Private Compliance Research Articles

CSR and the Constitutive Role of Law: Harnessing Social Norms for Labour Law Enforcement

Abstract This article explores how international labour law can harness social norms for the enforcement of international labour standards within private companies. By doing so, it provides a particular take on the ‘constitutive’ role of the law in shaping societal norms and economic activities. Such reliance on societal enforcement mechanisms gains particular relevance in the realm of global labour governance. With the dominance of private compliance initiatives, the law can regain influence by internalising its norms as social norms within companies, even when, strictly speaking, international law is not intended to oblige these actors. Accordingly, the article argues that international labour law holds unique cognitive and normative capacities that can shape actors’ beliefs and expectations, promoting a universal understanding of what shall be considered as the appropriate behaviour in the realm of labour. Once international labour standards become the social benchmark for evaluating companies’ codes of conduct, compliance with these norms becomes key to companies’ reputation and market access. At the same time, the transmission of legal norms to the company level is not straightforward. The article thus puts forward an evolutionary path where international labour law can induce desirable learning processes towards the gradual emergence of a social norm among companies on compliance with its legal requirements.

Outsourcing authority in global policy: legitimating the anti-money laundering regime through professionalization

Abstract How is authority legitimated when global policy leads to the delegation of implementation and monitoring tasks to private actors? This paper shows that putting private actors at the forefront of compliance gives them significant interpretation autonomy, with knock-on effects for how rule-making authority is legitimated. I show that actors can mobilize to claim expertise based on their practice in, and input to, transnational administration and that professional associations are important arenas for establishing and legitimating these claims. The paper explores these dynamics through an empirical focus on the global anti-money laundering regime. Revolving around the Financial Action Task Force, the regime to tackle illicit finance has been a highly political process with a global reach. Yet it relies heavily on financial institutions to put systems in place that control the flow of money. This puts private compliance officers at the forefront of transnational administration. The paper shows that compliance officers have responded to the demands of this role by professionally organizing. Focusing on the largest professional association, the Association of Certified Anti-Money Laundering Specialists or ACAMS, a US-based association with a global program and membership, the paper explains that professionalization mechanisms have helped demarcate practice boundaries and support the expertise claims of private sector employees. By becoming the experts, these officers can claim pragmatic authority over what global policy rules and standards mean and how they can be implemented.

Searching for institutions: upgrading, private compliance, and due diligence in European apparel value chains

This article argues that key avenues to improve working conditions – value chain integration, on the one hand, and lead firms’ compliance processes, on the other – have not resulted in improvements in the European apparel industry. Evidence is drawn from economic and social up-/downgrading trajectories in major apparel producing countries as well as a case study on social audits and labour market enforcement in the United Kingdom. Both suggest that institutions to prevent labour exploitation in supply chains have largely been ineffective. Institutional experimentation, which has been hybrid in combining hard and soft law as well as public and private governance elements, underlined the role of lead firms but continued to exclude civil society actors. It is argued that human rights due diligence, at the heart of many institutional experiments, draws on a deficient private compliance model, rather than building in worker-driven elements that could lead towards a better alternative.

From delta to omicron: The role of individual factors and social context in self-reported compliance with pandemic regulations and recommendations

As SARS-CoV-2 spreads especially when larger groups gather (e.g., at the workplace), it is crucial to understand compliance with regulations and recommendations in such settings. Using data from adults in Germany (N = 29,355) assessed between October 2021 and February 2022, we investigated factors associated with self-reported compliance in both private and working life and how these relate to each other. The results indicate that private compliance was stronger among older individuals and females; among those who worried more about the pandemic situation and assumed that infection was more severe; among those who trusted the government more; and among those who did not perceive public health measures as exaggerated. Private compliance was also associated with personality traits; in particular, individuals who followed regulations and recommendations were likely to be more introverted, conscientious, open, and agreeable. Compliance at work related to both private compliance and colleagues' behaviors. Individuals whose private compliance was high also complied at work. However, when private compliance was low, compliance at work aligned with colleagues’ behaviors; that is, compliance at work was high when colleagues complied and low when they did not. The observed effects were stable over time. In summary, they suggest that compliance with regulations and recommendations depends on individual risk perception, trust in government, perception of required or recommended measures, and social norms. To promote protective behaviors in contexts where larger groups gather (including workplaces), making positive social norms more salient (e.g., by supporting role models) may prove especially useful.

