From Blacklists to Bankers: Reputation, Market Enforcement, and International Cooperation

Abstract

Under what conditions is reputation a driving force for international cooperation? This dissertation analyzes how international organizations (IOs) can use reputation and enforcement to generate widespread improvements in compliance. It theorizes that IO monitoring and assessment is most effective at incentivizing policy change when it combines reputational damage with market punishment. Information about state behavior that is credible, precise, and relevant to actors' priorities is most likely to affect target states' reputations. When markets are a relevant audience for such information, IO monitoring can drive "market enforcement," whereby market actors reallocate resources away from states with damaged reputations. Market enforcement raises the costs of continued non-compliance and incentivizes widespread policy change.

I test this theory through an analysis of international cooperation on combating terrorist financing. Despite strong institutional rules and significant political support, as of 2009, less than 10 percent of countries had compliant laws on terrorist financing. Yet between 2010 and

2015, policy change suddenly became widespread, and today, almost every country in the world has laws that meet international standards. What explains this significant increase in cooperative behavior? The answer, I argue, is that an intergovernmental organization called the Financial Action Task Force (FATF) manipulated the reputational consequences of noncompliant behavior. By issuing a non-complier list, the FATF increased the reputational damage associated with uncooperative behavior and outsourced enforcement to market actors. Penalties from banks and investors incentivized domestic financial actors to become advocates for policy change, leading to widespread improvements in compliance.

Using original data, I illustrate this process through several different empirical approaches, including a regression discontinuity design that exploits a semi-exogenous change in FATF procedures to address concerns about endogeneity. I supplement this analysis with

qualitative evidence drawn from interviews of financial industry professionals, government officials, and IO bureaucrats, as well as participant-observation of two FATF-affiliate organizations. My findings draw attention to the importance of understanding how countries

acquire reputations with specific audiences. They also illustrate the limitations of reptutational damage alone in driving widespread compliance, and suggest markets are powerful potential allies for IOs seeking to incentivize policy change across states.