What is the risk of jurisdiction?
Jurisdiction risk is the danger that can happen when doing business in a different area or location. There are risks like these when you do business or give or borrow money in another country. Legal, regulatory, or political issues that are different in each country or area could also cause risks.
Recently, jurisdiction risk has been focusing more on banks and other financial institutions that may be vulnerable to the risk that some countries where they do business are at high risk for money laundering and funding terrorism.
How the Risk of Jurisdiction Works
If you borrow, give money, or do business in a foreign country, you may face extra risks called jurisdiction risks. Sometimes, this risk comes up when laws change quickly in a place where an owner has a stake. This kind of authority risk can often make prices more volatile. Because instability adds more risk, buyers will want higher returns to make up for the higher risk they are taking.
Political risk is an authority risk that means a business could lose money if the government changes or the country becomes unstable. If the government, parliamentary bodies, other foreign leaders, or the military take over, instability could hurt business returns.
Legal problems, exchange rate risks, and even political risks are some risks that banks, investors, and businesses may face when dealing with authority risks.
Recently, jurisdiction risk has come to mean countries with much money laundering and terrorist activity. Most people think that these kinds of activities happen a lot in countries that the Financial Action Task Force (FATF) has labeled as “non-cooperative” or that the U.S. Treasury has flagged as “requiring special measures” because of worries about money laundering or corruption. Financial institutions involved in money laundering or funding terrorism can face harsh fines and penalties. This is why most organizations have specific ways to measure and reduce jurisdictional risk.
Unique Things to Think About
Since 2000, the FATF has put out two papers three times a year for everyone to see. These studies show places in the world that the FATF says aren’t doing enough to stop money laundering and funding for terrorism. The name for these places is Non-Cooperative Countries or Territories.
Albania, Barbados, Botswana, Burkina Faso, Cambodia, Cayman Islands, Haiti, Jamaica, Malta, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, the Philippines, Senegal, South Sudan, Syria, Uganda, Yemen, and Zimbabwe were all on the FATF’s list of 22 countries that they would be keeping an eye on. These NCCTs aren’t doing an excellent job of putting anti-money laundering rules in place or spotting and stopping terrorist funding. However, they have all promised to work with the FATF to fix the problems.
The Democratic People’s Republic of Korea (North Korea) and Iran were put on the FATF’s list of countries needing something. However, the FATF says North Korea is still a significant threat to international financial systems due to its lack of dedication and problems in the areas listed. In addition, the FATF said it was worried about the country’s ability to make more chemical weapons. The group said that Iran said it would follow through on its promise to join the FATF but has not yet done so.
Examples of the Risk of Jurisdiction
Investors may face jurisdictional risk in the form of financial risk or foreign exchange risk. So, changes in the currency’s value may affect a financial deal between countries. This could cause a property to lose value. Hedging techniques like options and forward contracts can help lower foreign exchange risks.
Conclusion
- There is a chance of jurisdiction when you do business in a different country or area.
- Sometimes, an investment faces jurisdiction risk when the law changes without warning.
- The United States government tells financial companies to look at updates from the Financial Action Task Force to find places that might be dangerous because they don’t have robust measures in place to stop money laundering and funding for terrorism.
