Are regulatory ambassadors an answer? PDF
Preview Are regulatory ambassadors an answer?
bs_bs_banner Regulation&Governance(2014) doi:10.1111/rego.12049 The iteration deficit in responsive regulation: Are regulatory ambassadors an answer? John Braithwaite and Seung-Hun Hong RegulatoryInstitutionsNetwork,AustralianNationalUniversity,Canberra,ACT,Australia Abstract Onereasonthatregulationisdifficultisthatrepeatedencountersbetweenregulatorandregulateearerare. Wesuggestdiplomacyasamodelforreconfiguringregulatoryinstitutionsinresponse.Ambassadorsfor RegulatoryAffairswhowouldbeagentsforallstateregulatoryagenciescouldbebasedinmostlargefirms and small and medium enterprises that pose unusual regulatory risks.In rural towns,police would be trained as regulatory ambassadors. Just as a US Secretary of State can launch a“diplomatic surge”in Myanmarfrom2009,soregulatorysurgesarepossibleinmarketsectorsofhighriskorhighopportunity. Weproposestrategiesof indirectreciprocityasawayinwhichreciprocitythatisonlyepisodicinthese strategicwayscanpromotemoregeneralresponsiveness.Indirectreciprocityisreciprocitythatwedonot personallyexperience,butlearnfromtheexperienceof aculture.Thismeansthatsolongaswesustain regulationasarelationalasopposedtoapurelytechnocraticprocess,indirectreciprocitymightcivilize regulatorycomplianceinanhistoricalprocessinformedbythetheoriesofEliasandPutnam. Keywords: diplomacy,indirectreciprocity,responsiveregulation. 1. Introduction: reciprocity as a scarce resource in regulation Regulatorsfacemanydifficulties:informationchallenges(discoveringwherebodiesareburied); politicalchallenges(workingtopoliticalmasterswholiketobepopularwithbusinessbackers); andmanymore.Theanalysisinthisessayislimitedtojustoneoftheseotherlargechallenges: repeatencountersbetweenregulatorandregulateeastheexception,ratherthanthenorm.Ithas oftenbeenadvancedasacriticismof responsiveregulation(Ayres&Braithwaite1992)thatit depends on repeated encounters (Gunningham & Grabosky 1998, p. 404; Gunningham & Johnstone1999;Scott2004;Nielsen&Parker2009;Ford2011).Thisisbecauseoneimportant way that responsive regulation works is by escalating up a hierarchy of strategies,as regulated actorsfailtorespondtostrategiesatalowerlevelofthehierarchy.Howcanaregulatorescalate up an enforcement pyramid in response to failure to respond to an earlier signal without repeated encounters? It is an approach that gives forbearance a chance to be reciprocated by reform or compliance, and redemption a chance at reciprocation by de-escalation down the pyramid. This reciprocity seems impossible without iterated encounters. Nor does tit-for-tat seem possible, as in a game-theoretic model of the evolution of cooperation (Axelrod 1984; Scholz1984).AyresandBraithwaite(1992)advancedsuchaniteratedevolutionofcooperation asonepossibleexplanationforwhyaregulatorypyramidmightwork. Correspondence:JohnBraithwaite,RegulatoryInstitutionsNetwork,ANUCollegeofAsiaandthePacific, AustralianNationalUniversity,Canberra,ACT0200,Australia.Email:[email protected] Acceptedforpublication26November2013. ©2014WileyPublishingAsiaPtyLtd J.BraithwaiteandS.H.Hong Ambassadorsforregulatoryaffairs Whilecriticsarejustifiablyconcernedoverreciprocitydeficitsmakingresponsiveregulation difficultinpractice,theconcernappliestosomedegreetoallformsof regulation.Onecannot replacecommandandcontrolregulationof carbonemissionswithapriceoncarbonwithout repeatencountersbetweenregulatedindustriesandnewtaxinspectorswhoensurethatrecorded emissionsareaccurate.Apureeducationandpersuasionmodel,likeanykindof education,is hardtodeliverinasingleencounterbetweenteacherandstudent.Apoliceenforcementmodel basedonprosecutionatfirstevidenceofbreachofthelawrequiresrepeatedencountersbetween theinvestigatingofficerandthesuspect(andotherswhomighttestify).Usuallyitalsoinvolves moreencountersthanmeettheeye.Thesuspectmighthopethatbygrantingthepoliceofficer access to a space without a search warrant or by voluntarily accompanying the officer to the police station without an arrest warrant, they might be less likely to be targeted by escalated investigation,comparedtoothersuspectswhoaremorecombative. One hypothesis derived from responsive regulatory theory is that when pyramidal approachesworkwell,theydrivesuchahighproportionofregulationdowntothecooperative baseoftheregulatorypyramidthatregulatoryinspectioncansecurecomplianceonthebasisof fewer iterated encounters than a police investigation model. This is implicit in the claims of responsiveregulationthatitcanachievemoreregulatorycoveragethanacriminalenforcement modelthattieslawenforcersdowninlengthycriminalinvestigationsofafewcases.Thisaspect of responsiveregulationhasnotbeenempiricallytested. The