THREEPATHWAYSTOGLOBALSTANDARDS: … · THREEPATHWAYSTOGLOBALSTANDARDS: PRIVATE,REGULATOR,ANDMINISTRYNETWORKS By Stavros Gadinis* The proliferation of international standards has …

THREE PATHWAYS TO GLOBAL STANDARDS:PRIVATE, REGULATOR, AND MINISTRY NETWORKS

By Stavros Gadinis*

The proliferation of international standards has triggered heated debates in recent years.From human rights to environmental protection, from the Internet to financial derivatives,from antitrust to missile technology, international standards govern some of the most impor-tant issues of our day. These standards are not legally binding, but scores of governmentsaround the world have incorporated them wholesale in their national legal orders. The draftersof these standards are not political leaders, formal government representatives, or internationalorganizations,1 but rather informal committees of ministry officials, regulators, or privateexperts. Labeled transnational regulatory networks, these informal bodies have puzzled legalscholars and international relations theorists. Why do states adopt these standards instead ofproducing their own laws? How do these new global standard setters come about, and what aretheir goals? Addressing these questions has been the source of both “euphoria” and “anxiety,”as a leading commentator has recognized.2

Fascinated by the institutional novelty of the network phenomenon, early accounts of net-work activity were quick to highlight the common characteristics of these polymorphous inter-national bodies. Theorists in this tradition argue that networks’ informal processes allow them

* Assistant Professor of Law, UC Berkeley School of Law. Email: [email protected]. I would like to thankKenneth Abbott, Daniel Abebe, Afra Afsharipour, Richard Albert, Julian Arato, Ken Ayotte, Stephen Bainbridge,Stuart Banner, Mehrsa Baradan, Robert Bartlett, Omri Ben-Shahar, Gabriella Blum, Anu Bradford, Richard Bux-baum, Adam Chilton, John Coates, Ruth Collier, Steven Davidoff Solomon, Dhammika Dharmapala, Aaron Dhir,Onnig Dombalagian, Jeffrey Dunoff, Robin Effron, Zachary Elkins, Adam Feibelman, Allen Ferrell, LaurelFletcher, Jesse Fried, David Gamage, David Gartner, Anna Gelpern, Jacob Gersen, Jack Goldsmith, Erica Gorga,Todd Henderson, Bert Huang, William Hubbard, Howell Jackson, Kathryn Judge, Ehud Kamar, Roberta Karmel,Sung-Hui Kim, Reinier Kraakman, Prasad Krishnamurthy, David Landau, Maximo Langer, Saul Levmore, OdetteLienau, Katerina Linos, Omri Yitzhak Marian, Jonathan Masur, Richard McAdams, Justin McCrary, Tom Miles,Martha Minow, Jennifer Nou, Anne Joseph O’Connell, Jason Oh, Saule Omarova, Eric Pan, Kish Parella, PanosPatatoukas, Eric Posner, Shruti Rana, Annelise Riles, Chris Robertson, Mark Roe, Julie Roin, Heidi Schooner, HalScott, Holger Spamann, Matthew Stephenson, Lior Strahilevitz, Steven Sugarman, Symeon Symeonides, Eric Tal-ley, Pierre-Hugues Verdier, Andrew Verstein, Michael Waibel, David Weisbach, Mark Wu, Jacob Yackee, YeshaYadav, John Yoo, David Zaring, Nick Ziegler, and John Zysman, as well as participants at the American Societyof International Law Mid-year Research Forum, Conference of Empirical Legal Studies, University of Chicago LawSchool Faculty Workshop, U.C.L.A. Law School Faculty Workshop, Brooklyn Law International Business Round-table, U.S. Securities and Exchange Commission Brown Bag Series, Harvard Law School Faculty Workshop,Tulane Law School International Finance Workshop, ASIL International Organizations Workshop, ASIL Inter-national Economic Law Group, Berkeley Comparative Politics Workshop, Berkeley Law Faculty Workshop, andBerkeley International Financial Regulation Workshop. I am grateful for support from the Hellman FellowshipFund. All mistakes and omissions remain my own.

1 For the role of international organizations in producing international law, see JOSE E. ALVAREZ, INTERNA-TIONAL ORGANIZATIONS AS LAWMAKERS (2006).

2 See Annelise Riles, The Anti-network: Private Global Governance, Legal Knowledge, and the Legitimacy of theState, 56 AM. J. COMP. L. 605, 605 (2008).

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to build new avenues for cross-border cooperation and to respond more quickly to rapid devel-opments in global markets.3 For others, the reputational ties that network members developvis-a-vis their counterparts in other jurisdictions are the driving force for the networks’ expan-sion.4 Seen in this light, transnational networks carry significant normative appeal, as they pro-vide an informal venue where policy makers from around the world can participate at their ownvolition and take common positions without ceding decision-making power.

But as discussed in greater detail in part I, other scholars see these advantages as being coun-terbalanced by significant deficiencies: difficulties in addressing problems with important dis-tributional consequences that might bring network states to loggerheads with one another;5

lobbying by domestic interest groups in favor of rules that narrowly favor domestic actors;6 andthe capacity of powerful states to single-handedly impose their preferred rules,7 especially sincetrade partners have little choice but to comply if they still want access to those countries’ mar-kets.8 In response to these challenges to their legitimacy and as institutions for accountableglobal governance, networks have deployed methods used in domestic law to promote trans-parency and participation, as scholars in the Global Administrative Law project have shown.9

These various critics have attacked both the inputs to network standard setting, be it lob-bying by powerful industries or pressure from rich states, and the outputs, portrayed as homo-geneous regimes with little concern for the needs of different economies. What remains elusiveare the mechanisms through which networks absorb these inputs, shape their own operationand governance around them, and translate them into standards. These mechanisms are thefocus of this study. By opening up the black box of network standard setting, this study will(1) present a systematic study of networks’ operations, (2) identify general trends that extendbeyond subject-matter particularities, (3) pinpoint the elements of network governance thatinspire adopters to join, and (4) evaluate the reach of diverse criticisms leveled against net-works.

The starting point for such an approach to networks, I argue, lies in a key characteristic thatearlier accounts have overlooked: the lawmaking powers of network participants in theirrespective domestic legal orders. When global policy reforms are the object of internationaltreaties, states undertake to mobilize their domestic legislative machinery so as to comply withtheir international obligations. But as networks do not involve sovereigns, they need to employdifferent institutional channels to accomplish their reform objectives. Some networks connectexclusively nonstate actors, which must convince governments to get on board with their

3 See ANNE-MARIE SLAUGHTER, A NEW WORLD ORDER 8 (2004); David Zaring, International Law by OtherMeans: The Twilight Existence of International Financial Regulatory Organizations, 33 TEX. INT’L L.J. 281, 286(1998).

4 See Chris Brummer, How International Financial Law Works (and How It Doesn’t), 99 GEO. L.J. 257, 262–63(2011).

5 See Pierre-Hugues Verdier, Transnational Regulatory Networks and Their Limits, 34 YALE INT’L L.J. 113, 115(2009).

6 See Stavros Gadinis, The Politics of International Financial Regulation, 49 HARV. INT’L L.J. 447, 447–53(2008).

7 See DANIEL W. DREZNER, ALL POLITICS IS GLOBAL 58–59 (2007).8 See Anu Bradford, The Brussels Effect, 107 NW. U. L. REV. 1, 27–28 (2012).9 See Benedict Kingsbury, Nico Krisch & Richard B. Stewart, The Emergence of Global Administrative Law, 68

LAW & CONTEMP. PROBS. 15 (2005); Benedict Kingsbury, The Concept of Law in Global Administrative Law, 20EUR. J. INT’L L. 23 (2009). The argument is not limited to networks but applies to international organizations moregenerally.

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reform agendas. Other networks consist of regulators, which have powers to adopt new rulesinsofar as these rules fall within their statutory mandates. And still other networks rely on exec-utive officials directly accountable to elected leaders, who can use their government positionsand political leverage to push forward broad legislative overhauls linking multiple issue areas.Differences between private self-regulatory bodies, administrative agencies, and politicalappointees have motivated an extensive literature in domestic law that illustrates these bodies’diverse incentives and skill sets. This literature concludes that delegation to each of these threetypes of bodies has distinct functional advantages and raises distinct concerns.10

The differences between these three actor types, I argue, provide the basis for a systematicaccount of transnational networks that can better answer questions about these networks’ cre-ation, motivations, cross-border appeal, and ultimate desirability. The distinct institutionalcapacities of participants in each type of network determine not only the networks’ means butalso their missions, the relationships between peers, their implementation efforts, and the rea-sons countries want to join them.

To start, private actors have no policy-making powers under domestic law and thus mustconvince institutional players that have such powers—regulators, legislatures, or executivebranch officials—to adopt their standards. Private actors’ strongest card in such an effortwould be the validation of their standards by markets. To obtain markets’ approval, privatenetworks not only encourage firms to follow their standards voluntarily but also register marketreactions and then revise the standards, if necessary, to gain a positive market endorsement. Byshowing to policy makers the tangible benefits that investors, consumers, or other constituentsenjoy after they have voluntarily adopted the standards, the network can argue that these ben-efits will extend to the entire country when the same standards become mandatory. Once onecountry adopts the standards as law and gains a regulatory advantage, policy makers in com-petitor countries, whose industries risk falling behind, may become concerned. By adoptingthe standards themselves, competitors can eliminate any resulting gap. Thus, I hypothesize thatstandards created by networks of private market participants spread more readily among coun-tries whose national industries are in competition with one another.

