Jurisdiction risk definition
/What is Jurisdiction Risk?
Jurisdiction risk occurs when a business operates in a foreign location. This situation could arise when a business has physical locations in another country, or when it transacts business there, such as by lending money to borrowers in another country. Or, the laws may change in one of these locations, thereby interfering with a firm’s business model. This risk is more likely to be associated with financial institutions that deal with the movement of large sums that may be associated with dodgy transactions, such as money laundering. Since these institutions can be heavily fined for any involvement in money laundering, they need to impose special controls to mitigate their jurisdiction risk. This risk tends to result in greater foreign exchange rate volatility, so there is a possibility that an organization’s investment in a country could suddenly decline; this issue can be mitigated with a well-structured hedging strategy.
A high level of jurisdiction risk typically generates more volatile returns for a business, so investors and lenders will demand a higher return before they will be willing to invest in it.