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]

Mcormick, R. 2004 Management of legal risk is not a precise sccience and subjective to the situation of the institution, and primarily caused by the lack of proper communication channel, undefined institutional objectives (such as the lack of policies and regulations), unclarified information flow between different personnel and department, lack of delegation of power to specify task on mitigation of risks.[1]

Johnson and Swanson. 2007

The expenses of litigation of a company.[2]

Whalley, M. 2016

Legal risk is the risk of financial or reputational loss that can result from lack of awareness or misunderstanding of, ambiguity in, or reckless indifference to, the way law and regulation apply to your business, its relationships, processes, products and services.[3]

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.[4]

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. ^ a b Roger McCormick. "Legal Risk in the Financial Markets", Oxford University Press Cite error: Invalid <ref> tag; name "McCormick" defined multiple times with different content (see the help page).
  2. ^ IMA. "Issues". 
  3. ^$FILE/ey-legal-risk-2-show-you-are-in-control.pdf
  4. ^ "Experience from the Anti-Monopoly Law Decision in China (Cost and Benefit of Rule of Law)". SSRN 2260965Freely accessible.