Are regulatory ambassadors an answer?

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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.
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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
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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
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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).
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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.
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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.
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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
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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.
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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
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