Love Thy Neighbour? Perceived Community Abidance and Private Compliance to COVID-19 Norms in India

To arrest the spread of COVID-19 infection, strict adherence to frequent hand washing and respiratory hygiene protocols have been recommended. While these measures involve private effort, they provide health gains along with collective community benefits and hence are likely to be driven by pro-social motives like altruism and reciprocity. Using data from 934 respondents collected from April till May 2020 across India, we assess if changes in perceived community compliance can predict changes in individual compliance behaviour. We observe statistically significant and positive relationship between the two, even after accounting for observable and omitted variable bias allowing us to view the results from a plausible causal lens. Further, we find subsequent lockdowns having a detrimental effect on individual compliance though the gains from higher perceived community compliance seem to offset this loss. We also find positive perceptions about community can be particularly effective for people with pre-existing co-morbidities. Our findings underscore the need for multi-level behavioural interventions involving local actors and community institutions to sustain private compliance during the pandemic. We suggest these interventions need to be specially targeted for individuals with chronic ailments and emphasize on community behavioural practices in public messaging.JEL Codes: I12, I18, I19, I31

The Weak Underbelly of Business and Human Rights: Reflections on the 8th U.N. Forum on Business and Human Rights

The 8th UN Forum for Business and Human Rights, held at the end of November 2019, was meant to re-center the state within the discourse and practice of human rights based management of global economic activity. This essay considers two significant challenges to that effort. The first touches on the disappearance of small, poor, and developing states, within the construct of state based regulation of business and human rights (Part 1: The Obliteration of the State, or, Does Lesotho Exist?). The second ('Falling in Love Again:' 'Smart Mixes' and the De-Centering of the State Within Private Compliance Governance Orders) examines the way that new regulatory approaches continue the process of legal privatization and a further de-centering of the state even as it appears to try to the the opposite. The ultimate object of the essay is to suggest the contradictions that now appear more prominently in advancing the international business and human rights project on the basis of its current ordering premises. Whether consciously or not, the leading actors, both public and private, of this enterprise have backed themselves into a corner. The more they assert the principles in favor of national action, the more effectively they appear to manage the privatization of human rights and economic activity in precisely the ways they actually seek to avoid.

Labor Regimes and Free Trade in North America: From the North American Free Trade Agreement to the United States–Mexico–Canada Agreement

This article provides a comparative assessment of the labor provisions in the United States–Mexico–Canada Agreement (USMCA) and the North American Free Trade Agreement. It also evaluates new labor‐related requirements incorporated in the rules of origin (ROO) rather than the labor chapter of the newer treaty. The ROO in the USMCA determine a labor value content requirement for passenger vehicles and light and heavy trucks. No previous free trade agreement mandates that a fraction of a product be made by workers earning a specific minimum wage to qualify for duty‐free access. The new clause has raised concerns about its enforceability, which this article explores. Private compliance initiatives are presented as a means to strengthen compliance with the new labor regime without disrupting existing regional production networks.

Applying the GVC framework to policy: The ILO experience

Understanding global value chains (GVC), their power dynamics, and their opportunities and challenges for developing countries is a key policy priority for development. The analytical framework developed by Gary Gereffi has increasingly been embedded in policy-making at the multilateral level. This article homes in on the relevance of the GVC framework for policies and interventions of the International Labour Organization, the United Nations’ agency for labour rights and decent work. By reviewing the introduction of the GVC framework at the ILO in the past quarter of a century, I highlight how it has supported the ILO in understanding labour governance dynamics in the wake of globalisation, and in particular the rise of private compliance initiatives led by GVC lead firms. I also show how the ILO is using the GVC framework to map the most vulnerable segments of the production chain from a workers’ right perspective, and to develop targeted interventions to achieve decent work in GVCs.

