By the time management meets with the lawyer to discuss the question of “what are the chances that we will lose this case and what the likely damages are”, it is too late for risk management. Before we enter into litigation, we need to identify areas where there are uncertainties that impact our objectives. Risk management is not a matter of fortune-telling. Instead, we want to reduce the possible outcomes of certain events. Once a legal and governance structure has been defined, it is important to identify operational risks across the organization, such as fraud or unethical business practices, and to implement controls such as audits and awareness programs to manage these risks. Those who sign contracts sometimes overlook important provisions, including clauses that determine “choice of law” and “place of jurisdiction”. These clauses determine which law applies and where disputes relating to the contract are resolved. They do not want the inconvenience and expense of being dragged to court across the country. The Internet has changed the way we do business and you can sign contracts online. Nowadays, determining jurisdiction can be complicated when multiple sites are involved in a contract.
Costs and income foregone caused by legal uncertainty multiplied by the possibility of the individual event or the legal environment as a whole. [10] One of the most obvious legal risks in the conduct of business, which is not mentioned in the definitions above, is the risk of arrest and prosecution. Regulatory risks come in many colours, making it difficult to identify regulatory risks. Some regulations are cross-sectoral, such as taxation and labour and employment. Some regulations are specific to a jurisdiction: national, regional or local. Regulations may address specific practices such as clinical trials, consumer product protection or financial disclosures. Regulatory risks may be significant or unclear. What regulations apply to your organization? To use a tired sentence: “It depends.” Airline deregulation, antitrust complaints and competitors` pricing practices are examples of structural legal risks. One of the main reasons why legal risk is associated with operational risk is fraud, as it is recognized as the most important category of business interruption events and is also considered a legal issue. [2] However, this does not mean that the legal risk is limited to this conceptualization.
For example, there are certain types of legal risks defined by European Union (EU) law. In 2005, the European Central Bank stated that it would develop its own legal definition of risk in order to “facilitate appropriate risk assessment and management and ensure a consistent approach among EU credit institutions”. [3] You work hard to ensure your business is profitable and maintains an excellent reputation. Don`t risk this by losing sight of all the legal risks associated with running a business. Legal risk management is not a precise and subjective science to the situation of the institution and is mainly caused by the absence of an appropriate communication channel, undefined institutional objectives (such as the absence of policies and regulations), an unclear flow of information between different employees and departments, a lack of delegation of authority to define risk mitigation tasks. [7] What do we mean by legal risks? Why do legal risks warrant their own categorization and analysis? The best strategy is usually to resolve customer disputes as quickly as possible – before they become legal headaches. Bribery and corruption stem from employees` unmet needs and greed. Scams such as bribery and bribery can cause serious damage to a company`s finances. Bribes are offered by third parties in exchange for illegal discounts.
A bribe can be offered to evade taxes and launder money. One of the leading confectionery and chocolate manufacturers, Cadbury India (Mondelez India Foods), paid a consultant to help it obtain a license by bribing government officials. These practices certainly destroy the reputation of companies and companies can also be prevented from doing business in India. Therefore, all companies carry out risk analyses. Based on the analyses, they formulate risk management systems. After further analysis, they optimize the system to avoid legal problems. Compliance failures are not feasible for any business – lawsuits, violations, or the risk of policy changes can be costly. As you can see, businesses are exposed to a variety of legal risks and laws that can change.
The eight risks listed above only scratch the surface. You may face complex issues related to real estate, intellectual property, shareholder agreements, investors, business creation, environmental regulations, licensing, mergers and acquisitions, internet, zoning, insurance, joint ventures, and more. Effective management of the legal risks your business faces can give you more time to grow your business successfully. Contact your lawyer for more information on how to minimize legal risk in your situation. Legal risk was defined as part of operational risk by Basel II in 2003. It involves the risk of financial or reputational loss arising from any type of legal problem. This could include a lack of awareness or understanding of how laws and regulations apply to a business. But companies can take steps to reduce this risk. For example, a company may require all employees to complete health and safety training to reduce the legal risk associated with claims. With proper planning, implementation, monitoring and review, sound risk management of any size can bring the following benefits to your business: Here are some of the types of legal risks a company should consider when creating a legal risk management framework, as well as some strategies to address them if they occur. There are four types of legal risks.
Legal risks arise from contracts, regulations, litigation and structural changes in the market.