made or some other event occurring which results in a liability for the institution or other loss (for example, as a result of the termination of a contract) or; (c) failing to take appropriate measures to protect assets (for example, intellectual property) owned by the institution; or (d) change in law.[1]

Johnson and Swanson. 2007 The expenses of litigation of a company. [2]

Whalley, M. 2012 The risk of financial or reputational loss arising from: regulatory or legal action; disputes for or against the company; failure to correctly document, enforce or adhere to contractual arrangements; inadequate management of non-contractual rights; or failure to meet non-contractual obligations.

Tsui TC. 2013 The cost and loss of income caused by legal uncertainty, multiplied by possibility of the individual event or legal environment as a whole.[3]

One of the most obvious legal risks of doing business not mentioned in the above definitions is the risk of arrest and prosecution.

All definitions contain more detail.


  1. ^ Roger McCormick. "Legal Risk in the Financial Markets", Oxford University Press
  2. ^ Kevin Johnson and Zane Swanson "Legal Risk in the Financial Markets" Management Accounting Quarterly, Full 2007 at:
  3. ^ Tat Chee Tsui. "Experience from the Anti-Monopoly Law Decision in China (Cost and Benefit of Rule of Law)." The Network: Business at Berkeley Law (Apr/ May 2013) at: