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Basel II classified legal risk as a subset of operational risk in 2003. This conception is based on a business perspective, recognizing that there are threats entailed in the business operating environment. The idea is that businesses do not operate in a vacuum and that, in the exploitation of opportunities and their engagement with other businesses, their activities tend to become subjects of legal liabilities and obligations.
One of the primary reasons why legal risk is associated with operational risk involves fraud since it is recognized as the most significant category of operational loss events and considered to be a legal issue as well. These, however, do not mean that legal risk is only confined to this conceptualization because it is defined in more than way. For instance, there are specific sets of legal risks that are defined by the European Union (EU) Law. In 2005, the European Central Bank declared that it will develop its own legal risk definition to help "facilitate proper risk assessment and risk management, as well as ensure a consistent approach between EU credit institutions."
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.
Mcormick, R. 2004 Management of legal risk is not a precise science 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.
- Johnson and Swanson. 2007
- 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.
- Tsui TC. 2013
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.
- Chapman, Robert (2011). Simple Tools and Techniques for Enterprise Risk Management. Chichester, West Sussex: John Wiley & Sons. p. 435. ISBN 9781119989974.
- Moosa, Imad (2007). Operational Risk Management. New York: Palgrave Macmillan. p. 95. ISBN 9781349352951.
- Mišćenić, Emilia; Raccah, Aurélien (2016). Legal Risks in EU Law: Interdisciplinary Studies on Legal Risk Management and Better Regulation in Europe. Berlin: Springer. p. 6. ISBN 9783319285955.
- Roger McCormick. "Legal Risk in the Financial Markets", Oxford University Press
- Roger McCormick. "The Management of Legal RIsk by Financial Institutions", RSM
- IMA. "Issues". imanet.org.
- "Legal risk 2.0: Show you're in control" (PDF).
- "Experience from the Anti-Monopoly Law Decision in China (Cost and Benefit of Rule of Law)". ssrn.com. SSRN 2260965