What is Jurisdiction Risk?
Jurisdiction risk encompasses the array of risks that arise when conducting business, lending, or borrowing across international borders. These risks stem from legal, regulatory, or political factors distinct to foreign countries or regions. The rise of globalization has heightened the focus on such risks, especially for banks and financial institutions exposed to countries where money laundering and terrorism financing are prominent concerns.
Key Points
- Jurisdiction risk is linked with operating outside one’s home country.
- It includes the exposure of investors to sudden changes in foreign laws.
- Financial institutions should stay updated on territories with weak anti-money laundering and terrorist financing measures.
How Does Jurisdiction Risk Work?
Jurisdiction risk arises from business or financial activities in foreign nations. This risk often involves unforeseen changes in laws within regions where investors hold interests, which can introduce price volatility. The elevated risk and possible price swings compel investors to seek higher returns to compensate for the added uncertainty.
Political risk is a manifestation of jurisdiction risk where political shifts or instability in a country affect an investment’s performance. This instability might result from changes in government, foreign policy shifts, or military actions.
Companies and financial institutions might encounter various issues under jurisdiction risk, including legal complications, exchange rate fluctuations, and geopolitical risks. Key focus areas include countries viewed as high-risk for money laundering or terrorism, thereby necessitating rigorous risk assessment and mitigation processes.
Special Considerations
The Financial Action Task Force (FATF) publishes a list of jurisdictions with weak controls on money laundering and terrorist financing, thrice yearly. These regions, classified as Non-Cooperative Countries or Territories (NCCTs), are urged to improve their preventative measures.
As of June 2021, countries such as Albania, Barbados, Botswana, Cambodia, and Haiti, among others, are monitored for such deficiencies. Both North Korea and Iran are critical cases, with severe gaps in adhering to the FATF’s mandates, posing considerable risks to international finance due to terrorism financing and proliferation of weapons.
Examples of Jurisdiction Risk
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Related Terms: political risk, exchange rate, legal risk, geopolitical risk.
References
- Financial Action Task Force. “High-Risk Jurisdiction Subject to a Call for Action—June 2021”.
- Financial Crimes Enforcement Network. “Financial Action Task Force Identifies Jurisdictions with Anti-Money Laundering and Combating the Financing of Terrorism and Counter-Proliferation Deficiencies”.
- U.S. Department of the Treasury. “311 Actions”.
- Financial Action Task Force. “High-Risk and Other Monitored Jurisdiction”.
- Financial Action Task Force. “Jurisdictions Under Increased Monitoring – June 2021”.
- Financial Action Task Force. “High-Risk Jurisdiction Subject to a Call for Action—21 February 2020”.