To gain the market endorsement that is such a pivotal step for the spread of their standards,private networks design their drafting processes and internal structures accordingly. These net-works’ drafting processes are bottom-up. Private professionals with long careers and estab-lished reputations formulate the standards, while practitioners who follow the standards vol-untarily provide feedback to the networks, which fine-tune their standards accordingly. At thesame time, private networks seek to build a reputation as technocratic, a-national standard set-ters, rather than as instruments of specific governments or regulators. To this end, they takegreat pains to shield drafting processes from governments and regulators, which cannot par-ticipate in the networks or vote for the adoption of standards.

In contrast to private actors, national regulators have significant policy-making and enforce-ment powers that are directed at overseeing a specific sector, such as securities, or addressinga specific policy concern, such as environmental protection. Regulators see their powers erodedin a globalized market, in which violations might originate in another country beyond regu-lators’ reach, or in which foreign regimes might attract firms looking for lighter supervision.Expecting that these same problems also bedevil their counterparts across the border, regulators

10 See infra text accompanying notes 33–40.

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enter international networks in order to build channels of cooperation with foreign authorities.The key appeal of entering such networks lies in reciprocity: for example, regulator A under-takes to assist regulator B by conducting enforcement actions in its territory on B’s behalf, onthe understanding that B will similarly undertake actions in its territory on A’s behalf when thatneed arises. But given the wide variation of regulatory frameworks in different countries, reg-ulators within the network must make sure that any new entrants are able to reciprocate. Thus,I argue that regulators’ standards are more likely to spread among countries whose regulatorshave institutional capacities similar to those of existing networks members, and thus can makegood on the promise to reciprocate.

Because networks of regulators encourage sharing institutional resources among their mem-bers, their institutional arrangements foster cooperation in communities of peers. Upon join-ing a network, participating regulators send representatives to work closely with foreign col-leagues in various committees responsible for drafting proposals for standards. These proposalsreceive approvals from collective organs with the participation of all network members. Absentfrom these decision-making processes are both executive branch officials and private actors,whose input is limited to consultation at the drafting stage. The networks foster members’ senseof community by organizing technical assistance programs in which regulatory officials sharetheir experiences and train their colleagues in enforcement approaches. If regulators fail to per-form their obligations, they risk losing the reciprocal benefits of membership and tarnishingtheir reputations. Although well-resourced regulators are likely to play a greater part in staffingcommittees, offering technical assistance, and imposing sanctions, networks are set up toencourage participation by all members seeking to contribute.

Whereas national regulators’ powers are constrained by statute to specific sectors, executivebranch officials are in charge of a government apparatus that extends across multiple sectors andthat even has the power to bring previously unregulated activities under its oversight. Thus,ministry executives’ networks can promote broad political initiatives and combine actions bymany different government departments. Moreover, as parts of the executive branch, minis-tries can achieve their goals by utilizing means of pressure available to states. For example, theycan condition foreign aid or military assistance on joining a network. For these reasons, I argue,members’ influence and power relations form the pathway through which these networks’standards spread around the world.

Powerful countries will exercise their influence not only to promote the expansion of theirnetworks but also to structure relationships within them. These countries will take the lead inthe drafting process and will be the ones whose views—and votes—carry the most weightwithin ministry networks. By contrast, peripheral states will be confined to secondary roles.Compliance with ministry networks’ standards is often achieved through measures typicallyseen in foreign policy, such as the threat of economic sanctions. In view of such consequences,assessing members’ implementation efforts takes on a more formal guise, with delegations ofofficials visiting member countries to conduct on-site investigations.

To explore this theory empirically, this project identifies three networks in similar issue areasbut whose participants are private market players, regulators, and ministry officials, respec-tively. In this way, comparisons among the three networks are more likely to capture differ-ences in participants rather than subject-matter specificities. This study finds its three paradig-matic standard setters in the area of financial regulation. International finance has been at thecenter of attention since theorists started exploring networks as a distinct phenomenon, and



it offers some of the most celebrated examples of global coordination. Because subject-matteridiosyncrasies may affect networks’ operation in important ways, not all networks may behaveexactly as the ones included here. Thus, while this study cannot offer precise predictions forevery network, it can underscore the general dynamics that the lawmaking powers of networkparticipants create, both for the networks themselves and for the countries that join them, andit can sketch the broad contours in which the networks operate. Exploring how this theorytranslates into other areas of law is a project for fruitful future research, although this article’sconcluding remarks chart first steps and provide some additional examples of networks.

To narrow down the substantive scope of the inquiry even further, the three standards stud-ied below pertain to securities regulation. More specifically, accounting provides an exampleof a private network: the International Accounting Standards Board (IASB) was established byprofessionals to draft the International Financial Reporting Standards (IFRS) for publiclytraded companies. Securities regulators have formed their own separate network, the Interna-tional Organization of Securities Commissions (IOSCO), which has promoted cross-bordercooperation standards through its Multilateral Memorandum of Understanding (MMOU).Finally, ministry executives have joined forces to fight money laundering and terrorist financ-ing, creating the Financial Action Task Force (FATF), whose 40 Recommendations have beenwidely adopted.

The proposed theoretical claims have empirical implications both for the institutionaldesign of networks and for the patterns through which their standards spread. To explore bothdimensions, this study offers two types of evidence. First, three case studies provide a deeperlook at the characteristics of each network type. They demonstrate how private, regulator, andministry networks set out with separate motivations, organize their internal governance anddrafting processes to suit their particular needs and capabilities, and launch distinct implemen-tation efforts and sanctions. Second, quantitative evidence shows that the mechanisms of stan-dard promotion illustrated in the case studies are consistent with the distinct patterns throughwhich each network’s standards spread around the world. Prior empirical studies on interna-tional financial standards11 are few, focus mostly on IFRS, and do not account fully for theeffect that one country’s decision to join a network has on other countries—a key con-sideration for studies of laws’ spread across borders.12

This study’s data set covers 191 countries over a 23-year period from 1990 through 2012.The analysis explores how the likelihood of a country adopting a network’s standards changesbased on the characteristics of other countries that have already joined the network, while con-trolling for various domestic and international factors. The results indicate that one country’sdecision to join a set of international standards depends on other countries’ decisions in distinctways, according to the type of network at play. When private market professionals promulgate

11 See Daniel E. Ho, Compliance and Soft Law: Why Do Countries Implement the Basle Accord?, 2002 J. INT’LECON. L 647 (2002); William Judge, Shaomin Li & Robert Pinsker, National Adoption of International AccountingStandards: An Institutional Perspective, 18 CORP. GOV’T 161 (2010); Curtis E. Clements, John D. Neill & O. ScottStovall, Cultural Diversity, Country Size, and the IFRS Adoption Decision, 26 J. APPLIED BUS. RES. 115 (2010);David Bach & Abraham Newman, Domestic Drivers of Transgovernmental Regulatory Cooperation, 8 REG. & GOV-ERNANCE 395 (2014); Karthik Ramanna & Ewa Sletten, Why Do Countries Adopt International Financial ReportingStandards? (Harvard Bus. Sch. Accounting & Mgmt. Unit Working Paper No. 09-102, 2009), at http://www.hbs.edu/faculty/Publication%20Files/09-102.pdf.

12 For a discussion of how these effects differ from theories of socialization or acculturation of states, see infranote 22.


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standards, as in the case of IASB, countries are more likely to adopt the standards when theircompetitors have already adopted them. When the standards are the handiwork of regulators,however, as in the IOSCO example, earlier adoption by regulators with similar institutionalcapacities plays a key role. Finally, standards promoted by government officials, as in FATF,show patterns of spread that suggest the influence of powerful governments.

The article proceeds as follows. Part I introduces the theory proposed in this study, explain-ing how each network’s organizational elements, drafting process, and implementation effortsreflect the distinct capabilities of each network’s members. It also formulates hypotheses thatconnect the domestic lawmaking capacity of network participants with specific mechanismsthrough which their standards spread around the world. Part II begins by explaining why thestudy focuses on these three standards, and contains the case studies that explain in detail howIASB, IOSCO, and FATF draft and adopt standards, regulate membership and governance,and structure implementation efforts and sanctions. Part III discusses the construction of thedata set and presents the timeline, geographic reach, and popularity of each set of standardsamong different groups of countries. Part IV presents the methodology employed to capturecountry-to-country influences and shows how the character of prior adopters influenced eachstandard’s spread. Part V concludes by outlining the implications of the theory and findingsfrom the perspective of democratic accountability and institutional design for global gover-nance.