important point is that it is certainly hard to make responsive regulation work, and possibly any regulatory strategy work, without iterated encounters. The standard response of responsiveregulatorsistosaythatanimplicationofthetheoryisthatweneedtomakethemost crucialencountersmoreiteratedtosecureanevolutiontowardcooperativereform.Therespon- siveregulatorwantstoseeprudentialregulatorsspendinglesstimeintheirofficesporingover quantitative risk models and more time visiting banks“kicking the tyres”(Braithwaite 2009, p.440).Theresponsiveregulatorwantstoseetaxofficialsspendingahigherproportionoftheir scarce resources visiting strategically chosen taxpayers, compared with time re-examining tax returns(Braithwaite2005;BraithwaiteV.etal.2007).Responsiveregulatorspointedtoevidence fromtheUnitedStatesthatwhenafull-timeresidentinspectorislocatedatacoalminewitha corner-cutting safety culture, the best of these resident inspectors worked with management, unions, and local communities to challenge that safety culture. Mines selected for having an unusuallyhighriskprofileintheUSwereputintotheresidentinspectorprogram;thesemines finishedwithaccidentandfatalityratesthatwerewellbelowthenationalaverage(Braithwaite 1985,pp.82–83). Thepurposeof thisarticleistodevelopaprescriptionthatputsmorefleshonthesebones andtosuggestaresearchstrategytoexploreitsmeritsbystartingwithafocusonthestudyofKey ClientManagerinnovationsinSouthKoreanandAustralianregulation.Theideaistransforming regulatory practice and institutions to render them structurally more focused on iterated encounterswithhumanbeingsoutinthefield,lessfocusedonprocessingpiecesofpaper.Since the1990s,thewayresponsiveregulatoryimplementationhasbeenrolledoutintaxadministra- tion,and,to a lesser extent,in other domains,such as securities regulation (Kingsford-Smith 2011), gives a clue to our final destination. Some tax offices and securities regulators have permanently located Key Client Managers in the offices of many firms for many years now (Braithwaite2005,pp.74–80).Ontheotherhand,they“blitz”iteratedshortvisitsuponmarket segments or individual firms feared to be low in compliance.Responsive regulatory advocates thenpointedtoprogramsliketheTransferPricingRecordReviewProjectthattargetediterated encountersupanddownaregulatorypyramidoncompanieswithhighlevelsof international 2 ©2014WileyPublishingAsiaPtyLtd Ambassadorsforregulatoryaffairs J.BraithwaiteandS.H.Hong profitshiftingtoraiseanextrabilliondollarsintaxrevenueforeachmilliondollarsspentonthe program (Braithwaite 2005,pp.89–97).These are only incipient late twentieth century mani- festations of the policy solution we seek to consider. Studying them is the start we propose toward advancing our empirical understanding of prospects for more richly relational regula- tion. First, however, we seek a more sophisticated relational vision by learning from a long- entrenchedpolicyexemplar,diplomacy. Our plan is first to discuss how diplomatic surges work, and then we compare this with regulatorysurgesincontextswherereciprocityisascarceresource.Thenextsectionconsiders howAmbassadorsforRegulatoryAffairswouldwork,followedbyaconsiderationof ourpro- posed reconfiguration of rural policing in accordance with the diplomacy model. Finally, we reflectontheexperienceofdiplomacyasaresilientlyusefulinstitutionbecauseitreliesmoreon indirectreciprocitythandirectreciprocity.Likewise,adiplomacymodelofregulatorytransfor- mationmightworkthroughindirectreciprocity.Thereasonsitmightnotwork,weargue,could bemoreaboutresistancefromentrenchedregulatorybureaucracieswhorepelsurrenderoftheir regulatoryprerogativestocollaborations. 2. Blitzes where reciprocity is a scarce resource 2.1. Diplomaticsurges The President or Secretary of State of even the best-funded diplomatic endeavor,the US gov- ernment,doesnothavethecapacitytointeractwithalloftheworld’sforeignministers.Yetthey can and do put on diplomatic surges with focused groups of nations when there is a priority diplomaticopportunityorrisk.Theotherprincipalremedyisforstates,eventhepoorestamong them,topostpermanentAmbassadorstothecapitalsofstatesthatarediplomaticallycriticalto them.Top-down diplomatic surges supply episodic focused reciprocity;Ambassadors provide continuousmiddle-outreciprocity,thoughonlyinkeycapitals.Whileaninstructivemodel,in anerawheresomanycivilwarsstartinruralareas(Autesserre2010),diplomacyrepeatedlyruns up against the limits of diplomats cloistered in the embassies of national capitals. As with regulatoryinspectors,diplomatsneedtogetoutwherethey“gettheirbootswet”(anexpression fromHawkins’s[1984]environmentalinspectors).Thisisjusttosaythatwhilediplomatscannot beeverywhere,diplomaticsurgesneedtogorightdowntoruralhotspotsincentralAfrica,as opposedtococktailpartiesinGeneva,whenthosearetheruralspacesthatareignitingwars. 