New governors on the block: the rise of anti-money laundering professionals

Anti-money laundering (AML) activities are part of an institutionalized, global, and increasingly prescriptive regime, covering a growing set of predicate offences. Yet with much of the responsibility for implementation and monitoring at the hands of private actors, compliance professionals within financial institutions have become foot soldiers in the fight against money laundering. This paper argues that AML professionals do not only implement and monitor, however, but, to protect their interests, also shape the content of governance. The process is two-fold. First, a professionalization process is underway inside banks and other financial institutions. Professionalization has strengthened the relative standing of compliance departments against a background of lower tolerance for illegal and irregular transactions and a growing reputational and financial cost for banks knowingly or accidentally enabling such activities. From that position, the compliance industry has consolidated its role through the development of systematic professional standards and through identifiable skills and expertise as defined by professional associations. Second, anti-money laundering professionals interpret rules and engage in regulatory creep. They meticulously implement different requirements by developing private compliance standards and risk assessments that are technically sophisticated and designed to earn regulatory kudos; they do not simply follow what is required. Further, they extend their mandate by including other compliance facets. Acting out of concern for professional security and advancement, AML compliance officers become governors on the output, but also on the input side.

From a 'Two Thrust Approach' to a 'Two Sword One Thrust Strategy' to Combat Criminal Corruption: Government Enforcement of Compliance and Oversight by Sovereign Investors

The commitment of governments, international organizations and enterprises to combatting corruption appears to have intensified in recent years. The efforts of these institutions appear centered on a “Two Thrust Approach,” consisting of the simultaneous application of the development and enforcement of public legal regimes and the implementation and operation of private compliance systems. This system dies not produce regulatory coherence between the law making by the government and the compliance systems created by business are not coordinated well. However, recent regulatory and compliance trends suggest the emergence of a “Two Swords, On Thrust Strategy” as a supplemental approach to the enforcement of anti-corruption rules and norms. The Two Swords-One Thrust Strategy combines the power of state officials to exercise discretion in managing anti-corruption laws and the authority of financial institutions to control the access of enterprises to their investment universe or to exercise their shareholder authority to influence corporate behavior. The essay examines the possibility of developing this strategy. To that end, the essay first considers the emerging efforts to institutionalize rules for the exercise of prosecutorial discretion in criminal investigations to compel corporate governance reform. It then considers the “second sword”, the use of market power by sovereign investors to influence compliance oriented corporate governance reform that parallels those advanced by prosecutors. The essay ends by suggesting the utility of this strategy for Chinese anti-corruption efforts by considering the possibility of coordinating the work of the procuratorate with the financial power of Chinese sovereign wealth finds in the exercise of their shareholder power and their power to limit access to investment markets.

The Shadow Cost of Bank Capital Requirements

We estimate the shadow cost of capital requirements using data on a costly loophole that allowed banks to relax these constraints. This loophole—liquidity guarantees to asset-backed commercial paper conduits—was exploited by the largest banks before the crisis of 2008. We show theoretically that a bank's use of the loophole reveals its private compliance cost, which takes into account both the costs of issuing equity and the effectiveness of capital regulation. We find that increasing capital requirements would impose a modest cost—$220 million a year for all participating banks combined per one-percentage-point increase, and $14 million on average.

The Interaction of Labour Inspection and Private Compliance Initiatives: A Case Study of Better Work Indonesia