I. HOW NETWORKS DIFFER: A THEORY

Current Theories of Regulatory Networks

As international lawyers have long recognized, to convince many diverse states to alter theirpreferred policies requires significant effort. Even in the case of international treaties, compli-ance is far from certain.13 In light of such well-established difficulties, it is surprising to seeinformal bodies succeed where sovereign states stumbled. In recent years, many states havedecided to abandon their national policies and, instead, to adopt wholesale, as their domesticlaw, various international standards, best practices, recommendations, principles, or guidance.Whatever the formal title, the implication is clear: states are free to adopt such rules out of theirown volition. Typically, the rules are the handiwork of informal associations of state officials,national regulators, or even nonstate actors, such as industry professionals or experts. Recog-nized by legal and international relations scholars as transnational regulatory networks,14 thesebodies provide ongoing forums for negotiating and revising their respective rules, as well as avehicle for direct cooperation among their members.

The widespread consensus among lawyers and political scientists is that networks have beensuccessful in getting their standards enshrined as domestic law in many states15 and in expand-ing their membership. Anne-Marie Slaughter has famously heralded networks as the agents ofa “new world order.” Even those who express skepticism about networks’ positive portrayals

13 See, e.g., Katerina Linos, How Can International Organizations Shape National Welfare States? Evidence fromCompliance with European Union Directives, 40 COMP. POL. STUD. 547, 547–48 (2007).

14 See Anne-Marie Slaughter, International Law in a World of Liberal States, 6 EUR. J. INT’L L. 503 (1995).15 See Roberta S. Karmel & Claire Kelly, The Hardening of Soft Law in Securities Regulation, 34 BROOK. J. INT’L

L. 883 (2009).


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in the literature do not doubt their preeminent position in the international architecture.16 Buthow can we explain networks’ rise? What are the reasons that lead states to join networks andadopt their standards?

Prominent scholars have proposed various theories in an effort to explain the spread of inter-national standards through networks. An early wave of scholarship, mostly in law, emphasizedthe advantages of networks’ informal structure, compared to rigid and costly-to-negotiateinternational treaties.17 Others argue that regulators in a network meet their peers frequentlyand develop a reputation toward them, which they feel compelled to uphold by complying withthe networks’ directives.18 Yet, as networks have expanded into hundreds of participants, rela-tionship links are growing at once harder to build and easier to overrun. Moreover, networkshave had to sacrifice some of their flexibility and informality when they have adopted moreformal procedures modeled on domestic administrative law’s notice-and-comment templatein an effort to gather the views of many constituents.19 This development has not preventednetworks from gaining new followers, however, or from launching into rule revisions.

Other scholars are less inclined to see networks as effective cooperation mechanisms. Someturn their attention to the economic goals and domestic politics of states that join the network.They argue that domestic interest groups lobby their governments in favor (or against) globalrules that could confer on them a regulatory advantage compared to their international com-petitors, or that could entrench them in protectionist regimes.20 Others claim that, behindtheir highly technical facade, global rules involve deep distributional conflicts that unelectedbodies are ill equipped to address.21 By contrast, others claim that ideas and norms, rather thanmaterial incentives, are behind the global spread of standards. They argue that states that adopta policy gradually acculturate others into joining, particularly through meetings in interna-tional forums such as networks.22

Another group of critics take issue with the claim that networks provide a global forum inwhich all states can participate on more or less equivalent terms. They argue that powerful statesthat control important economic centers can promote their preferences more effectively withinnetworks.23 In some cases, jurisdictions with important markets become the de facto globalregulators, as products designed to comply with these markets’ requirements are also exported

16 See Pierre-Hugues Verdier, The Political Economy of International Financial Regulation, 88 IND. L.J. 1405(2013).

17 See Kal Raustiala, The Architecture of International Cooperation: Transgovernmental Networks and the Future ofInternational Law, 43 VA. J. INT’L L. 1 (2002); Zaring, supra note 3.

18 See Brummer, supra note 4.19 See David Zaring, Three Challenges for Regulatory Networks, 43 INT’L LAW. 211 (2009).20 See Gadinis, supra note 6.21 See Verdier, supra note 5.22 For useful overviews of relevant literatures in political science and sociology, see Frank Dobbin, Beth Simmons

& Geoffrey Garrett, The Global Diffusion of Public Policies, 33 ANN. REV. SOC. 449 (2007); Ryan Goodman &Derek Jinks, How to Influence States: Socialization and International Human Rights Law, 54 DUKE L.J. 621 (2004);ALASTAIR IAIN JOHNSTON, SOCIAL STATES: CHINA IN INTERNATIONAL INSTITUTIONS, 1980–2000 (2008);RYAN GOODMAN & DEREK JINKS, SOCIALIZING STATES: PROMOTING HUMAN RIGHTS THROUGH INTER-NATIONAL LAW (2013). The theory presented below suggests that each state’s decision to join a network and adoptits policies alters the material incentives for other countries looking to join, because it makes the network moreattractive. See the discussion on network effects in “Applying the Theory to Global Standard Setters: Case Selec-tion” in part II.

23 See DREZNER, supra note 7.


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elsewhere.24 Moreover, the network format, by dividing global regulation in distinct func-tional spheres, prevents cross-issue linkages that could have allowed less powerful states tostrike a better bargain with dominant ones.25

These diverse perspectives raise doubts as to networks’ promise of a more inclusive, dem-ocratic, and egalitarian international regulatory system. Networks have sought to allay suchcriticisms by adopting procedures that boost their legitimacy toward their constituents in waysthat resemble rulemaking in the domestic regulatory state, as scholars in the Global Admin-istrative Law project have pointed out.26 Networks offer improved transparency regardingtheir decision making, invite constituents to participate by circulating reports and drafts forconsultation, and give reasons for their ultimate choices.27 Inspired by the ideals of account-ability and fairness through process, writers in this tradition have documented the formulationof global administrative law principles in various issue areas28 and across borders.29 This schol-arly effort has brought to light a variety of ways in which formal and informal internationalbodies use procedural devices to further shared normative objectives of fairness, accountability,and democratic decision making.

While these criticisms assert that factors exogenous to the network affect its policy-makingdecisions, more recent research focuses, instead, on the goals and aspirations of network insid-ers. The regulatory officials, ministry appointees, or private industry experts that participatein networks bring to the table not only their technical knowledge but also the policy-makingagendas that they advance in their domestic careers. In fact, a network presents these domesticactors with the opportunity to win policy battles at the global level. Some theorists argue thatthe network format favors strong domestic regulators: administrative bodies that have theresources, staffing, and policy-making capacity to propose and formulate ready-to-implementrules and principles.30 Typically, these regulators would be ones with a clear domestic mandateand exclusive competence to regulate the sector or industry relevant to the network. The morecomplementary a country’s national regulatory structure appears to the international one, thestronger its voice on international standard setting.

The theory proposed in this study develops these insights further. By refocusing the inquiryfrom general pros and cons of network standards to the pursuits and resources of specific net-work participants, this line of research makes a crucial first step in understanding how domesticadoption comes about. It views network participants not as pieces in a global chessboard that

24 See Bradford, supra note 8.25 See Eyal Benvenisti & George W. Downs, The Empire’s New Clothes: Political Economy and the Fragmentation

of International Law, 60 STAN. L. REV. 595, 597 (2007).26 See Kingsbury et al., supra note 9; Kingsbury, supra note 9.27 See Benedict Kingsbury & Lorenzo Casini, Global Administrative Law Dimensions of International Organiza-

tions Law, 6 INT’L ORG. L. REV. 319, 325 (2009).28 See, e.g., Errol Meidinger, The Administrative Law of Global Private-Public Regulation: The Case of Forestry, 17

EUR. J. INT’L L. 47 (2006); Gus Van Harten & Martin Loughlin, Investment Treaty Arbitration as a Species of GlobalAdministrative Law, 17 EUR. J. INT’L L. 121 (2006).

29 See generally GLOBAL ADMINISTRATIVE LAW: TOWARDS A LEX ADMINISTRATIVA (Javier Robalino-Orellana& Jaime Rodrıgues-Arana Munoz eds., 2010) (exploring how the principles and values of global administrative lawreverberate in various states).

30 See TIM BUTHE & WALTER MATTLI, THE NEW GLOBAL RULERS: THE PRIVATIZATION OF REGULATIONIN THE WORLD ECONOMY 12 (2011).


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simply channel other groups’ preferences, but as actors with separate objectives and policy con-siderations. Following this lead, the paragraphs below introduce domestic institutional capac-ities as a distinct dimension in the profile of network participants, so as to link their interna-tional initiatives with their domestic roles.

The Mechanisms of Network Standard Setting

The literature discussed above provides a rich portrayal of transnational networks. Some the-orists focus on networks’ impressive outputs, either applauding the efficiency gains of globalregulatory coordination or lamenting the downplaying of national particularities.31 Otherscholars focus, instead, on the inputs to networks’ standard setting, whether these inputs areinterest group preferences, powerful-country desires, subject-matter characteristics, or well-re-sourced regulators’ templates.32 Yet we still lack an account of the mechanisms through whichnetworks process these inputs and produce global coordinated standards.

