Legal and reputation risks co-exist. Factors that cause legal risk also lead to reputational complications. For example, an annoyed employee due to redundancy or any other complaint may put up a Legal case against the bank. Whatever the nature of the case may be a little or big, simple or complicated, the bank has to hire a lawyer with a heavy fee which is a financial loss to the bank. Other employees feel insecure and send a feeling of resentment against the institution among the employees. An employee may indulge in misappropriation in the customer account. The matter is unearthed by the account holder or the auditors, making the whole unit unreliable and skeptical. If divulged to the press, the news may create a huge legal and reputation loss to the bank. An unscrupulous employee may connive with culprits and involve himself and the bank in the laundering of illicit money for the holder may cause legal, financial, and reputational risk for the bank. A borrower may stop paying back the Loan amount willfully. Bank may initiate a recovery lawsuit against the defaulting borrower.
Fraud not only causes monetary loss to a bank, but it also negatively affects the reputation of the bank. Negative publicity in the press bears a huge loss to the bank. Fraud is an intentional act by one or more individuals among management, those charged with governance, and employees of the bank or third parties. Fraud and misappropriation (the theft of a company’s assets such as cash) are not limited to theft. It may be parallel banking or an unauthorized transaction in customer accounts, misappropriation of assets, divulging customer information, etc. are causing a long-term effect on the bank's reputation. Unscrupulous employees may indulge in illegal activities like AML and blow a reputational risk for the bank.
Legal repercussions in the banking business are multifarious, and banks generally maintain a full-fledged legal department for legal services.
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