2.2. Regulatorysurges The diplomacy model for managing reciprocity has some (admittedly faint) resonances in regulatorypractice.WehavementionedtheKeyClientManagersscheme,whichhasexistedat theAustralianTaxationOffice(ATO)sincethe1990s.Thisprogramisorientedtothelargestor highest-riskcompaniesthatoverperiodsofmanyyearshaveanATOauditorwithadeskinside the corporate headquarters, but also visiting internal auditors on their travels around key operating sites. As with diplomatic deployment, one rationale for the policy is improving relationshipsandcommunication,andasecondisimprovingintelligencebybeingclosetothe spaces,people,andtransactionswherebodiesareburied. Attheindividuallevel,theHighWealthIndividualsTaskForcewasestablishedin1996,an Australian innovation that at least a dozen other national tax administrations have emulated since2000(OECD2009,p.56;forcasesto2009)afterAustraliansuccessinincreasingrevenue fromthewealthyindividualstargeted.Thetargetingherewasof 142individualsandthesetof companiestheycontrol(expandedto700by2004).Theinitialintentwastotargetindividuals ©2014WileyPublishingAsiaPtyLtd 3 J.BraithwaiteandS.H.Hong Ambassadorsforregulatoryaffairs whohad$30millioninassets,butpaidlessthan$20,000intax.Mosthadmuchgreaterwealth thanthis,andinatleastonecasehadpaidnotaxatallsince1987!Iteratedrelationshipswere established,notsomuchwiththempersonally,astheywerebusyrunningthecountry,butwith theiraccountants.AnotherresponsiveprogramofthissortbytheATOwasthePromotersTask Force that worked with promoters of tax shelters to negotiate and monitor compliance plans. Becauseanumberofthesepromoterswereenforcementtargetsfornon-taxregulatoryagencies, whole-of-governmentplansweredevelopedtocurtailtheiraggressivegamingofthelawacross anumberof arenas.Thisalsoseemedtoachievesomesuccessinshuttingdownthe1990stax shelterboominAustralia(Braithwaite2005). An example from a different domain is the On-site Supervisor Program of the Financial Supervisory Service (FSS) of South Korea. The FSS led intensive restructuring of a financial sectorrecoveringfromtheAsianfinancialcrisisof1997–8.Itisresponsibleformicro-prudential supervisionoffinancialfirms.Since2001,theOn-siteSupervisorProgramhasbeenorientedto banks,insurance,andsecuritiescompaniesshowingnegativesignsintheirmanagement.On-site supervisors are dispatched to a firm with a broad brief to monitor corruption and illegality, inspectregulatorysystems,improverelationshipswithotherauditors,investigatethefirm’srisk level,andpreventescalationofpotentialfinancialcrises.Eighty-onecasesofon-sitesupervisors havebeenpostedfromtheFSSmutualsavingsbankdepartmentalone,whichhasmostactively runthisprogram.1 In prudential regulation,as with tax,there is more mundanely cyclical targeting of a wide rangeoftypesoffinancialactors.Theideaistocommunicatethepossibilitythatthetaxoffice mayeventuallygetaroundtofocusedtargetingonanyandallvocations.Inpractice,targetinga vocationlikeacademiamayhappenwhenthereissomepolicychangethatneedstobeconsoli- datedintocompliance,sayachangeinthewayacademics’professionallibrariesaredepreciated. The year when such a change comes in may be the time when academics are chosen for their summerof iteratedencounterswithtaxauditors. In summary, we might say that targeted surges to complement permanent missions (Key ClientManagers)intaxadministrationhavetendedtotaketheformofblitzes.Thisphilosophy has been influenced by Malcolm Sparrow’s The Regulatory Craft (2000). Sparrow’s advice is against regulators spreading themselves thinly across a wide terrain of problems, collecting reamsofinformationthatarerarelyused.Rather,hisadviceisto“pickimportantproblemsand fixthem,”inthefashionof abusyUSSecretaryof State(2000,p.133).Thisessayisnotabout suggesting which kinds of problems should be picked for iterated encounters of one kind or another.Thatanswerwillbeverydifferentfordifferentkindsofregulatorsindifferentcountries. Seung-HunHong’scomparativeempiricalresearchprogramontheweaknessesandstrengthsof KeyClientManagerswillcastsomelightonthisquestionforthefirsttime. Taxadministrationis,ofcourse,anunusualcasefordrawinganylessons,bothbecauseofthe largenumberofactorsitmustregulate–allthecompanies,partnerships,trusts,individualsin a country – and because tax administrations usually have very large numbers of regulatory personnel.Itisharderforsmallagenciestolocatepermanentmissionsortomountanysurges. Nevertheless,thereisalonghistoryof innovativeapproachestodoingso. From the nineteenth century,a tiny regulator,the Coal Mines Inspectorate in the state of Queensland,Australia,supervisedmanyminesthatweretakinglargenumbersofminers’lives, asinChinatoday,butwithfewstafftosupervisethem.Theylegislatedforelectedworker“check inspectors”toundertaketestsformethanegaslevelsbeforeeveryshiftenteredamineandfor variousotherpowersthatthestatedelegatedtothem.Laterthestatetookoverpayingthesalaries of theseminesiteworkers(Braithwaite&Grabosky1985,p.43). 