To chart the mechanisms of network standard setting, this study turns to a significant lit-erature in domestic law, which has analyzed rulemakers with powers delegated from the electedbranches. From a domestic legal perspective, accounts of private self-regulatory bodies, admin-istrative agencies (in particular, independent ones), and political appointees start from differ-ent perspectives. Private lawmakers, such as professional associations or self-regulatory orga-nizations, take on some of the state’s legislative privileges.33 Thus, to grant lawmaking powersto these bodies is appropriate when self-interested considerations for private gain are thoughtto be in line with general social welfare—for example, when private actors must maintain a rep-utation for integrity.34 But even under these conditions, some firms or individuals might haveincentives to violate shared norms so as to obtain greater short-term profits.35

The rationale for creating executive and independent administrative agencies, along withthe contraints that typically accompany delegated rulemaking, has long preoccupied admin-istrative law theorists. Insulating administrative agencies from direct political control is justi-fied on the basis of agencies’ high technical expertise and dispassionate decision making for thelong run.36 Yet, concerns about lack of accountability to voters have worried both courts,37

which have suggested that delegation to agencies has to be kept within bounds, and admin-istrative law scholars, who have argued for greater political control over the bureaucracy.38

31 See “Current Theories of Regulatory Networks” in part I.32 Id.33 See Alec Stone Sweet, The New Lex Mercatoria and Transnational Governance, 13 J. EUR. PUB. POL’Y 627, 627

(2006); Stavros Gadinis & Howell E. Jackson, Markets as Regulators: A Survey, 80 S. CAL. L. REV. 1239, 1250(2007).

34 See Reinier H. Kraakman, Gatekeepers: The Anatomy of a Third-Party Enforcement Strategy, 2 J.L. ECON. &ORG. 53, 54 (1986); Robert D. Cooter, Decentralized Law for a Complex Economy: The Structural Approach to Adju-dicating the New Law Merchant, 144 U. PA. L. REV. 1643, 1656–59 (1996).

35 See Kenneth A. Bamberger, Regulation as Delegation: Private Firms, Decision-Making, and Accountability in theAdministrative State, 56 DUKE L.J. 376, 383 (2006).

36 See Lisa Schultz Bressman & Robert B. Thompson, The Future of Agency Independence, 63 VAND. L. REV. 599(2010); Rachel Barkow, Insulating Agencies: Avoiding Capture Through Institutional Design, 89 TEX. L. REV. 15, 24(2010); Mark Tushnet, Administrative Law in the 1930s: The Supreme Court’s Accommodation of Progressive LegalTheory, 60 DUKE L.J. 1565 (2011).

37 Whitman v. Am. Trucking Ass’ns, 531 U.S. 457 (2001).38 See James F. Blumstein, Regulatory Review by the Executive Office of the President: An Overview and Policy Anal-

ysis of Current Issues, 51 DUKE L.J. 851, 885 (2001); Elena Kagan, Presidential Administration, 114 HARV. L. REV.


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More recently, the scope of executive power entrusted to elected politicians has been thefocus of renewed debate following national emergencies such as the 9/11 terrorist attacks and2008 financial crisis.39 Many jurisdictions responded to the 2008 crisis by shifting importantpowers, such as authorizing interventions to banks nearing collapse, away from independentagencies and toward political appointees.40 While elected politicians enjoy the legitimacy thatstems from direct connections to voters, they may focus disproportionately on short-term pol-icies that can win them support in the next election, at the expense of long-term planning.

Private actors, national regulators, and ministry officials are also the key actors that createinternational networks aimed at global policy reforms. Table 1 and the ensuing discussiondevelop empirical predictions that link each network type with different drafting processes andgovernance arrangements, designed to best further distinct strategies for gaining country adop-tions. The next section (“Networks’ Institutional Profiles Affect How Their StandardsSpread”) develops hypotheses connecting each network’s strategy, with predictions regardingthe patterns by which standards spread.

Before launching into the analysis of differences among transnational networks, whichforms the theoretical core of this article, it is necessary to acknowledge their many similarities.As drafters of regulations, all three types of networks cater to similar constituents, such as con-sumers, investors, and the industry. Dynamics from relationships with constituents—forexample, the forces that public choice theories have illustrated—are likely present in all threecases. As technocratic organizations, they all draw from their participants’ expertise andmay suffer from the tunnel-vision distortions that sometimes plague experts. As nongov-ernment entities, all three types have a tenuous relationship with sovereign states, whichwho might see international lawmaking as an encroachment on their privileges. Finally,as international bodies, they are all prone to disagreements arising from national prefer-ences. Yet, in choosing how to respond to these common forces, private, regulator, andministry networks have different options that arise from the different lawmaking capac-ities of their participants. For example, while securing markets’ endorsements of a pro-posed rule is an important win for any lawmaker (whether in the administrative or exec-utive branch of government), regulators and ministries have greater flexibility than privatebodies to move against markets’ desires. It is these differences, outlined in Table 1, thatare explored in the theory proposed below.

Key motivation. Influencing global policy and law is a common goal for all networks, but eachtype of participant is likely to bring aspirations to its network that are unique to the partici-pant’s institutional background. Private networks bring together professionals with extensiveexperience on the ground, direct knowledge of market developments,41 and a strong vision for

2245, 2384 (2001); Laurence Lessig & Cass R. Sunstein, The President and the Administration, 94 COLUM. L. REV.1, 103 (1994).

39 See Eric A. Posner & Adrian Vermeule, Crisis Governance and the Administrative State: 9/11 and the FinancialMeltdown of 2008, 76 U. CHI. L. REV. 1613 (2009); Eric A. Posner & Adrian Vermeule, Accommodating Emer-gencies, 56 STAN. L. REV. 605 (2003).

40 See Stavros Gadinis, From Independence to Politics in Financial Regulation, 101 CAL. L. REV. 327 (2013).41 In countries with a professional civil service, like the United Kingdom or Germany, industry practitioners in

private networks have very different backgrounds from career bureaucrats. But even in countries like the UnitedStates, where people move between private practice and the government more commonly, a separate network allowsprivate practitioners to promote their agendas uninhibited by political realities, regulatory directives, or institu-tional limitations, all of which can influence government initiatives.


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the rules most appropriate to govern their industries. Drafting standards will allow them to tapinto these experiences for the common good and to express, in fully formed rules, what theyhave learned after years in practice. Thus, for private market participants, creating a networkis a way to advocate for their vision on a global scale, free from what they perceive as the dis-tortive influence of national politics. But by offering global blueprints for their industries, theseindividuals are also promoting their own—and their firms’—interests in national and inter-national markets. Their standards are likely to reflect the policies, practices, and approachesdeveloped by large, elite firms, which typically have resources superior to those of their smallercompetitors and can thus boast that they provide higher-quality services.42 Moreover, by con-vincing governments around the world to adopt their standards, these large players can expandthe market for their services beyond the borders of their countries of origin to the markets ofnew adopters. At the same time, the implementation of global standards can reduce the coststo those firms of training and monitoring professionals from foreign jurisdictions.

Where private players see opportunities in the global marketplace, national regulators seechallenges. Violations of laws often start in one jurisdiction and extend into another. Cross-border misconduct is hard to pursue without cooperation from local authorities or a commonset of rules. Moreover, because of globalized markets, regulators often recognize that imposinga set of standards in their own jurisdictions makes little sense if companies headquartered inneighboring jurisdictions or in those of important competitors are not subject to the samerestrictions. By joining networks, national regulators can harmonize standards and cooperate

42 For a discussion of the implications of global standards for multinational firms, see Gadinis, supra note 6, at470, and Bradford, supra note 8, at 27–28.

TABLE 1.PARAMETERS OF DIFFERENCE AMONG TRANSNATIONAL REGULATORY NETWORKS

Dimensions Private Regulator Ministry

Key motivation Express industry experience(and preferences) in rules

Enhance tools to promoteregulatory mission andprotect turf

Achieve broad policyobjectives inmultiple sectors

Strategy fordrafting andadoption

Extended engagementwith, and trial among,market participants

Regulators adoptstandards afterconsulting withconstituents

Collaboration amonggovernmentofficials fromvariousdepartments

Membership Private firms only;governments do notbecome members (evenafter adoption)

Stand-alone regulatorsdistinct from centralgovernment

Anyone can join, butfew countries havepowers

Governance Distance from governmentsand politics

Regulators participateequally as peers

Diplomats negotiatedirectly

Implementationefforts

Improving know-how Improving know-howand technical assistance

Improving know-how, technicalassistance, andmonitoring

Sanctions Exit from markets Lack of reciprocalcooperation

Potential sanctionsagainst violators’industries


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more effectively. Thus, national regulators join networks because they are looking for newpolicy-making tools that will enhance their ability to promote their regulatory missions andallow them to maintain and perhaps even expand their turf.

While national regulators’ missions are often constrained by domestic statutes, ministryexecutives typically enjoy wide latitude in formulating policy objectives. Thus, their initiativescan be ambitious, reflecting broad societal goals. For example, they can seek internationalcooperation in order to launch a fight against terrorism or drug trafficking, or they can hopeto promote world peace through a regime for controlling missile technology. Ministry initia-tives may span various issue areas and government departments, and may even expand intoissues that had not been subject to regulation before. Pursuing these important objectives canhelp increase the electoral appeal of individual ministers and even entire administrations.

