Basic Concepts
What is Risk?
Risk is the probability that set goals will not be achieved or that adverse consequences will arise. In business, risks are most often associated with financial losses.
Legal Risks
Legal risks arise from violations of the law or direct legal requirements. For example:
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Invalidating a contract, leading to the payment of interest or fines established by law.
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Loss of collateral due to the invalidation of a security agreement.
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Fines for non-compliance with legislation.
Economic Risks
Economic risks are related to contract terms, property characteristics, or other factors not associated with legal violations. For example:
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Reduction in the economic benefits of a transaction.
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Decreased liquidity of property due to encumbrances.
Why Manage Risks?
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Informing Decision-Makers
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Clear distinction between significant and minor risks.
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Focus on risks that may affect business owners (subsidiary, criminal, or administrative liability).
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Providing data for negotiations to achieve more favorable terms.
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Convenient information presentation to save time.
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Reducing Decision-Making Costs
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Ability to accept risks in groups rather than individually.
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Distribution of authority based on risk levels.
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Reducing time spent on legal analysis and preparation of legal opinions.
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Standardization of Processes
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Unified system for identifying and assessing risks across all company departments.
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Eliminating discrepancies in the interpretation of issues by different lawyers.
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Minimizing intentional concealment of risks at lower management levels.
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Risk Management System
All elements of risk management should be logically connected. The risk management policy should be based on current business processes, and any changes should be justified and approved by authorized persons.
Where to Start?
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Analyze internal documents (contract approval procedures, standard contract forms, etc.).
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Describe actual decision-making procedures if they are not documented.
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Compile and systematize risks from existing legal opinions.
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Identify standard risks related to legislation or judicial practice.
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Develop or update the format of legal opinions.
Scope and Depth of Legal Analysis
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Scope of Analysis: The range of issues to be examined. For example, during due diligence, the review can be limited by the transaction amount or type of property.
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Depth of Analysis: The level of detail. For example, checking real estate documents may involve verifying registered rights or analyzing all previous ownership documents.
Criteria for Determining Scope and Depth of Analysis
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Cost of potential risks.
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Role of the property or contract in the company's activities.
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Time allocated for the review.
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Client's preferences.
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Regulatory requirements.
Risk Lists
Risk lists include:
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Risk factors (events that may lead to risk).
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Causes of risk.
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Cost of risk (potential losses).
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Risk level (probability of occurrence).
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Parties influencing the risk (counterparties, government agencies, etc.).
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Duration of the risk.
Additional items may include:
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References to legislation and judicial practice.
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Methods for mitigating or eliminating risks.
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Responsible departments or individuals.
Risk Levels by Probability of Occurrence
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Maximum: Risk is almost inevitable.
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High: Risk is likely, but other outcomes are possible.
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Medium: Equal probability of risk occurrence and non-occurrence.
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Low: Risk is unlikely but possible.
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Minimum: Risk is practically excluded.
Risk Rating System
A rating system is used to assess risks, considering two key parameters:
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Impact Level of Risk on the Transaction (critical, significant, minor, negligible).
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Risk Level by Probability of Occurrence (maximum, high, medium, low, minimum).
Each level is assigned points, which are multiplied to obtain the final risk score. For example:
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A critical risk (4 points) with a maximum probability (5 points) scores 20 points.
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A negligible risk (1 point) with a minimum probability (1 point) scores 1 point.
Risk Levels by Impact on Business
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Critical Risks: Risks where avoiding the transaction is better than proceeding. For example:
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Disqualification or criminal liability of business owners.
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Suspension of operations or bankruptcy.
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Significant fines or increased costs making the transaction impractical.
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Significant Risks: Risks that reduce the economic benefit but do not make the transaction impractical. For example:
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Substantial fines.
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Additional expenses affecting profitability.
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Minor Risks: Risks causing financial losses that do not affect the transaction's economic purpose. For example:
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Insignificant fines or additional costs.
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Negligible Risks: Risks causing losses within the initially planned transaction scope. For example:
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Insignificant fines or loss of property not affecting the transaction.
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Mitigation or Elimination of Risks
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Eliminable Risks: Risks that can be completely eliminated.
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Mitigable Risks: Risks that can be reduced but not fully eliminated.
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Non-Mitigable Risks: Risks that cannot be eliminated or reduced.
When mitigating risks, consider:
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Costs of eliminating the risk.
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Time required to eliminate the risk.
Alternative Risk Management Methods
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Changing contract terms during negotiations.
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Including conditions in the contract that reduce losses if the risk materializes.
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Insuring business risks.
Checklists
Checklists help systematize the risk identification process. They can be:
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Questionnaires: Manual preparation of legal opinions.
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Automated Programs: Automatic preparation of opinions based on predefined parameters.
Risk Acceptance
Some risks can be accepted without individual review if they meet set criteria:
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Transaction amount.
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Type of risk (e.g., non-mitigable risks).
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Probability of risk occurrence.
Risk Accounting System
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Current Risks: Maintaining a database of current risks with details on amounts, counterparties, and other parameters.
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Realized Risks: Analyzing cases where risks led to adverse outcomes to prevent future occurrences.
How Botman.one Helps in Legal Risk Management
The Botman.one platform allows lawyers to create expert systems for automating legal risk identification and assessment without programming. With it, you can:
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Standardize risk analysis processes.
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Reduce time spent on preparing legal opinions.
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Simplify interdepartmental collaboration.
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Minimize human error and oversight.
Using Botman.one, you can effectively manage legal risks while focusing on your business's strategic goals.