4 ©2014WileyPublishingAsiaPtyLtd Ambassadorsforregulatoryaffairs J.BraithwaiteandS.H.Hong WithnursinghomeinspectionintheUS,stategovernmentagedcareinspectorateswereso overwhelmedwithgettingthebasicsofnursinghomeinspectiondonethat“pickingimportant problems and fixing them” was something they rarely managed to do. In 1987, one of the interesting elements of a legislative reform package accomplished by the National Citizens’ Coalition for Nursing Home Reform required staff of all nursing homes to meet with their resident representatives to reach agreement on one quality of care problem that they would targetasapriorityoftheirchoice(BraithwaiteJ.etal.2007).Thatlawdidnotspecifyanything aboutwhattheproblemtheypicktofixshouldbe.Itjustrequiredthatitbechosenandaplan ofactiontofixitrecorded,alongwithamethodologyformeasuringitsaccomplishment.Similar approaches were adopted in subsequent continuous improvement and continuous learning enforcedself-regulationapproachestoAustraliannursinghomeregulation(BraithwaiteJ.etal. 2007, pp. 198–214). Another response in both the US and Australia has been government fundingforCommunityVisitorandOmbudsmanprogramsstaffedmainlybyvolunteerswho are concerned about aged care standards (often based on experiences with their own family members), with limited numbers of state-funded professionals to back up volunteers in the worstcircumstances. While such innovations show that responses are available to the problem of non-repeated encounters,the difficulties remain so endemic,especially for small agencies,that more radical reconfigurationofregulatoryinstitutionsmightbeconsideredasaremedy.Itistothisweturn inthenextsection. 3. Reconfiguring regulatory institutions 3.1. AmbassadorsforRegulatoryAffairs One feature of Ambassadors in foreign capitals is that they represent every agency of their home state.Wealthier states have specialists from some of their most powerful agencies – the trade ministry, defense, the intelligence service – but the state agencies of most states are represented by generalist diplomats in most foreign capitals.This introduces one of the chal- lengesof diplomacythatwouldbeboundtobereplicatedinregulatorydiplomacy.Somestate agenciesaremorepowerfulthanothersanddifferentagenciesfrequentlyimposecontradictory demands upon diplomats. So let us consider adapting this move to the reciprocity dilemmas of the regulatory state. All of the most important firms might have permanent state Ambassadors for RegulatoryAffairs located within their offices.In the US context,this would go beyond the entire Fortune 500. It would include all significant firms in highly sensitive industries, such as defense contracting, mining, pharmaceuticals, nuclear power, and banks. These ambassadors would operate in the fashion of On-site Supervisors of the South Korean FSS or Key Client Managers of the ATO, but across all regulatory functions. Regulatory Ambassadors may have a staff that is a mixture of specialists and generalists, as in any dip- lomatic embassy. They would be a liaison not only to the tax authority or to the securities regulator,but to both,andalsotoenvironmental,occupationalhealthandsafety(OHS),prudentialregulatorsif theywereabankorinsurancecompany–indeedtoallstateregulators.Theirkeyinterlocutors would be board audit committees and ethics committees, controllers, chief financial officers, corporatecompliancegroups,andspecialistcompliancegroups,suchassafetycommittees.Just asthelatterprivateactorsarebridge-builderswhoassistwithenablingprivatepowertobemore “permeable”to public power (Parker 2002,pp.38–43),so wouldAmbassadors for Regulatory Affairssupplypublicbridgingcapital. ©2014WileyPublishingAsiaPtyLtd 5 J.BraithwaiteandS.H.Hong Ambassadorsforregulatoryaffairs One hope for Ambassadors for Regulatory Affairs is that they might leverage systemic improvementincompliancesystems,audit,complainthandle,andlearnfromcriticalincidents at their firm that would be of benefit across all domains of regulatory compliance. Specialist regulatorsfindithardtojustifysystemicimprovementdiagnosticswithonefirmwhenthereare manifestrisksatalonglistofotherfirms.Theyalsofalldownonsiftingsinglefirmintelligence for the same reason.They fail to pick up learning from critical incidents at a single firm