Strategy for drafting and adoption. Since private networks’ members lack any legislative orrulemaking authority of their own, they can secure the adoption of their standards only by per-suading national authorities to enshrine them in local law. But what reasoning can they presentto argue that their standards are superior to alternatives? Private players’ best argument lies intheir deep understanding of market needs and opportunities: a strong endorsement from pri-vate firms is an excellent argument in favor of particular regulatory standards. In order to draftstandards that reflect market priorities and gain support from constituents, a bottom-up pro-cess is required. To start, a network can present a set of nonbinding standards designed toencapsulate its perceived “market wisdom” in rule-like format, so as to present a valid alter-native to domestic laws. But to gain traction, standards must signal commitment to a highlyregarded value, such as accuracy in financial reporting. In this way, the network can developa brand name, making compliance with the standards synonymous with the values that theyrepresent. By offering this high-quality signal, standards can appeal to market participants andgain an initial base of supporters: companies will start to abide by the standards; financial ana-lysts will become familiar with their requirements and monitor firm compliance; and investorsor consumers will start to value the brand. Once the standards gain salience in the market, theyare more likely to attract the attention of national authorities. The network can point to firms’voluntary compliance as evidence of the standards’ advantages over national laws. Moreover,the standards’ international reach can allow local firms to compete more effectively in foreignmarkets. Yet, this bottom-up process for standard drafting comes at a cost. It might take con-siderable time and effort for the network to reach a level of market penetration that wouldentice policy makers to consider adopting the standards as national law.

Unlike private market players, national regulators have domestic rulemaking and enforce-ment powers that they can readily use to adopt and implement international standards. How-ever, regulators’ powers are not unlimited; rather, their statutory mandates constrain their dis-cretion and tools. On the one hand, since regulators are likely to embrace only those networkproposals that fall within the scope of their statutory objectives, networks must tailor their stan-dards accordingly. On the other hand, the only offer that regulators can extend to their networkpeers is to assist them in ways allowed by their statutory mandate. Thus, the network’s task isto devise cooperation mechanisms that utilize regulators’ existing powers in ways that wouldappeal to regulators in other countries, which are the network’s potential new members. Forexample, regulator networks can pool resources to develop new policies or can offer assistancein enforcement actions. In return, new members can contribute their own domestic powers.



To balance objectives and constraints, national regulators are likely to require direct partici-pation in negotiations for establishing networks and drafting standards. Thus, the drafting pro-cess for regulator standards is likely to center on meetings of peer technocrats, as opposed tothe bottom-up process that private networks are likely to employ. Of course, regulator net-works could also benefit from the reactions of other constituents. Many regulators follow pub-lic consultation procedures in their domestic rulemaking, which they can replicate internation-ally by circulating proposals to the wider public. Regulators can consider any collectedfeedback, but they also have the authority to depart from constituents’ suggestions should theychoose to do so. Thus, regulator networks do not face the same strong pressures as private net-works to gain market endorsement.

Compared to the statutory boundaries defining the operation of national regulators, min-istry officials have few institutional limitations and can use their central positions in the exec-utive branch to push forward broad legislation. Ministry officials are directly accountable totheir political superiors, however, whose interests they also represent at the international level.As a result, their modes of communication will need to safeguard states’ interests. For example,they must maintain confidentiality in negotiations and provide a secure environment fornational representatives to try diverse bargaining approaches and strike multiple deals. Thus,meetings with foreign counterparts are likely to adhere to prototypes developed in interna-tional relations. Negotiations are likely to remain closed to the public, and to occur directlyamong officials, with announcements following after the successful completion of talks. Ratherthan participating directly in negotiations, private market players and other constituents willbe asked to channel their input through their respective national representatives. As in inter-national treaty negotiations, ministry executives from powerful countries are likely to obtaina leading role, as power relations and long-standing connections between governments cometo the forefront.

Membership.As private market players, regulators, and ministry executives have distinctmotivations and institutional sensitivities, they have strong incentives to turn to their foreignpeers when launching global policy-making initiatives. Peer groups are more likely to shareobjectives, even when disagreeing on means. Similar businesses and institutions are more likelyto assist one another on the ground when dealing with common problems. Moreover, peersare less likely to find themselves at opposite ends of law enforcement activities or investigations,which might prove detrimental to joint rulemaking efforts.43

Private networks’ appeal consists in their ability to rely on their connections with practitio-ners to deliver standards that markets favor. To persuade policy makers about the market val-idation of their standards, private networks can set membership terms that underline the mar-ket qualifications of their participants. But at the same time, a network’s membership andmanagement must be able to inspire policy makers with the confidence necessary to delegate

43 I do not mean to exclude the possibility that some networks might engage actors of two or even all three insti-tutional backgrounds when concerted action seems desirable. As an empirical matter, the Financial Stability Board,discussed in this article’s concluding remarks, is a “network of networks,” bringing together networks from all threetypes. However, the FSB’s constituents remain separate institutions—that is, it assigns different tasks to private,regulator, and ministry networks, a form of organization that represents a recent development in internationalfinancial networks. This article’s theory is potentially useful in developing predictions about its future course. Seeinfra text accompanying note 157.


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rulemaking power without requesting a direct hand in formulating rules. Governments wantan effectively run marketplace, not a set of rules that allows the industry to cheat.

To balance these conflicting objectives, private networks are likely to draw the members oftheir governing bodies from the ranks of high-profile industry professionals who combine tech-nical expertise with a reputation for integrity. To the extent that governments are allowed anyrole in network membership, it will be limited to ensuring that the persons nominated andelected have profiles that allow them to assume delegated rulemaking powers. But providinggovernments with more powers within the network would go against its market-oriented cre-dentials. Thus, governments are unlikely to be accepted as full members of the network, evenafter they have fully adopted the standards as domestic law.

While private networks seek to minimize any government involvement with their activities,regulator networks invite a specific type of government actor to participate: specialized gov-ernment agencies. Established by statute to oversee particular areas of the law, these regulatorsare separate from their governments because they have carefully defined powers, distinct insti-tutional structures, and highly specialized staffs. By bringing these regulators together, a net-work can create a pool of policy makers with the requisite powers to adopt its standards asdomestic laws and cooperate with each other on enforcement actions on the ground.44 Becausecountries’ administrative structures vary significantly, formal institutional prerogatives anddistinctions, such as criteria of independence from the executive, are not likely to be empha-sized. Instead, networks are likely to welcome effective regulators from other countries.

Membership rules must also preserve the separation between these regulators and the polit-ical leadership of their respective countries. Organizations that work hard to maintain theirinstitutional autonomy in the domestic sphere would be unlikely to join an international bodythat places them at the hands of national governments and exposes them to political head-winds. Regulators also have to maintain their distance from private industry, which they seeas a constituency that they must supervise closely for the greater societal good. Thus, govern-ments and industry bodies are unlikely to get to vote on a network’s standards, although a net-work might seek input from governments or from industry bodies and representatives.

National governments, mostly shut out from private and regulator networks, take the lead-ing role in putting together networks of ministry executives. To take advantage of the full pan-oply of options available in international relations, governments are better off negotiating withother governments. In this way, they can strike deals that include multiple areas of economicactivity or regulatory supervision, and they can apply pressure in various ways and offer benefitsthat are going to be politically valuable to foreign leaders.

Governance. For organizations seeking to add many new members beyond their initialfounders, as networks do, governance arrangements serve many purposes beyond regulatinginteractions among members. They need to encapsulate the founders’ motivations, to promotetheir drafting and adoption strategies, and to ensure that these strategies will remain intact asthe network expands. Adhering to these objectives is at once a network’s promise to existingmembers and its calling card for new ones.

44 See generally FABRIZIO GILARDI, DELEGATION IN THE REGULATORY STATE: INDEPENDENT REGULA-TORY AGENCIES IN WESTERN EUROPE (2008) (showing that some countries emphasize independence in theappointment process, others emphasize independence in budgetary resources, and others in decision making).


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To enhance the profile of the standards as endorsed by the market, private networks mustallay fears that the domestic politics of any particular nation are dictating those standards. Byemphasizing its standards’ a-national character, a network can more readily convince the gov-ernments of multiple countries to adopt them. Thus, private networks’ governance arrange-ments must safeguard the non-political, non-national origins of the standards45 and insulatestandard setters from pressures by either regulators or government officials. These principlesare likely to determine the appointment of a network’s management and, in particular, thecomposition of its standard-drafting body. Government authorities may express views aboutthe network’s standards, priorities, or overall progress, but no voting or appointment powersare likely to be conferred.

Regulator networks rely on their members to voluntarily adopt common standards and toput their domestic enforcement powers at the disposal of their foreign counterparts. For sucha strategy to work effectively, a network’s best option is to cultivate mutual respect and trustamong its members. Thus, its governance arrangements should allow members to express theirviews and concerns and to participate in decision making, and should provide for a process thatallows members to voluntarily commit to the proposed regulatory output. These governancesafeguards are also essential for regulators considering whether to enter the network, since reg-ulators might be wary of forgoing their domestic powers in favor of an unbending internationalregime. To establish mutual respect through peer participation and to assuage fears of disem-powerment, network governance is likely to provide voting rights to all regulators upon joiningthe network and adopting the standards. Note the contrast with private networks, which donot provide regulators with any say over their standards, even after domestic adoption.

The pursuit of market validation that animates private networks and the concern for insti-tutional autonomy that dominates regulator networks are likely to play only a secondary rolein the governance of ministry networks. Instead, these networks promote objectives in linewith their governments’ overall political goals, and they can rely on traditional means of pres-sure in international relations to gain adopters. Accordingly, ministry networks’ governance islikely to grant the leading role to the powerful states whose influence keeps the networkstogether—for example, by weighing these states’ votes more favorably. Important states arelikely to head the networks’ drafting efforts, participate in network management, and have akey vote on accepting new members. Even after joining, new members are unlikely to have thepower to undo core countries’ privileges.

