Legal risk refers to the potential for financial loss or adverse consequences that arise from legal actions, non-compliance, or regulatory changes. This type of risk encompasses issues such as litigation, penalties, and reputational damage resulting from failure to adhere to laws and regulations. 

In the financial crime compliance space, legal risk is a significant concern for financial institutions. Non-compliance with Anti-Money Laundering (AML) regulations, sanctions, or anti-corruption laws can lead to severe legal penalties, fines, and damage to the organisation’s reputation. Effective management of legal risk involves implementing robust compliance programs, conducting regular audits, and staying updated on regulatory changes. By proactively addressing legal risk, organisations can minimise their exposure to financial penalties and ensure they operate within legal and regulatory frameworks, thereby maintaining the integrity of the financial system.