that might drive what Parker (2002, p. 277) calls“triple loop learning”across a whole regulatory systeminhowtotreatrisksorseizeopportunitiesforimprovement. WhileAmbassadors would be less expert in all substantive areas of regulation,they would becomemoreexpertatbusinessdiplomacyandattriplelooplearning.SotheAmbassadoridea involves a trade-off between solving the problem of thin relationships and the technical com- petenceproblem.Aswithinternationaldiplomats,partofthecraftofthediplomatisbeinggood at knowing what expertise one lacks,knowing what part of one’s state or civil society has the expertise,and knowing how to build a bridge that expertise can travel across when it is most desperatelyneeded.Sometimestheambassador–generalistsolutionwillberadicallysuboptimal. Thishappenswhenbridgesarenosubstituteforhavingtheexpertiseofaspecialistregulatorin place. Diplomacy has accumulated wisdom in how to make particularistic judgments about contextswhereageneralistdiplomatshouldcallinaspecialist.Forexample,manygreattrading cities of the world that are not national capitals are dotted with consulates staffed by a trade specialist from the home state, with no generalist diplomat to be found in the consulate. A military attaché may be found unaccompanied by generalist diplomats in rural war zones far fromcapitals. Likewise,regulatory diplomats and their specialist staff need to spend much of their time “getting their boots wet” at the site level where so many problems arise. Many sites are sig- nificant enough to need their own ambassador supported by specialist staff,such as a nuclear power plant,a large environmentally and safety-sensitive mine,or an abattoir where there are constant tensions among consumer health, animal welfare, environmental, and occupational safety concerns. There are contradictory demands, for example, over the frequency and methods for washing blood from wet floors and managing large animals that are not killed cleanly. An advantage of the resident Ambassador is that they cannot pretend that these contradictory demands do not exist, pushing the contradiction onto the abattoir that decides, for example, to meet the demands of the food inspectors to wash down floors more frequently because they are more feared than OHS inspectors who demand dry floors for workers.Better regulation might come from sensible brokering of the contradictory demands by a diplomat whose job is to facilitate dialogue, discover optimal compromises, or innovate intothirdwaysthatarebestdiscoveredthroughon-sitedialoguegroundedinfamiliaritywith local context. AsecondaryfunctionofaMinistryofRegulatoryAffairsthatdeployedgeneralistregulatory Ambassadorswouldbenurturingcoordinationamongstateregulatoryagencies.Strategiccoor- dinationamongdifferentstateregulatorshastendedtobeweak,sothismightbeasignificant benefit.Acadreof regulatorygeneralistdiplomatsbuiltupthroughambassadorialexperiences mighthelplaybaresomeof thegapsbetweenregulators,contradictions,andmissedopportu- nities in the rule of regulatory law and policy.A well-designed Ministry of RegulatoryAffairs couldalsoenhanceaccountabilityasanewnodeof oversightforcaptured,corrupt,orunrea- sonableregulators.TheMinistryof RegulatoryAffairscouldhaveitsownparliamentaryover- sight committee and a structure of consultative committees with civil society and business to enhanceaccountabilityuptotheparliamentanddowntothepeople. 6 ©2014WileyPublishingAsiaPtyLtd Ambassadorsforregulatoryaffairs J.BraithwaiteandS.H.Hong Ambassadorswouldneedtomaketheirintelligencefunctionworktodirectspecialistsfrom specialist regulators to targets from a large number of possible sites at which blitzes might be directed. This includes small and medium enterprise (SME) sites upstream and downstream from large firms that can be revealed as non-compliant from large firm intelligence sources. Obversely,SMEblitzesbyspecialistregulatorswouldneedtobeharnessedtoprovideintelligence toregulatoryambassadorsatlargefirmsupstreamanddownstreamfromSMEs.Aswithinter- national diplomats, regulatory diplomats would be at risk of “going native,” becoming “cap- tured,”andsowouldrequirethesameremedyofoptimizedrotation.Thisisadifferentkindof trade-off.Rotationsthataretoolongriskexcessivecapturebythepowerfulpoliticalactorsofthe local site; overly short rotations cut off reciprocity and the acquisition of specialized local knowledgebeforethesearesufficientlymatured. TheAustralianPrudentialRegulationAuthority(APRA)seesitstargetedspecificissueaudits asacheckontheauditingoffrontlineResponsibleSupervisorsdesignatedtoonebank,andvice versa.2Thatis,therearetimeswhenaspecialpurposeauditcallsabank’sResponsibleSupervisor to account for failing to pick up a problem at their bank detected in the blitz across all firms. Obversely, the Responsible Supervisor sometimes calls the specialized auditor to account for failing to pick up something that they subsequently detect at their firm as a result of their superiorintelligence.Moremundanely,thesetwobranchesofregulatorymanagementcollabo- ratetoeachimprovetheirworkwiththeratherdifferentkindofintelligencetheotherfunction generates.APRAseesthisasanimportantmanagementvirtuewherethebiggestproblemsatthe biggestplayersaredoublychecked. 