This paper explores the interaction of Better Work Indonesia (BWI) with the public labour inspectorate in that country. We consider the programmes and mechanisms of interaction, and also how Better Work’s contributions are implemented. We present here the preliminary findings of our field work, using the analytic model presented in Kolben’s study of the interaction between Better Work Jordan and the Jordanian labour inspectorate. His concept of “dialogic regulation” captures and distinguishes between the degree of institutional formality in which interaction takes place, and the degree of subjective intentionality of the parties in their interaction. We find that the interaction between BWI and the Ministry has altered and shaped how labour inspection in Indonesia is conceptualised and managed in practice. The BWI model seems to have contributed to a recent initiative to require that enterprises have “Labour Norms Cadres”. BWI also appears to have influenced the interaction between the central and district levels of the Indonesian inspectorate. Although it has never been an explicit programmatic objective of Better Work, our findings suggest that in Indonesia, the public labour inspectorate has been strengthened as a result of its interactions with BWI, even if that has come about largely in an ad hoc fashion. Our findings tend to reinforce those of other empirical studies of the interaction of private and public compliance. Prior studies have shown that the empirical reality is far more complex than some of the policy or theoretical arguments would accommodate. It transpires that displacement, for example, may not be a risk, even if only because of limited resources – at least in the case of Indonesia. Our findings also tend to suggest that complementarity in regulatory regimes may be feasible, even if the mechanisms and mechanics by which that can be achieved are likely to vary significantly according to the country and the context, and may often only be discovered through trial and error, and through persistence of interaction.

Food Safety Meta-Controls in the Netherlands

Public food safety authorities in Europe and elsewhere have recently developed forms of coordination and collaboration with private compliance systems in the monitoring and enforcement of public food safety laws. Such policies bring with them the risk of regulatory capture, loss of transparency and fuzzy accountability relationships. In this paper we analyse how the Netherlands Food and Consumer Product Safety Authority (NVWA) assesses and monitors the functioning of private food safety control systems so it can use these private systems in its own enforcement activities. We do so by discussing two national private systems that have been formally accepted by the NVWA and are as such subject to its meta-control. The article examines the safeguards that the public enforcement agency uses while coordinating its own activities with private food safety controls, the advantages and risks involved in this strategy, and the extent to which this policy can be improved. From this we draw lessons for public agencies elsewhere willing to engage with private compliance mechanisms. The study is based on the analysis of policy documents, public and private regulation and open-ended interviews with representatives of the public and private sector in the Netherlands.

Parallel Paths to Enforcement: Private Compliance, Public Regulation, and Labor Standards in the Brazilian Sugar Sector

In recent years, global corporations and national governments have been enacting a growing number of codes of conduct and labor laws to combat dangerous or degrading work conditions in global supply chains. On the receiving end of this activity, local producers must contend with multiple regulations and verification systems, but it is not clear how these systems interact and the results they produce. This paper examines the public and private enforcement of labor standards in the sugarcane, sugar and ethanol sector in Brazil. It finds that private and public agents refuse to communicate with each other, but they act in ways that reinforce each other’s actions. On one side, labor inspectors and prosecutors use their broad legal powers to outlaw some forms of outsourcing. On the other side, private auditors use their extensive access to targeted businesses and the trust they command as insiders to help them engage in a process of workplace transformation that makes it easier for firms to comply. Although these public and private agents refused to cooperate with one another, their parallel enforcement actions blocked the low road and steered targeted firms to a higher road that made compliance with labor standards not only viable, but sometimes even desirable.

Parallel Paths to Enforcement: Private Compliance, Public Regulation, and Labor Standards in the Brazilian Sugar Sector

Parallel Paths to Enforcement: Private Compliance, Public Regulation, and Labor Standards in the Brazilian Sugar Sector

The Shadow Cost of Bank Capital Requirements

We estimate the shadow cost of capital requirements using data on a costly loophole that allowed banks to relax these constraints. This loophole — liquidity guarantees to asset-backed commercial paper conduits — was exploited by the largest banks before the crisis of 2008. We show theoretically that a bank's use of the loophole reveals its private compliance cost, which takes into account both the costs of issuing equity and the effectiveness of capital regulation. We find that increasing capital requirements would impose a modest cost — $220 million a year for all participating banks combined per 1pp increase, and $14 million on average.

