High-Profile Enforcement as an Effective Deterrence Mechanism: Evidence from the Paul Manafort Prosecution and the Foreign Agents Registration Act (FARA)

Abstract

Operating within bounded rationality, individuals and organizations seek to maximize their utility or economic benefit, which many times leads to regulatory non-compliance. Although prior literature in economics and criminology agrees that three conditions—certainty, severity, and celerity of punishment—must be met to effectively deter institutional non-compliance, it is still not clear which conditions matter, under what contingencies, and how these three conditions interact with each other. Particularly, less attention has been paid to the effect of these three conditions on white-collar crimes. By looking at the Investigation into Russian Interference in the 2016 Presidential Election led by special counsel Robert Mueller and his team as an empirical setting, we examine whether lobbyists in Washington, D.C. working for foreign governments comply with FARA and register their work after this high-profile investigation and enforcement. We further argue that the sudden change in enforcement may well be more salient to low-reputation firms than high-reputation firms because high-reputation firms are more likely to have already complied with even unenforced institutional rules when noncompliance might damage their reputation asset. The preliminary results of our study using a natural experiment through an unexpected shock provide robust empirical evidence that the prosecution increased compliance, especially with respect to low-reputation registrants and registrants working with clients from countries with relatively poor human rights record. The effects we find are consistent and robust across many aspects of their reporting behaviors, which strongly supports our arguments.