Jurisdiction risk refers to the risks that can arise when operating in a foreign country or jurisdiction. These risks can arise simply by doing business, or else by lending or borrowing money in another country. Risks could also stem from legal, regulatory, or political factors that exist in different countries or regions.
In recent times, jurisdiction risk has focused increasingly on banks and financial institutions that are exposed to the volatility that some of the countries where they operate may be high-risk areas for money laundering and terrorism financing.1
Jurisdiction risk is associated with operating in a foreign country or region.
Jurisdiction risk can also be applied to times when an investor is exposed to unexpected changes in the laws.
The U.S. government advises financial institutions to refer to updates from the Financial Action Task Force to identify potentially risky jurisdictions with weak measures to fight money laundering and terrorist financing.2
Jurisdiction risk is any additional risk that arises from borrowing and lending or doing business in a foreign country. This risk can also refer to times when laws unexpectedly change in an area in which an investor has exposure. This type of jurisdiction risk can often lead to added price volatility. As a result, the added risk from volatility means investors will demand higher returns to offset the higher levels of risk being faced.
Political risk is a form of jurisdiction risk whereby an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policymakers, or military control.
Some of the risks associated with jurisdiction risk that banks, investors, and companies may face include legal complications, exchange rate risks, and even geopolitical risks.
As mentioned above, jurisdiction risk has recently become synonymous with countries where money laundering and terrorist activities are high. These activities are generally believed to be prevalent in countries that are designated as non-cooperative by the Financial Action Task Force (FATF) or are identified by the U.S. Treasury as requiring special measures due to concerns about money laundering or corruption.34 Because of the punitive fines and penalties that can be levied against a financial institution that is involved—even inadvertently—in money laundering or financing terrorism, most organizations have specific processes to assess and mitigate jurisdiction risk.
The FATF publishes two documents publicly three times a year and has done so since 2000. These reports identify areas of the world that the FATF declares have weak efforts to combat both money laundering and terrorist financing. These countries are called Non-Cooperative Countries or Territories (NCCTs).4
As of June 2021, the FATF listed the following 22 countries as monitored jurisdictions: Albania, Barbados, Botswana, Burkina Faso, Cambodia, Cayman Islands, Haiti, Jamaica, Malta, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Uganda, Yemen, and Zimbabwe.5 These NCCTs have deficiencies when it comes to placing anti-money laundering policies, as well as recognizing and fighting terrorist financing. But they have all committed to working with the FATF to address the deficiencies.
The FATF placed both the Democratic People's Republic of Korea (i.e., North Korea) and Iran on its call-to-action list. According to the FATF, North Korea still poses a great risk to international finance because of its lack of commitment and deficiencies in the noted areas. The FATF also indicated its concern over the country's proliferation of weapons of mass destruction. The organization noted Iran outlined its commitment to the FATF but has failed to enact its plan.61
Investors may experience jurisdiction risk in the form of foreign exchange risk (also known as currency risk). So, an international financial transaction may be subject to fluctuations in currency exchange. This can lead to a drop in the value of an investment. Foreign exchange risks can be mitigated by using hedging strategies including options and forward contracts.
Learn the Basics of Trading and Investing
Looking to learn more about trading and investing? No matter your learning style, there are more than enough courses to get you started. With Udemy, you’ll be able to choose courses taught by real-world experts and learn at your own pace, with lifetime access on mobile and desktop. You’ll also be able to master the basics of day trading, option spreads, and more. Find out more about Udemy and
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Jurisdiction risk refers to the risks that can arise when operating in a foreign country or jurisdiction. These risks can arise simply by doing business, or else by lending or borrowing money in another country. Risks could also stem from legal, regulatory, or political factors that exist in different countries or regions.
In recent times, jurisdiction risk has focused increasingly on banks and financial institutions that are exposed to the volatility that some of the countries where they operate may be high-risk areas for money laundering and terrorism financing.1
Jurisdiction risk is associated with operating in a foreign country or region.
Jurisdiction risk can also be applied to times when an investor is exposed to unexpected changes in the laws.
