Can Sanctions Deter Illegal Financial Transactions?
Abstract
The Office of Foreign Assets Control (OFAC) within the US government has the authority to issue civil penalties to companies for engaging in business transactions with foreign countries sanctioned by the US government. Announcements of OFAC civil penalties are generally unanticipated because they are made only after OFAC had completed its investigation. Using data for listed financial companies, we find that there were no announcement effects for firms that engaged with “bad” countries such as Russia and Iran. However, consistent with the prediction that large penalties can deter illegal activity (Gary Becker, 1968), we find that the upper quartiles of penalties had reputation costs where the loss in market value exceeded legal costs. Additional predictors of reputation costs include penalties jointly enforced by OFAC and the Department of Justice and activities that are considered “egregious.”
