Zhizhen Lu

PhD in Government

Check in the Dark: Regulatory Reward and Deterrence in Firm Sanctions Risk Perceptions


Economic sanctions depend on private organizations to translate government restrictions into decisions about customers, transactions, and commercial relationships, yet sanctions research often treats firms as unitary actors and pays limited attention to how formal compliance systems shape individual knowledge and behavior. We examine reported compliance infrastructure, correct identification of the principal U.S. sanctions authority, intended responses to an uncertain transaction, and reactions to enforcement messages using an original survey of 564 corporate managers with international business exposure. Respondents reported their organizations’ compliance practices, identified the agency responsible for administering U.S. economic sanctions, and evaluated how they would respond to a prospective client from Kazakhstan. They were randomly assigned to a punishment message, a reward message emphasizing penalty mitigation through cooperation, or a control condition. Formal compliance infrastructure is widespread across respondents' firms, but only 39 percent of respondents correctly identify the Treasury Department’s Office of Foreign Assets Control. Respondents who correctly identify Treasury/OFAC are more likely to select a thorough background check. However, the experimental message did not produce a statistically significant change in perceived sanctions risk or intended behavior. We supplement our experiment with a latent class analysis, which identifies thin, formalized, and adaptive configurations of reported compliance practices. The formalized and adaptive profiles contain extensive screening, personnel, and external assistance, but differ sharply in reassessment. Respondents in the adaptive profile are not more likely to identify Treasury/OFAC correctly or select a thorough background check. These findings reveal a gap between the compliance systems organizations report having and the individual understanding needed to apply sanctions policy in ambiguous situations. Sanctions effectiveness depends not only on whether firms adopt formal controls, but also on whether those controls transmit usable knowledge to the people making transaction-level decisions. Understanding sanctions effectiveness requires attention to how government policy passes through organizational systems and reaches individuals making transaction-level decisions.