Sanctions, reputational losses and salience
Berkowitz, Daniel; Lezama, Guillermo; Nackley, Claire (26.01.2026)
Numero
1/2026Julkaisija
Bank of Finland
2026
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe202601268783Tiivistelmä
Can government agencies in sanctioning countries deter their companies from violating laws that limit business transactions with sanctioned countries? To understand this issue, we study the Office of Foreign Assets Control (OFAC), which is the primary enforcer of sanctions in the United States. OFAC announces a company’s violations and penalty only after it has successfully completed its investigation. We document that OFAC’s announcements were unanticipated and imposed reputational losses that could deter non-compliance throughout the industry when the penalties were large enough and when announcements were made at times when OFAC was being searched intensely on the internet. This suggests that a broader market sentiment sympathetic to OFAC’s mission of stopping financial crimes was necessary.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
Can government agencies in sanctioning countries deter their companies from violating laws that limit business transactions with sanctioned countries? To understand this issue, we study the Office of Foreign Assets Control (OFAC), which is the primary enforcer of sanctions in the United States. OFAC announces a company’s violations and penalty only after it has successfully completed its investigation.
CONTRIBUTION
OFAC penalties tend to be small compared to those imposed by other government agencies. However, “reputational losses” can be deterrents even when penalties are small (Karpoff and Lott, 1993). Estimating reputational losses is challenging because the release of information about misconduct and expected legal costs can occur over many years so that traders and investors can adjust before the penalty is announced (Armour, Mayer and Polo, 2017). We show that it is possible to identify reputational losses because OFAC announces a company’s violations and penalty only after it has successfully completed its investigations. We validate this claim using a detailed analysis of filed corporate documents.
FINDINGS
We find that when the OFAC agency was salient (i.e. frequently searched on the internet) an above median penalty was associated with reputational losses that were 1.1, 1.9, 3.0 and 6.2 times the size of a penalty during market windows of one, two, five and nine trading days around the announcement, respectively. However, there were no reputational losses when salience was low even in robustness checks in which large “outlier” penalties were added to the sample.
FOCUS
Can government agencies in sanctioning countries deter their companies from violating laws that limit business transactions with sanctioned countries? To understand this issue, we study the Office of Foreign Assets Control (OFAC), which is the primary enforcer of sanctions in the United States. OFAC announces a company’s violations and penalty only after it has successfully completed its investigation.
CONTRIBUTION
OFAC penalties tend to be small compared to those imposed by other government agencies. However, “reputational losses” can be deterrents even when penalties are small (Karpoff and Lott, 1993). Estimating reputational losses is challenging because the release of information about misconduct and expected legal costs can occur over many years so that traders and investors can adjust before the penalty is announced (Armour, Mayer and Polo, 2017). We show that it is possible to identify reputational losses because OFAC announces a company’s violations and penalty only after it has successfully completed its investigations. We validate this claim using a detailed analysis of filed corporate documents.
FINDINGS
We find that when the OFAC agency was salient (i.e. frequently searched on the internet) an above median penalty was associated with reputational losses that were 1.1, 1.9, 3.0 and 6.2 times the size of a penalty during market windows of one, two, five and nine trading days around the announcement, respectively. However, there were no reputational losses when salience was low even in robustness checks in which large “outlier” penalties were added to the sample.