3.2. Returningpolicetotheirroots ImplementingKeyClientManagersorOn-siteSupervisorsisastrategythatisonlylikelytobe effective and affordable at the sophisticated center, at or near the commanding heights of capitalism.Touncoverastrategythathasworkedattheperipheryofcapitalism,wenowturnto thehistoryof“police”asregulation.1829wasawatershedyearfortheregulatorystate.Itsawthe creation of the London Metropolitan Police.Much was decisive about this watershed; we will arguethatadistinctivepathdependencyoftheregulatorystateflowedfromitglobally(seealso Bayley & Shearing 1996; Ericson & Haggerty 1997; Johnston 2000). One shift was the rapid globalization in the course of the nineteenth century of police as paramilitary organizations specializinginoneprincipalformofregulation–criminallawenforcement.Thisglobalization was of a different conception of police from the dominant conception in Europe and North Americainpreviouscenturies. Fromlatemedievaltimes,“police”hadmeantvillageandtownconstableswhowereregu- latory generalists. Police had the same Greek etymology as politics and policy. In addition to regulating theft and violence,constables would regulate alcohol licensing,vagrancy,pollution into streams,weights and measures and other consumer protection,usury,the monopolies of guilds, forestry and hunting, community safety from sources that ranged across unsafe food, unsafe roads,unsafe machinery,unsafe mines,unsafe animals: the whole gamut of regulatory functions.3 After police became crime control specialists, from the mid-nineteenth century, new specialist regulatory agencies, such as the Alkali Inspectorate, factory inspectorates, mine inspectorates,weights and measures and health inspectorates,and workhouses to regulate the poorbegantospringuptopickupfunctionsthenewPeelianpolicehadsloughedoff.Thisnew latemodernspecializationinregulationworkedwellinmanyways,butonlyincities.Inspectors almostnevergotouttofactories,shops,orsourcesofpollutionorunsafefoodlocatedinrural ©2014WileyPublishingAsiaPtyLtd 7 J.BraithwaiteandS.H.Hong Ambassadorsforregulatoryaffairs areasatlongdistancesfromtheircityoffices.Regulatoryscholarship,likeregulatorypractice,is myopicallyurbaninorientation,neglectingthedysfunctionalityoftheregulatorystateforrural peopleinallsocieties,andparticularlyitsdysfunctioninsocietieswheremostpeoplearerural. Rural disadvantage is an important injustice in many countries. It is greatly increased by monopolypricesandunregulatedexploitationthatafflictsruralpeople. Policecontinuedtohaveapresenceinruraltownsandvillages,butnolongersawthemselves as responsible for non-criminal regulation.Rural people,especially in countries likeAustralia whereruralspacesarevast,missedoutonthebenefitsoftheregulatorystate(Braithwaite2008). The worst rural pathologies of regulatory states are in the least developed economies. Illegal loggingof thetropicalforestsof theSolomonIslandsbyforeignfirmshascontributedtowar, top-down corruption of a kleptocratic state, trafficking of arms on logging ships under the protectionofthatcorruption,andthetraffickingofchildrenforsexualexploitation(Braithwaite etal.2010).BraithwaiteandDinnen’sfieldworkrevealedthatwhenchiefscomplainedtolocal police that multinational loggers were destroying their village livelihoods and environments, theyweretoldthatitwasnotapolicematter.TheyshouldcomplaintotheForestryInspectorate farawayinthecapitalcity.Becausetherewerefewforestryinspectorsinthecapital,andthecost of travel to the remote forests targeted for destruction is prohibitive,no one comes;no one is evencalled. Braithwaite(2008,p.30)proposedthatruralpoliceofficerscouldbeagentsforallregulatory agencies,responsibleforthetriageof regulatorybreacheslargeandsmall.If aconsumerhasa complaintaboutabutcher’sscalessellingthemshort,theruralpoliceofficercouldinvestigate this on behalf of the consumer protection agency. If another complains of the only two gas stationsinthetownmovingtheirpricesinliaisonasaduopoly,thepoliceofficer,onbehalfofthe competitionregulator,dropsaroundtoremindthemoftheirlegalobligations.Ifallegationsof pollutionintoariveraremade,thelocalpoliceofficerwouldgetdowntotheriverpromptlyin