What Is Jurisdiction Risk?

Jurisdiction risk is the risk that arises when operating in a foreign jurisdiction. In recent times, jurisdiction risk has focused increasingly on banks and financial institutions that are exposed to the volatility that some of the countries where they operate may be high-risk areas for money laundering and terrorism financing.

Jurisdiction risk can also refer to times when laws unexpectedly change in an area in which an investor has exposure. This type of jurisdiction risk can often to lead to volatility. As a result, the added risk from volatility means investors will demand higher returns to offset the higher levels of risk being faced.

How Jurisdiction Risk Is Dealt With

Jurisdiction risk is generally believed to be higher in countries that have either been designated as non-cooperative by the Financial Action Task Force (FATF) or have been identified by the U.S. Treasury as requiring special measures due to concerns about money laundering or corruption. Because of the punitive fines and penalties that can be levied against a financial institution that is involved (even inadvertently) in money laundering or financing terrorism, most organizations have specific processes to assess and mitigate jurisdiction risk.

The FATF issues two reports every quarter that identify jurisdictions with weak measures to fight money laundering and terrorist financing.

Key Takeaways

  • Jurisdiction risk arises when operating in a foreign location.
  • This type of risk has, more recently, has focused increasingly on banks and financial institutions.
  • Jurisdiction risk can also be applied to to times when an investors is exposed to unexpected changes in laws.

An Example of Jurisdiction Risk

The Financial Action Task Force (FATF), in 2012, issued a statement expressing its deep concerns about the continued failure to take action by Turkey to fully criminalize terrorist financing and put in place a sufficient legal framework for identifying and freezing terrorist assets consistent with the FATF Recommendations.