Risk Laundering

A Risk Laundering is a deceptive business practice that conceals, minimizes, or transfers operational risks, financial risks, or legal risks from one party to another without proper risk disclosure or risk compensation.

• AKA: Risk Concealment, Risk Obfuscation, Hidden Risk Transfer.
• Context:
  • It can typically involve Risk Information Asymmetry where knowledgeable parties exploit less-informed risk bearers.
  • It can typically employ Risk Complexity Manipulation making risk assessment difficult for receiving parties.
  • It can typically utilize Risk Documentation Obscurity burying critical risk information in complex legal documents.
  • It can typically create Risk Attribution Confusion making it unclear who bears specific risk consequences.
  • It can typically establish Risk Transfer Chains distancing original risk creators from ultimate risk bearers.
  • ...
  • It can often exploit Regulatory Arbitrage transferring risks to less-regulated market participants.
  • It can often leverage Contract Complexity hiding risk allocation in dense legal language.
  • It can often utilize Information Overload drowning important risk disclosures in excessive documentation.
  • It can often employ Technical Jargon Barriers preventing risk comprehension by non-experts.
  • ...
  • It can range from being a Simple Risk Laundering to being a Complex Risk Laundering, depending on its risk transfer mechanism sophistication.
  • It can range from being a Legal Risk Laundering to being an Illegal Risk Laundering, depending on its risk transfer legality.
  • It can range from being a Transparent Risk Laundering to being an Opaque Risk Laundering, depending on its risk disclosure level.
  • ...
  • It can be detected through Risk Audit Procedures examining risk allocation patterns.
  • It can be prevented via Risk Transparency Regulations mandating clear risk disclosure.
  • It can be prosecuted under Consumer Protection Laws prohibiting deceptive practices.
  • It can be exposed by Whistleblower Reports revealing hidden risk transfer schemes.
  • ...
• Example(s):
  • Financial Risk Launderings, such as:
    • Subprime Mortgage Bundling hiding default risks in complex financial instruments.
    • Derivative Product Complexity obscuring market risks from retail investors.
    • Insurance Coverage Gap transferring uncovered loss risks to policyholders.
  • Operational Risk Launderings, such as:
    • Supply Chain Risk Transfer pushing quality risks to downstream suppliers.
    • Outsourcing Risk Shift moving operational liability to third-party contractors.
    • Platform Risk Delegation transferring user safety risks to individual platform participants.
  • Technology Risk Launderings, such as:
    • Software Liability Disclaimers shifting bug risks to end users.
    • AI Risk Laundering concealing AI system risks from buyers.
    • Cloud Service Risk Transfer moving data loss risks to customers.
  • ...
• Counter-Example(s):
  • Risk Sharing Agreement, which transparently allocates risks between informed parties.
  • Risk Disclosure Practice, which clearly communicates all known risks to stakeholders.
  • Risk Retention Strategy, which keeps risks with parties best able to manage them.
  • Insurance Contract, which explicitly prices and transfers specific risks.
• See: Deceptive Practice, Risk Transfer, Information Asymmetry, Business Ethics, Risk Management.

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