Flipping Markets to Virtue with Qui Tam and Restorative Justice

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Flipping Markets to Virtue with Qui Tam and Restorative Justice Accounting, Organizations and Society xxx (2012) xxx–xxx Contents lists available at SciVerse ScienceDirect Accounting, Organizations and Society journal homepage: www.elsevier.com/locate/aos Flipping markets to virtue with qui tam and restorative justice John Braithwaite RegNet, Fellows Rd., Australian National University, Canberra 0200, Australia abstract Contemporary economies are characterised by a regulatory capitalism in which both mar- kets and regulation extend their sway. Freer markets with more rules nurture markets in vice that game regulation. Tax avoidance and evasion are used to illustrate these dynamics. Yet freer markets with more rules also engender markets in compliance services that can be virtuous and more dominant (more demanded) than markets in vice. As a result of that dominance, firms and individuals often comply at levels that seem economically irrational virtue. To hold corporations to compliance through markets in virtue requires regulation with toughened enforcement capabilities for drawing out insider information about loom- ing problems. Qui tam is suggested as one option. This option can be complemented with a more deliberative approach, restorative justice. One reason to consider this package of hybrid private–public enforcement that knows no jurisdictional boundaries is that when fraud is globalised, firms organise their affairs so that fraud is off-shore from all state reg- ulators with an interest in exercising jurisdiction against it. Ó 2012 Published by Elsevier Ltd. Introduction capitalism. When markets enhance the efficient produc- tion of outcomes which are good according to some ethical In this paper, I seek to draw some lessons from the theory, these are defined as markets in virtue. When mar- mixed empirical experience of success and failure of tax kets enhance the efficient production of outcomes which administrations in flipping markets in vice to markets in are bad according to that ethical theory, these are defined virtue. I construe them as lessons of more general rele- as markets in vice. Then the paper considers qui tam, an vance to a contemporary capitalism in which: approach that harnesses whistle blowers by paying them a percentage of penalties imposed, as one promising tool (a) Many different kinds of markets in vice cyclically for pushing the worst players of markets in vice to become rise and fall (in insider trading, monopolisation, the best players of markets in virtue. We consider how fraud against the government, securities fraud, envi- restorative justice might flip economies away from catas- ronmental crime, bribery). trophe and finally how qui tam might enable rather than (b) There is a demand-side and a supply-side to under- disable restorative justice. The potential for qui tam to cre- standing those undulations. ate a space for restorative justice illustrates the idea that a (c) The market in vice works by siphoning a share of the whole web of influences is required to enable tax adminis- benefits of cheating on the upswing, setting up cli- trators, like other business regulators, to flip markets in ents to shoulder the costs of the downswing. vice to markets in virtue. As discussed in Michael Power’s contribution to this The plan of this essay is first to use tax compliance to special issue, under conditions of regulatory capitalism consider the heightened tug of war between markets in the ‘legalisation of management’ and the ‘managerializa- virtue and markets in vice under conditions of regulatory tion of law’ need not be seen as contradictory trends. In- stead they can be seen as mutually constituting in a world where markets penetrate the state under the man- E-mail address: [email protected] dates of the New Public Management (Klijn, 2012) and 0361-3682/$ - see front matter Ó 2012 Published by Elsevier Ltd. http://dx.doi.org/10.1016/j.aos.2012.07.002 Please cite this article in press as: Braithwaite, J. Flipping markets to virtue with qui tam and restorative justice. Accounting, Organizations and Society (2012), http://dx.doi.org/10.1016/j.aos.2012.07.002 2 J. Braithwaite / Accounting, Organizations and Society xxx (2012) xxx–xxx state meta-regulation, regulated self-regulation, infuses quality. It can expand very quickly. The art of tax adminis- markets (Parker, 2004). This essay provides an example tration is keeping the lid on these cycles. Empirically, we of how both phenomena can occur simultaneously. Qui found that markets in vice are predominantly supply dri- tam involves a partial privatisation of markets for public ven, then herd driven. Let me explain what that means. enforcement; restorative justice stimulates conversations The market niche for truly aggressive tax advice is a pre- to catalyse the managerial imagination of the