The U.S. government advises financial institutions to refer to updates from the Financial Action Task Force to identify potentially risky jurisdictions with weak measures to fight money laundering and terrorist financing.2
Jurisdiction risk is any additional risk that arises from borrowing and lending or doing business in a foreign country. This risk can also refer to times when laws unexpectedly change in an area in which an investor has exposure. This type of jurisdiction risk can often lead to added price volatility. As a result, the added risk from volatility means investors will demand higher returns to offset the higher levels of risk being faced.
Political risk is a form of jurisdiction risk whereby an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policymakers, or military control.
Some of the risks associated with jurisdiction risk that banks, investors, and companies may face include legal complications, exchange rate risks, and even geopolitical risks.
As mentioned above, jurisdiction risk has recently become synonymous with countries where money laundering and terrorist activities are high. These activities are generally believed to be prevalent in countries that are designated as non-cooperative by the Financial Action Task Force (FATF) or are identified by the U.S. Treasury as requiring special measures due to concerns about money laundering or corruption.34 Because of the punitive fines and penalties that can be levied against a financial institution that is involved—even inadvertently—in money laundering or financing terrorism, most organizations have specific processes to assess and mitigate jurisdiction risk.
The FATF publishes two documents publicly three times a year and has done so since 2000. These reports identify areas of the world that the FATF declares have weak efforts to combat both money laundering and terrorist financing. These countries are called Non-Cooperative Countries or Territories (NCCTs).4
As of June 2021, the FATF listed the following 22 countries as monitored jurisdictions: Albania, Barbados, Botswana, Burkina Faso, Cambodia, Cayman Islands, Haiti, Jamaica, Malta, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Uganda, Yemen, and Zimbabwe.5 These NCCTs have deficiencies when it comes to placing anti-money laundering policies, as well as recognizing and fighting terrorist financing. But they have all committed to working with the FATF to address the deficiencies.
The FATF placed both the Democratic People's Republic of Korea (i.e., North Korea) and Iran on its call-to-action list. According to the FATF, North Korea still poses a great risk to international finance because of its lack of commitment and deficiencies in the noted areas. The FATF also indicated its concern over the country's proliferation of weapons of mass destruction. The organization noted Iran outlined its commitment to the FATF but has failed to enact its plan.61
Investors may experience jurisdiction risk in the form of foreign exchange risk (also known as currency risk). So, an international financial transaction may be subject to fluctuations in currency exchange. This can lead to a drop in the value of an investment. Foreign exchange risks can be mitigated by using hedging strategies including options and forward contracts.
Learn the Basics of Trading and Investing
Looking to learn more about trading and investing? No matter your learning style, there are more than enough courses to get you started. With Udemy, you’ll be able to choose courses taught by real-world experts and learn at your own pace, with lifetime access on mobile and desktop. You’ll also be able to master the basics of day trading, option spreads, and more. Find out more about Udemy and get started today.
pppokAccounting Rate of Return (ARR): Definition, How to Calculate, and Example
What Is the Accounting Rate of Return (ARR)?The accounting rate of return (ARR) is a formula that reflects the percentage rate of return expected on an investment or asset, compared to the initial investment's cost. The ARR formula divides an asset's average revenue by the company's initial investment to derive the ratio or return that one may expect over the lifetime of an asset or project. ARR does not consider the time value of money or cash flows, which can be an integral p...
pppokCreative Destruction
What Is Creative Destruction?Creative destruction is the dismantling of long-standing practices in order to make way for innovation and is seen as a driving force of capitalism.KEY TAKEAWAYSCreative destruction describes the deliberate dismantling of established processes in order to make way for improved methods of production.Creative destruction is most often used to describe disruptive technologies such as the railroads or, in our own time, the internet.The term was coined in the early 194...
pppokZero-Bound
What Is Zero-Bound?Zero-bound is an expansionary monetary policy tool where a central bank lowers short-term interest rates to zero, if needed, to stimulate the economy. A central bank that is forced to enact this policy must also pursue other, often unconventional, methods of stimulus to resuscitate the economy.KEY TAKEAWAYSZero-bound is an expansionary monetary policy tool where a central bank lowers short-term interest rates to zero, if needed, to stimulate the economy.Central banks will m...
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