Income Tax Compliance Cost of Corporations in India, 2000–01

This is the first study of compliance costs of income taxation of corporations in India. Compliance costs are the costs of meeting obligations under the income tax law and in planning to save taxes. Opportunity costs such as when tax refunds are delayed are also included. Social compliance costs, gross versus net private costs, and mandatory versus voluntary cost can be distinguished. Gross private compliance costs include both legal and illegal expenses (such as bribes paid), employee costs, the cost of tax advice, and also other non-labour expenses. Estimates in this paper are for the year 2000-01 based on a postal survey of 45 companies throughout India in August-September 2001. Estimated gross compliance costs, excluding bribe costs, are between 5.6 and 14.5 per cent of corporation tax revenues. These are similar to estimates for other countries near the lower limit but are a cause for concern near the upper limit. Tax deductibility of legal expenses and cash flow benefits from the timing difference between taxable income and payment of tax result in net compliance costs between minus 0.7 and plus 0.6 per cent of corporation tax revenue. Both gross and net compliance costs are regressive. Among other findings, five are noteworthy: First, around 25 per cent of sampled companies knowingly paid excess tax (median value: 46%) since tax evasion penalty cannot be levied under Indian law if assessed taxes have already been paid. Second, 70 per cent of companies, especially small companies, used external assistance to prepare tax returns accounting for 39 per cent of the legal compliance costs. Third, voluntary costs associated with tax planning contribute 19 to 43 per cent of total compliance costs. Fourth, the average sample company had 10 to 11 assessment years locked in disputes for tax or penalty in addition to around two years for which assessments were incomplete. Statistical analysis suggested that one extra disputed assessment year raises legal compliance costs by 5.7 per cent. Fifth, it was found to be fairly common for incorrect application of tax laws by tax officials in areas where they have high discretion to cause tax assessments to be revisited. Among reform suggestions is streamlining of 22 legal and procedural �hot spots� which add to compliance costs. Since the response rate was a disappointing 1.15 per cent, the stratified random sample design degenerated into a convenience sample with over-representation of large firms and under-representation of loss-making and zero-profit companies. Therefore, results should be viewed as preliminary and tentative. Other problems are that there were only qualitative questions about in-house cost components; assumed opportunity cost of funds to value cash flow benefits were used; and, as in earlier studies, there can possibly be a bias due to incorrect apportionment of fixed costs and the value of time of company management

Shadow prices, environmental stringency, and international competitiveness

Empirical tests of the relationship between international competitiveness and the severity of environmental regulations are hampered by the lack of pollution abatement cost data for non-U.S. countries. The theory of the firm suggests that environmental stringency can be measured by the difference between a polluting input's shadow price and its market price. We make a first attempt at quantifying such a measure for two industries located in nine European OECD countries. Overall, we provide (i) a new approach to measure cross-country regulatory differences in that we use a theoretically attractive measure of industry-specific private compliance cost, and (ii) empirical estimates that are an attractive tool for researchers and policymakers who are interested in examining how economic activity is influenced by compliance costs.

Compliance and reporting issues arising for financial institutions from money laundering regulations: a preliminary cost benefit study

Explores views on the costs and benefits of financial institution compliance with money laundering regulations as a precursor to a full cost benefit study. Notes that there is very little information on the costs and benefits of money laundering, which is linked with the difficulties of estimating the volume of money laundering that is occurring. Deals with attempts to measure money laundering; the problems involved in this have resulted in a system and procedure based approach which focuses on input rather than output and is clearly inferior. Looks at the costs and benefits for private compliance with money laundering regulation. Moves on to the UK’s money laundering control system, which is based on the Financial Services Authority; financial institutions have to file suspicious activity reports (SAR( and to know their customer, but it is not clear that statistics on these activities show more than the companies’ compliance. Concludes that the industry regards these duties, ie of policing the regulations on behalf of the government, as a burden, and that if this is regarded as excessive, there will be a deterrent to cooperation.

The Effect of a Favor on Public and Private Compliance: How Internalized is the Norm of Reciprocity?

The norm of reciprocity requires that we repay in kind what another has done for us. This study examined the degree that social (public) and internal (private) consequences of reciprocation helped to explain both the power and the prevalence of the norm. Participants were randomly assigned to conditions in which they were or were not given a small favor, and then were asked to comply with a request. Participants expected that the favor-doer would either know or not know whether they complied with the request. We found support for both public and private reasons for reciprocation, as the presence of a favor appeared to increase compliance in both public and private conditions. In addition, public compliance was greater than private compliance.