Implementation efforts. To assist with a smooth transition from multiple domestic regimesto a single international one and also to bolster their standards’ reputation, networks engagein ongoing efforts to support the implementation of their standards. In structuring theseefforts, the institutional makeup of network participants is likely to play an important role.Private networks, which have no policy-making or enforcement powers of their own and tryto keep government authorities at bay, have to rely on others for implementation. Their bestoption is to assist the implementation indirectly, by educating the implementers. Private net-works are likely to focus on knowledge sharing: they can collect feedback from practitionersand suggest possible ways of dealing with hurdles on the ground. They may issue guidance,

45 See INTERNATIONAL FINANCIAL REPORTING STANDARDS FOUNDATION, CONSTITUTION, Arts. 25, 26,32 ( Jan. 2013) [hereinafter IFRS CONSTITUTION], at http://www.ifrs.org/About-us/IFRS-Foundation/Over-sight/Constitution/Pages/Constitution.aspx.


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either in the form of rules implementing the standards or in the form of memorandums andother unofficial commentary. As with drafting, the networks have to rely entirely on voluntaryparticipation for the success of these efforts.

Knowledge sharing can prove just as useful for regulator networks seeking to secure a smoothtransition to a harmonized regime across multiple countries. But while private networks musttry to educate implementers that have had little direct involvement with the networks, regu-lator networks need educate only their own members. Regulator networks can organize tech-nical assistance programs that go further than knowledge sharing; officials from experiencedmembers can introduce new entrants to techniques for supervision, investigation, and enforce-ment. Moreover, direct contact among officials from various national authorities can help cre-ate much tighter communities among network participants.

Ministry networks can also benefit from knowledge sharing and have the capacity to orga-nize technical assistance programs, as they include executive officials in their ranks. But as rep-resentatives of sovereign governments, they can also undertake commitments toward othergovernments in ways that extend beyond the powers of national regulators, such as throughmonitoring or dispute resolution mechanisms. For example, they may conduct periodicreviews of each member state’s implementation efforts, because members can make availabletheir domestic officials for interviews and provide documentation and other information. Pub-licly available reports can outline findings, praise successes, and identify failures in an effort todiscipline members into complying.

Sanctions. Private market networks do not have any formal sanctioning powers since theydo not belong in any jurisdiction’s regulatory hierarchy. Thus, implementation of thestandards can rely only on market-imposed sanctions, such as investors or consumers dis-counting the products of firms that evidently violate the standards. In many cases, market-imposed sanctions can prove effective, especially if the networks’ efforts to involve con-stituents in standard drafting is successful. States that adopt the standards in theirdomestic laws may either institute specific sanctions for violators or utilize the sanctionsavailable for other violations in that area of the law. These domestic law sanctions are likelyto vary significantly from country to country, however, and cannot be easily prescribed ormanaged by the networks.

While regulator networks can also, like private market networks, rely on market-imposedsanctions, they have an additional set of tools to encourage compliance with their standards:they can ask their members to employ their domestic supervision, investigation, and enforce-ment powers. These powers are primarily directed against domestic violators—that is, firms orindividuals that disobey the laws that incorporate a network’s standards in the domesticregime. But the network may also be able to rely on these powers in order to discipline member-regulators that have failed to implement the standards. When a national regulator fails to com-ply with network standards, its counterparts may deny cooperation under the reciprocalarrangements common in these networks. They may refuse regulatory assistance in a cross-bor-der case or refuse to recognize the foreign regulator’s supervisory reviews or licensing of firmsin its jurisdiction. The threat of withholding reciprocity will likely be the most severe sanctionthat a network can use against misbehaving members, as it cuts them off from the benefits ofjoining a community of peer authorities.

Whereas regulators’ sanctioning powers are constrained by their institutional capacities,ministry executives can utilize the panoply of measures afforded to governments by domestic



laws. For example, they can cut off foreign aid, withdraw military assistance, or impose taxationand duties on financial flows from these countries. Because of their sanctions’ firepower, min-istry networks can set in place compliance regimes that extract more obligations from theirmembers. For example, they can connect negative findings in their implementation reportswith the threat of sanctions. Such powers, which are available on top of any market-imposedsanctions, can instill members’ cooperation even before the sanctioning stage and may promotethe adoption of domestic reforms.

Networks’ Institutional Profiles Affect How Their Standards Spread

Networks’ respective institutional arrangements help them to develop standards bettersuited to their intended missions—that is, to encapsulate market wisdom, support their mem-bers’ regulatory functions, or pursue their governments’ political objectives. As a result, eachset of standards’ appeal to domestic audiences is also different, triggering separate pathways bywhich the standards spread.

As private market networks do not possess any regulatory or legislative authority, their suc-cess depends on firms’ voluntary decisions to comply in order to increase their appeal to inves-tors and consumers. By complying with these standards, firms signal to investors and consum-ers the high quality of their offerings. When private market networks have been successful ingetting their standards known to consumers, appreciated by the investment community, andadopted by many firms, they may attract the attention of national legislatures. Just as compli-ance with these standards helps individual firms reassure investors and consumers about theirproducts’ quality, it can also help a national industry—a group of firms—offer these reassur-ances. Likewise, by adopting these standards as domestic law, legislators are signaling to mar-kets that their national industry is governed by high-quality rules. This signal is particularlyimportant for legislators whose national industries (such as small and remote countries thathave not previously received extensive investor interest) are likely to face greater obstacles inovercoming investors’ uncertainties in the global marketplace.

As a national industry accrues benefits from the adoption of highly regarded internationalstandards, its competitors in other countries suffer a hit, as investors redirect resources. Toavoid being left behind, one option for competitors is to invest in improving and raising theprofile of their own national laws, with the hope that these laws will come to be more highlyappreciated by the international community. But such an effort is likely to be costly and time-consuming, and its outcome is uncertain. Alternatively, competitors can simply adopt theinternational standards themselves, so as to eliminate their regulatory disadvantage and gainback lost ground. If this analysis is correct, then international standards are more likely tospread among countries that are in competition with each other. Hence:

Hypothesis 1. Standards created by private market networks spread among countries whosenational industries are in competition with each other.

As discussed above, since a network of regulators relies heavily on reciprocity, existing mem-bers need to ensure that new entrants are in a position to perform their network obligations—for example, assisting with cross-border investigations or performing reviews of firms’ foreignoperations. More specifically, new entrants must have the requisite powers under domestic law;they must operate free from political interventions that could blunt the network’s objectives;



and they must be able to perform their obligations in an effective and timely manner. If theseconditions are fulfilled, then existing members can make their own rulemaking and enforce-ment powers available to new members.

National regulators’ reliance on reciprocity leads to specific predictions about the likelihoodthat a country will join the network. Countries with effective regulatory structures have mostto gain by working together with their similarly effective foreign counterparts. By doing so,countries essentially extend the reach of their rules and enforcement powers to include the ter-ritory of their co-participants. For this reason, the appeal of joining the network increases everytime a new entrant joins. By contrast, states whose regulatory bodies are ineffective, dysfunc-tional, or otherwise unable to pursue their regulatory mission have little to contribute to thenetwork. Good examples are government bodies in countries characterized by high levels ofcorruption, clientelistic bureaucracies, or authoritarian regimes. Thus, it is important for net-work members to ensure that expansion of the network brings regulators that can actually addto its firepower.

The reciprocal effectiveness that existing network members seek from new ones is similarlyvaluable to those government bodies that are considering whether to join the network.National regulators could adopt the proposed standards at their own initiative, without joiningthe network. However, membership in a network of peer regulators brings additional benefits,such as recognition of one another’s regulatory licenses and supervisory practices, facilitationof cross-border establishment of operations for national businesses, and access to counterparts’enforcement capabilities. Hence:

Hypothesis 2. Standards created by national regulators spread more readily among countrieswith similarly effective regulatory structures.

For ministry executives, launching or joining a network is an essentially political initiative.Because of their central positions in government and their direct connections to the top holdersof political power in their countries, ministry executives have at their disposal many bargainingtools that national regulators and private firms lack. Ministry executives have a wide scope ofpowers in many areas of economic activity, ranging from taxation to antitrust violations to con-sumer protections, as discussed above. Moreover, governments can also take advantage of for-eign-policy tools in order to attract members to their networks, or to ensure compliance withthese networks’ standards. For example, they can attach network participation as a conditionto receiving foreign aid or International Monetary Fund (IMF) or World Bank loans.

Not all states in the world have equal access to these policy-making tools. The use of domes-tic regulatory tools for international purposes is more effective when foreign firms are especiallykeen to enter a country’s domestic market. As scholars have pointed out, the centralization ofinternational markets in a few hubs provides policy makers in these hubs with significant toolsto extract compliance.46 Moreover, foreign-policy tools are more readily available to countriesthat have leading roles in some key international organizations, such as increased voting powerat the IMF, or that participate in bodies important for global relations, such as the G-7 or G-20.

