General Deterrence of Systemic International Misconduct: The Role of Firms’ Territoriality Beliefs

Abstract

For decades, Swiss banks’ private wealth management (PWM) business had systemically engaged in organizational misconduct based on jurisdictional arbitrage. Swiss banks complied with Swiss regulations, but persistently transgressed United States (U.S.) law by helping clients evade U.S. tax liabilities. Our interpretive study explores why the U.S. government’s enforcement of U.S. law (the challenger’s territoriality, i.e. claims of authority over a certain actor, geographic, and issue scope) against some Swiss banks eventually deterred not only prosecuted banks (specific deterrence) but also observing peers (general deterrence) from violating U.S. law. We identify observers’ territoriality beliefs about the scope of the challenger’s territory and about their conduct’s location within or outside that perceived territory as the critical factor for general deterrence. Such beliefs are shaped by the challenger’s, incumbent’s scope of territoriality claims, and the level of ambiguity of the challenger’s claims. Our study contributes to institutional, regulatory and territoriality scholarship.