searchofobviouspollutionsourcesanddispatchsamplestothelaboratoryoftheenvironmental regulator. Rural police in contemporary conditions are in repeated contact with most local businessesintheirtownonallmannerof servicecall-outs.Inaworldwheretheybecamenot only the local ambassador of the criminal law, but also an ambassador for all regulatory law, reciprocitywouldbecomeevenmoreiterated.Obviously,eachruralpoliceofficerwouldneedto coverasmallerpatchthantheydotodayinordertocopewiththeseextraresponsibilitiesandso wouldneedtobepaidmorethancontemporaryruralpolice. Ruralpolice,underourmodelforreconfiguringtheregulatorystate,wouldattendsomeof the same training courses at the Ministry for Regulatory Affairs that would equip regulatory Ambassadors to large corporations. They would be provided with some of the same intranet resourcesoftheMinistryforRegulatoryAffairsonhowtoconductapreliminaryinvestigation, howtoreporttothecompetitionauthorityontheirfindingsinapricefixingallegation,howto captureandsealthatpollutionsamplefromtheriver. So our proposal for reconfiguring regulatory institutions is now fleshed out, not only as scatteringAmbassadors for RegulatoryAffairs across the big firms listed on the world’s major stockexchanges,acrossmanyhigh-risksitesofthosefirms,andacrosshigh-riskSMEs,butalso acrossthesmallestoftowns,whereprospectsforiteratedregulatoryencounterswithcity-based inspectoratesaremostremote.Inbetween,incityfirmsthatarenotlargeorprioritytargetsof regulatory scrutiny, repeated encounters with regulators only happen when regulatory surges targetspecificissuesfortheirindustrysector,orwhenspecificallegationsarelaidagainsttheir firmofaseriousnature.Thismeansthatthereisstillahugedeficitinrelationalregulation,yet agreatlyreducedoneincomparisontocurrentconfigurationsof regulatorystates. 8 ©2014WileyPublishingAsiaPtyLtd Ambassadorsforregulatoryaffairs J.BraithwaiteandS.H.Hong 3.3. Reconfiguringregulatorycapitalism Anagencylikeataxauthoritythatregulatestensofmillionsofentities,ofcourse,doesverylittle ofitsiteratedregulatoryworkwithtaxpayersthemselves.Itdoesitwithtaxpreparers,manyof whomhavehundredsorthousandsoftaxpayerclients.Mostly,whensomeonetapsataxpayeron the shoulder and warns them that their conduct may be a breach of the law, it is their tax preparer,ratherthanataxinspector,whodoesit.Whenacompanyisalertedthatanaspectof aprospectustheyintendtoissueisillegal,itismorelikelythatwarningwillcomefromalawfirm retainedtoassistwiththeprospectus,thanfromthesecuritiesregulator.Thisisanobservation fromtheregulatorycapitalismtradition(Levi-Faur2005)thatwhilestateregulatorsareimpor- tant,incontemporaryconditionsmostregulationisundertakeninaprivatemarketforregula- tory services. In that world, smart regulators harness those private providers of regulatory servicestotheircomplianceprojects.Theywritetoalltheregisteredtaxadvisorstorequestthat theypleasewarnalltheirclientsofanintentiontoimplementcertainenforcementsurgesinthe comingyear.Theyurgeaccountantstopleaseusetheyeartoensurealltheirclientsaremain- tainingtherecordsnecessarytodocumenttheircompliancewiththeseprovisions.Itisnotthen thestateenforcementonthesethingsduringthenextyearthatdrivesmostof thecompliance benefit;it is private enforcement in the market for regulatory services.It is a meta regulatory, ratherthanadirectregulatory,accomplishment. It follows that while the reforms we propose are for the reconfiguration of the regulatory state,underconditionsofregulatorycapitalismmostoftheleverageofstateregulatorsandstate Ambassadors for Regulatory Affairs would be indirect. This is relevant to considering the important limitation of our proposal that it trades off specialized technical competence for enhancedreciprocity.Wewouldworryaboutthatmoreinaworldwheremoststateregulation was directly supplied by state actors, rather than by leveraging the technical competence of privateprovidersofregulation.Soweenvisagethemonthlymeetingofthelocalpoliceconstable wearing her hat as the Ambassador for Regulatory Affairs, running through a checklist of regulatorysurgeslikelytoarriveinthecomingmonthsatalocalchamberofcommercemeeting: Iadvisethatthetaxofficewillbeconductingablitzonemploymentrelatedexpenses,so pleasetalktoyouraccountantaboutassuringyourcomplianceinthatarea.Therewillbe somespotchecksthatgaspumpsaredeliveringaccuratevolumes,includinginruralareas, soyouwouldbewisetogetyourpumpscheckedbyacertifiedserviceagent.Theenviron- mentinspectorateisblitzingnoisepollutionaroundpubsandclubs.Ifyourbusinessisin that category, I have noise detection equipment that I can lend you to check your own compliancebeforeyougetintotrouble.Irecommendyoudothatcollaborativelywithyour