46 See Beth A. Simmons, The International Politics of Harmonization: The Case of Capital Market Regulation, 55INT’L ORG. 589, 590 (2001). The United States and United Kingdom famously used this strategy in the 1980sin order to get France, Germany, and Japan to join in the 1988 Basel Accord. Anu Bradford makes a similar argu-ment with regard to European Union regulations in international commerce. See Bradford, supra note 8.


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These states can use their influence over such international organizations to promote their stan-dard-setting agendas in states where these organizations are active. If leading states rely on theirpower in foreign relations as an important vehicle to promote a network’s standards, this powershould also be reflected in the network’s membership-expansion patterns. Hence:

Hypothesis 3: Standards created by ministry executives spread in a manner that reflects thepower of the network’s founders.

II. THREE STANDARD-SETTERS FOR SECURITIES REGULATION:IASB, IOSCO, AND FATF

Applying the Theory to Global Standard Setters: Case Selection

To empirically assess the theoretical claims presented in part I, the diversity of issue areas inwhich governments have enshrined networks’ standards as domestic law represents a key chal-lenge. One might be concerned that substantive differences between the standards’ subjectmatter, rather than the institutional profile of network participants, are behind the results. Toaddress this issue, it is helpful, as noted earlier, to identify three standards that have comparablesubject matter but whose drafters are regulatory networks comprising private actors, regulators,and ministry officials, respectively. One issue area that provides examples of networks of allthree types is finance. Among the various financial standards, this study has selected three thatconcern securities markets more directly and deal with various types of disclosure and fraud.Given the current population of nonbinding standards that have been adopted as domestic law,the three covered below probably represent the best possible attempt at comparability, as theyhave notable substantive similarities.

To start, financial markets constitute a highly technical subject matter, constantly evolvingat a rapid pace. While impenetrable to the uninitiated, they are appealing to potential moneylaunderers, insider traders, dishonest equity issuers, and other fraudsters. Addressing the chal-lenges that these activities present to financial market integrity is a central task of all three setsof financial standards to be discussed here. Moreover, all three of these areas have been exposedto industry-wide trends such as the internationalization of markets and the growing impact oftechnological advances on financial transacting.

Network effects are also important in all three areas, as the appeal of each standard setterincreases when new members join. In accounting, each new country adoption of IFRSincreases the number of firms using the standards and thus increases the benefits for investorswho have to incur the costs of training. In turn, an ever growing pool of investors acquaintedwith the standards increases the standards’ appeal for firms whose governments have not yetjoined. With regard to cross-border enforcement, the addition of each new regulator expandsthe territory that a regulator can reach at once through the mechanisms available in IOSCO’sMMOU and thus expands the benefits of joining for regulators that have not yet done so. Anal-ogous dynamics arise in anti-money-laundering efforts, as each country’s addition to the FATFnetwork increases the number of potential cooperators for countries seeking to join.

Recognizing the central role that these three regulatory bodies occupy in global financial reg-ulation, influential international organizations have embraced their standards in an effort todevelop robust and stable markets around the world. In their ongoing evaluation of countries’financial systems, the IMF and World Bank use the standards produced by IASB, IOSCO, and



FATF as the benchmarks in each field.47 The Financial Stability Board, an international bodyset up by the G-20 to coordinate global financial regulation,48 maintains a list of twelve KeyStandards for Sound Financial Systems—a list that includes IASB, IOSCO, FATF, and theirstandards.49 Thus, all three are widely recognized as part of the international rulebook for howto develop and maintain strong financial markets.

Since each set of standards studied here governs some aspects of securities markets, certainpolitical economic dimensions are shared by all three cases. For example, important institu-tional actors are common. Big investment and commercial banks, as well as other financialinstitutions, are key players in all three areas. Associations of finance professionals, like theSecurities Industry and Financial Markets Association in the United States, are active in pro-moting the interests of their members in all three areas. Retail and institutional investors standto make more informed choices if they support honest accounting and oppose cross-borderfraud and money laundering. Market infrastructure institutions, such as stock exchanges andclearinghouses, must police their marketplaces against any type of financial fraud and criminalactivity, including the ones targeted by the three standards studied here. Not only are the samepolitical economic actors involved in all three areas, but their respective attitudes and perspec-tives remain unaltered across these three areas. For example, private firms might risk collapseif they face a major scandal in any of these three areas. High compliance costs might affectsmaller firms more severely than bigger ones—which stands true for accounting, cross-borderfraud, and money laundering alike. I do not mean to suggest that the political economy of eachof the three standards is identical. Any particular actor may be more directly affected by reg-ulatory developments in one area rather than in another. Similar motivations, however, affecta common set of actors in all three areas

Historically, each of the three areas covered in this study—accounting standards, cross-bor-der fraud, and money laundering—has been governed by private bodies, national regulators,and ministry executives. This pattern helps refute the claim that the substantive character ofeach area calls for a particular institutional actor and thus indirectly determines the variationin patterns of spread. While international accounting standards are now private, government-drafted accounting standards predate—and were replaced by—the international standards inmany jurisdictions. Moreover, international organizations such as the European Commissionand the United Nations had previously sought to harmonize accounting rules.50 National reg-ulators still maintain significant rulemaking and enforcement powers in accounting, whichthey sometimes use to incorporate the international standards into domestic law. In cross-bor-der fraud, where international cooperation now occurs at the regulator level, governmentdepartments such as the police force or the ministry of finance often become involved. More-over, professional associations have promulgated standards of conduct and proposals for inter-nal compliance mechanisms. In money laundering, where ministries have the leading role

47 See International Monetary Fund, Reports on the Observance of Standards and Codes (ROSCs), at http://www.imf.org/external/NP/rosc/rosc.aspx.

48 See Stavros Gadinis, The Financial Stability Board: The New Politics of International Financial Regulation, 48TEX. INT’L L.J. 157 (2013).

49 See Financial Stability Board, Key Standards for Sound Financial Systems, at http://www.financialstabilityboard.org/cos/key_standards.htm. The three standards included in this study, along with the Basel Accords, are generallyconsidered the most influential of the twelve Key Standards.

50 See KEES CAMFFERMAN & STEPHEN A. ZEFF, FINANCIAL REPORTING AND GLOBAL CAPITAL MARKETS:A HISTORY OF THE INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE 1973–2000, at 45 (2007).


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internationally after the creation of FATF, some of the earliest efforts to provide a regulatoryresponse originated out of the cooperation between private banks and regulators in Switzerlandin the late 1970s. To this date, banks’ reporting systems and regulators’ supervision mecha-nisms play a key role in day-to-day surveillance against money laundering.

While the three selected networks’ substantive similarities—as discussed throughout thissection—make them a good fit for the proposed analysis, their subject matters are not identical.Thus, it is possible that potential differences in subject matter influence this article’s findingsto some extent—which is one of the limitations of the present study. It is also possible, however,that focusing on three standard setters with a high degree of substantive similarity raises ques-tions about the generalizability of the article’s findings; standard setters in different areas of thelaw may actually behave differently than this study predicts. Even so, the theoretical propo-sitions of this article are not tied to a specific subject matter. Its goal is to sketch general dynam-ics in international networks and to put forward ideal types, which may vary somewhat in prac-tice. To fully explore the theory’s hold on other areas of economic activity, further study isnecessary, and the concluding remarks in this article suggest possible directions.

Many criticize scholarship on the diffusion of laws for focusing primarily on examples ofsuccessful global templates rather than also considering failed ones. Indeed, most prior studiesexamine a single policy that spreads quickly around the world, whereas this article’s theoreticaland empirical analyses emphasize variation in the pace and geographic character of the diffu-sion of innovations. By showing that some networks’ standards spread more slowly, do not gainmany followers, or are not as appealing to influential jurisdictions, this project also illustratesfactors that stall the network’s mission.51 Indeed, the theory elaborated in part I explores themany ways in which standard-setting efforts can fail before reaching a level of maturity thatwould allow standards to be incorporated in domestic laws.

More generally, the theory presented in part I argues that the lawmaking capacities of net-work participants have multiple implications both for the functioning of networks and for thespread of their standards. The first set of claims, which concern the mechanisms through whichnetworks function, can best be explored through qualitative case studies. In particular, sincethe theory develops multiple logically interconnected propositions, case studies illuminatingeach of the separate claims offer significant evidence on the plausibility of these claims. Theseissues will be addressed in the remaining sections of part II, in which I describe how IASB,IOSCO, and FATF differ on six dimensions: key motivations, drafting strategies, governancestructures, membership criteria, implementation efforts, and sanctions. The second set ofclaims in this article, which concern the spread of international standards to diverse jurisdic-tions, are best explored through quantitative methods, which can analyze multiple data pointsover time. This analysis is presented in parts III and IV.

IASB and IFRS: Accounting Principles Developed by Market Professionals

By adhering to accounting norms that ascribe particular meanings to each line in their state-ments, companies can communicate valuable financial information quickly and effectively toinvestors. A company’s financial statements and its management’s discussion of their contentsform a central part of disclosure obligations imposed on securities offerings around the world.