firm to craft carious one. In normal times, an adviser who puts an preventive and reparative management remedies in the aggressive new shelter into the market comes up against shadow of law enforcement. the wall of conservatism generated by the market in virtue. Yet enticing just a few clients to use the shelter can get the aggressive advisor on a roll quickly if they have promo- Regulating tax avoidance and corporate crime with tional flair. This is the sense in which the market is supply markets in virtue driven at first. Chances are those few clients will get away with it if the shelter is half-credible and supported by let- Tax cheating is often economically rational behaviour. ters of comfort from respected tax lawyers. When addi- For most of the common forms of tax non-compliance, tional clients see the combined reality of the letters of odds of detection are way below 50%, while the expected comfort and that previous clients have made a killing with- punishment following detection is less than double the out the tax authority laying a hand on them, momentum in tax avoided. Yet the evidence from most developed econo- shelter sign-ups grows. It has become more demand-dri- mies is that most taxpayers comply with most tax laws ven. The (false) marketing pitch in effect can then become most of the time (Braithwaite, 2003a). Why are they so ‘everyone is getting away with this except patsies like you’. irrational? One reason is that professional tax advice is Even when a stampede into shelters occurs, most taxpay- more a market in virtue than a market in vice. ers cling to the market in virtuous advice and most advis- In Markets in Vice, Markets in Virtue, Braithwaite (2005) ors say no when questioned about joining the stampede. argued that the market in virtue is mainly demand-driven Professionals in the dominant market then scream to the in Australia. Sakurai and Braithwaite’s (2003) data show tax authority and to their political masters because they that individual Australian taxpayers overwhelmingly pre- are losing business to the market in vice. Then the tax fer an ‘honest, low fuss’ tax adviser over a gameplayer authority garners the extra resources and the political will who aggressively pursues loopholes. That is the kind of to crack down on the shelters. This takes long enough to tax adviser they mostly want and that is what they mostly mobilise for the market in vice to accumulate stupendous get. This demand for an ‘honest, low fuss’ adviser consti- wealth before shelters are shut down. At the end of the tutes a market for tax advice that is to this extent a market crackdown, shelter promoters are discredited, shunned in virtue. by taxpayers who stampede back into the market in virtu- When someone cautions a taxpayer, it is rarely a tax ous advice. Even so, participating in the cyclical niche mar- official. Usually it is a tax adviser who the taxpayer em- ket in vice can have been a good business choice for the ployed to do so. This is to say, when our adviser frowns, shelter promoter. Some of their clients may lose their for- most of us respond with ‘oh dear, then we’d better not tunes after the shelter bubble bursts. The promoters, so do that’. This reality that demand in the tax advice market long as they stay out of jail, which is usually not difficult, is predominantly for tax compliance virtue is a great re- just lose their future income stream. Their business model source for tax authorities. If the authority is concerned that is to make their fortune while the bubble is expanding, tax morality is becoming loose, for example on employee then retire or move onto something else when it bursts. work expenses, a good way to tighten it can be to get the There is a more general problem of the risks markets in message out to tax advisors that the authority has this con- vice pose to contemporary capitalism. Rogue traders in cern and is therefore planning to target the issue. Then tax derivatives and other products can aggressively trade other advisers will do a lot of tapping people on the shoulder to peoples’ money in pursuit of bonuses that will be paid for check the legitimacy of their work expenses. A tap on the large gains. When large losses occur, it is their clients or shoulder is all most taxpayers need to improve their com- their shareholders who suffer. While the traders are dis- pliance. Those who do not retain a tax advisor might still credited as traders, they have siphoned fortunes from their be cautioned by family members or workmates who do. firms through their bonuses while the bubble rose. The bo- When a tax authority announces an intent to attack a par- nuses might stop when it bursts, but if they have been ticular corporate tax shelter after it becomes widely aggressive enough on the upswing, their nest egg is so abused, even if tax advisers who put clients into that shel- huge that they are well set up.
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