nearestresidentialneighborssotheygettoseethatyouareincomplianceandthatyouare checkingcompliance.Thenyouwillgetfewerillegitimatecomplaintsfromyourneighbors. Theoccupationalhealthandsafetyinspectoratehasmadeavailableatthiswebsiteaself- auditingtoolforthreshingmachinesandotherfarmmachinery.Pleasepasswordamong your farm customers that if they correctly,carefully self-certify as compliant and a farm workerdoeshappentobeinjured,Iwillbesparedtheunpleasanttaskofarrestingthemfor aworksafetybreach.AnyquestionsthatIcananswermyselforpassontogetyouananswer fromtheexperts? SuchareturntoaregimemorelikenineteenthcenturyEuropeanruralPolizeiwouldneedto be evaluated empirically in terms of whether it would enhance or erode the legitimacy of the police in performing contemporary criminal enforcement functions. And we can imagine a comparabletownhallmeetingoftheAmbassadorforRegulatoryAffairstoalargecorporation ©2014WileyPublishingAsiaPtyLtd 9 J.BraithwaiteandS.H.Hong Ambassadorsforregulatoryaffairs where various constituencies within the firm, and perhaps from without as well, are put on notice about the advisability of getting a compliance audit done on this or that. Likewise, empiricalresearchwouldbeneededonwhetherthislocalrelationalregulationwouldenhanceor erodethelegitimacyof specialistregulatoryoffices. 4. The strategy of indirect reciprocity Weturnnowtotheoreticaldevelopmentsintheconceptofreciprocitytoconsiderwhatwecall the strategy of indirect reciprocity. Our argument here will be that even though Regulatory Ambassadors to corporations and small towns combined with regulatory surges elsewhere spreadreciprocitythinly(albeitmorewidelyandstrategicallythancurrentpractice),ifsurgesare discharged with sufficient frequency and publicity,they may imbue indirect reciprocity in the compliancebehaviorof thosenottargetedbysurgesorAmbassadors. 4.1. Cultivatinghabitsofcivility The message of invincibility that an enforcement pyramid is intended to give is not learned mainlythroughthepersonalexperienceofbeingpushedupapyramidbyaregulator.Itisalso learnedthrougheffortsbyregulatorstoeducateacommunitythataregulatorypyramidexists. Itislearnedbyobservingmisfortunebefallotherswhoescalateuppyramidsduringsurges.Most of all,good responsive regulators use outside-in regulatory design (Braithwaite 2005,p.156), thatis,theregulatedindustryparticipatesindesigningregulatorypyramids.Participationinthe designandperiodicredesignof regulatorypyramidsisanotherpathwherebyleadersfromthe regulatedcommunitylearntoplaythegameatthebaseofthepyramid,reducingthefrequency andcostsof iteratedencountersathigherlevelsof thepyramid. One idea here is that even when a social practice like diplomacy is transacted in one-shot interactions,thosewhohavebeensocializedasdiplomatslearnhabitsof cooperation.Thatis, the diplomatic norm, even with enemies, is that cooperation is the normal response, with betrayalreservedasaresponseforexceptionalcircumstanceswhereinterestsareseenasexcep- tionally profound. Diplomats generally do not learn that cooperation is normally the right response from iterated encounters in which they experience bad consequences of non- cooperation.Rather,theylearntobecooperativeintheirtraining.Secondly,becausesomanyof themovesandcountermovesofdiplomacyarepubliclyknown,especiallytoinsidersofthecraft, diplomatslearnfromobservingescalatediteratedencountersexperiencedbyotherdiplomats. They observe escalations to war even if in their personal experience they never encounter an escalationthatleadstosuchaseriousoutcome.Socializationforcivilityisthefirstlineofdefense againstpeoplebeinguncivilbacktous.Observationofconsequencesfromuncivilescalationsby othersisasecondlessimportantdefense.Personalexperienceofhowone’sownuncivilbehavior hasbadconsequencesistheleastimportantpathtolearningcivility. Elias(2000)seesalonghistoricaltrajectoryof“civilizing”processesinthewest.Thetheory of indirect reciprocity is a useful lens for seeing the brilliance of Elias and his relevance to understanding all forms of regulation. Diplomacy is central to the history Elias recounts. “Courtly”goodmannersarisefirstinthecourtsofkingsandnoblesintheMiddleAges.Before the rise of “courtesy,” knights achieved their objectives through largely unregulated violence. Unarmedcitizensdeferredtoknightsoutoffear.Asstatestructuresconsolidated,however,even powerfulknightslearnedtoliveinworldssurroundedbyotherscapableofkillingthem.Inthe court,knightslearnedtoavoidupsettingothersbyfollowingcourtesiesofdiversekinds.These avertedaggravationofothers:fromrefrainingfromspittingonthefloortoblowingone’snose 10 ©2014WileyPublishingAsiaPtyLtd
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