Basel II classified legal risk as a subset of operational risk in 2003. This conception is based on a business perspective, recognizing that there are threats entailed in the business operating environment. The idea is that businesses do not operate in a vacuum and that, in the exploitation of opportunities and their engagement with other businesses, their activities tend to become subjects of legal liabilities and obligations.
One of the primary reasons why legal risk is associated with operational risk involves fraud since it is recognized as the most significant category of operational loss events and considered to be a legal issue as well. These, however, do not mean that legal risk is only confined to this conceptualization because it is defined in more than way. For instance, there are specific sets of legal risks that are defined by the European Union EU Law. In 2005, the European Central Bank declared that it will develop its own legal risk definition to help "facilitate proper risk assessment and risk management, as well as ensure a consistent approach between EU credit institutions."
There is no standard definition, but there are at least two primary/secondary definition sets in circulation.
Mcormick, R. 2004 Legal risk is the risk of loss to an institution which is primarily caused by: a defective transaction; or b a claim including a defense to a claim or a counterclaim being made or some other event occurring which results in a liability for the institution or other loss for example, as a result of the termination of a contract or; c failing to take appropriate measures to protect assets for example, intellectual property owned by the institution; or d change in law.
Mcormick, R. 2004 Management of legal risk is not a precise science and subjective to the situation of the institution, and primarily caused by the lack of proper communication channel, undefined institutional objectives such as the lack of policies and regulations, unclarified information flow between different personnel and department, lack of delegation of power to specify task on mitigation of risks.
Johnson and Swanson. 2007
The expenses of litigation of a company.
Whalley, M. 2016
Legal risk is the risk of financial or reputational loss that can result from lack of awareness or misunderstanding of, ambiguity in, or reckless indifference to, the way law and regulation apply to your business, its relationships, processes, products and services.
Tsui TC. 2013
The cost and loss of income caused by legal uncertainty, multiplied by possibility of the individual event or legal environment as a whole.
One of the most obvious legal risks of doing business not mentioned in the above definitions is the risk of arrest and prosecution.
All definitions contain more detail.