51 These predictions are borne out in the empirical analysis. See infra Figures 1–4.


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But as accounting practices reflected the interests, concerns, or idiosyncrasies of industries andcompanies in different parts of the world, national accounting systems developed in divergentdirections. Investors looking to diversify their portfolios internationally have to become famil-iar with different sets of highly technical rules that might include well-hidden loopholes. Com-panies active in jurisdictions with different accounting standards face increased costs as theyare called to comply with multiple laws at the same time. When foreign companies seek toappeal to more investors by listing their shares on a stock exchange outside their own markets,they are required to engage in formal, detailed reconciliation exercises and to present theirfinancial statements under the host countries’ accounting standards. In some well-knowncases, these reconciliations revealed significant differences between home and host accountingperspectives,52 putting into question the credibility of the entire premise of accounting.

In 1973, professional associations of accountants in nine countries—Australia, Canada,France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and theUnited States—joined forces to create a novel set of standards. They established the Interna-tional Accounting Standards Committee (IASC), renamed as the International AccountingStandards Board (IASB) in 2001. IASB members never had any regulatory authority overaccounting in their home countries. In its four-decade-long effort—still ongoing—to wincountry adoptions, IASB has reformed its organizational structure several times, while main-taining its character as a group of market professionals drafting standards to be implementedby their colleagues, as the paragraphs below illustrate.

Key motivation: Express industry experience (and preferences) in rules. The establishment ofIASB53 grew out of an effort to better understand how accountants in different jurisdictionsdealt with similar problems and to streamline professional standards for an industry that wasfast expanding across borders. Initially, this effort involved the professional accountancy asso-ciations in Canada, the United Kingdom, and the United States, which formed a study groupin order to conduct “comparative studies as to accounting thought and practice in participatingcountries.”54 These comparisons, founders hoped, would identify superior practices andinspire participants to adopt them. Moreover, common practices would help accountantsaround the world maintain equally high levels of quality and credibility, which was of particularimportance to multinational corporations consolidating information from multiple jurisdic-tions.55 But study group partners quickly realized that common practices would require com-mon standards, and grew wary of standard-setting initiatives by international organizationssuch as the European Commission and United Nations.56 Hoping to create a body that wouldput its own mark on international standard setting, these study group partners collaboratedwith professional accountancy associations from other developed markets to establish IASC in

52 See Gadinis, supra note 6, at 477–78.53 In its initial formulation, IASB (then IASC) was an informal association established under a private agreement

between professional accountancy associations from various countries—now known as the 1973 IASC constitution(on file with author). IASC’s staff was provided by the United Kingdom and Ireland professional accountancy asso-ciations. In a 2001 reorganization, the IASC Foundation became a nonprofit Delaware corporation (File No.3353113). For a discussion of the reorganization and the governance changes it brought, see subsections “Mem-bership” and “Governance” (IFRS) in part II, infra text accompanying notes 61–68.

54 See CAMFFERMAN & ZEFF, supra note 50, at 30.55 Id. at 31.56 Id. at 45.


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1973. For IASC’s first ten years, the individuals representing their countries’ professional asso-ciations were almost exclusively partners in major accounting firms. In subsequent years, thecomposition of IASC also included accountants working for major corporations or financialinstitutions, as well as accountants who had previously served in regulatory posts.

Drafting and negotiation: Extended engagement with, and trial among, market participants.IASB’s strategy for gaining adoptions consists in convincing governments that its standards aretried and approved by the market. A quick look at IFRS’s history illustrates this argument.Before gaining any country adoptions, IASB actively campaigned to convince private firms andmarket institutions to comply with its standards even though they were not formally required to doso. On the European side, IASC reported that in 1995, seventy-seven publicly traded companieswere already voluntarily in compliance with IFRS. By 2000, that number had increased to 275,which featured prominently in European Commission proposals advocating for the adoptionof IFRS.57 In the United States, IASC secured the support of the New York Stock Exchange,which hoped to convince the Securities and Exchange Commission (SEC) that IFRS financialstatements need not be reconciled with U.S. Generally Accepted Accounting Principles(GAAP), thereby lowering the costs of a New York listing for foreign companies. The NewYork Stock Exchange sponsored conferences to improve market recognition of IFRS, openlyadvocated for IFRS in the press and in regulatory circles, and assisted with fundraising for IASBin the United States.58

To gain the market endorsement that forms the essential first step for its strategy, IASB hasestablished committees and procedures that actively engage market participants not only indrafting specific rules but also in determining broad initiatives and priorities. IFRS trusteesappoint an advisory council, which includes financial analysts, company representatives, aca-demics, regulators, and national standard setters. The advisory council offers nonbindingadvice on IASB’s priorities and major projects, and informs IASB of major organizations’ viewsabout them.59 To produce new standards or revise existing ones, IASB creates a steering com-mittee, typically under the leadership of an IASB board member. The steering committee cir-culates drafts and invites input not only from IASB directors, representatives of participatingassociations, and accounting practitioners, but also from other market professionals such asfinancial analysts, stock exchange executives, and members of national standard setters.60

Membership: Only firms; governments do not become members even after adoption. A country’sdecision to adopt IFRS does not confer on that country an automatic right to have its repre-sentatives participate in either IASB or any of its other administrative bodies. Nor do profes-sional associations of firms from that country gain a right to vote on standard formulation whentheir home country adopts the standards. While 118 countries in the current article’s data sethad adopted IFRS by 2012, IASB currently has only 16 members, and the IFRS Foundationhas 22 trustees. Individuals in these positions must be representative of all general regions of

57 See European Commission, Update of the Accounting Strategy Frequently Asked Questions, Memorandum,MEMO/00/34 ( June 14, 2000), at europa.eu/rapid/press-release_MEMO-00-34_en.doc.

58 See CAMFFERMAN & ZEFF, supra note 50, at 316.59 See IFRS CONSTITUTION, supra note 45, Art. 44.60 See BUTHE & MATTLI, supra note 30, at 120.


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the world (Africa, Asia/Oceania, Europe, North America, and South America) but do not needto originate in countries that have adopted the standards.61

Governance: Distance from governments and politics. Government relationships represent amajor challenge for IASB: it needs simultaneously to lure lawmakers and regulators into adopt-ing IFRS as mandatory national law and to reject their attempts to dictate IFRS’s content. Forthe first fifteen years of its existence, IASB’s predecessor, IASC, had only informal contacts withgovernments and regulators—contacts that did not produce any concrete outcomes. In the late1980s, IASC cultivated closer connections with governments and regulators, and invited tosome meetings representatives from organizations such as the Basel Committee, EuropeanCommission, IOSCO, and World Bank. These representatives had observer status and no rightto vote.62 By the mid-1990s, IOSCO openly endorsed IASC’s standards,63 and following theAsian financial crisis of 1997, the G-7 finance ministers called for “internationally agreedaccounting standards.”64

The absence of any regulatory supervision over IASC was so striking that, as the SEC wasconsidering whether IFRS users to list on U.S. exchanges without reconciling their accountswith U.S. GAAP, it became concerned that private fundraisers might influence IFRS require-ments. To allay these fears, IASC split into two bodies. The first of these, IASB, took overIASC’s standard-setting tasks and consists of former accountants now employed full time byIASB.65 The second body, a not-for-profit Delaware corporation called the IFRS Foundation,is responsible for organizing IASB’s financing, setting its budget, appointing IASB’s members,and exercising general administrative powers. The IFRS Foundation’s twenty-two trustees areaccounting professionals selected to ensure representation of broad geographic regions aroundthe world.66 In 2009, the creation of a third body, the Monitoring Board, provided some lim-ited and indirect government supervision over IASB for the first time.67 Consisting of repre-sentatives from the European Union (EU), IOSCO, and Basel Committee, as well as securitiesregulators of Japan and the United States, the Monitoring Board must approve the appoint-ment of IFRS Foundation trustees.68

61 IFRS CONSTITUTION, supra note 45, Arts. 6, 26. The breakdown for IASB members is as follows: four fromAsia/Oceania, four from Europe, four from North America, one from Africa, one from South America, and twofrom any geographic area. The breakdown for the IFRS Foundation Trustees is as follows: six from Asia/Oceania,six from Europe, six from North America, one from Africa, one from South America, and two from any geographicarea. For a discussion of the different roles of the IASB and IFRS Foundation in the network’s governance structure,see subsection “Governance” (IFRS) in part II, infra notes 62–68.

62 See CAMFFERMAN & ZEFF, supra note 50, at 219.63 See Technical Committee of the International Organization of Securities Commissions, IASC Standards—

Assessment Report (May 2000), at http://www.iasplus.com/en/binary/iosco/ioscores0005.pdf (Mar. 23, 2014)(referring to the IASC-IOSCO joint press release of July 1995, which initiated closer cooperation between the twonetworks).

64 See BUTHE & MATTLI, supra note 30, at 71.65 Up to three IASB members can participate on a part-time basis. IFRS CONSTITUTION, supra note 45,

Art. 24.66 Id., Arts. 4–6.67 The creation and synthesis of the Monitoring Board is another illustration of global efforts to coordinate net-

works’ outputs, which is part of the political and regulatory response to the 2008 financial crisis. For a discussionof how this article’s theory and findings help better understand these developments, see “Network Types as Vehiclesfor International Policy Coordination” in part V.

68 IFRS CONSTITUTION, supra note 45, Arts. 18–23.


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Implementation efforts: Improving know-how. At first, the professional associations thatfounded the IASC undertook to publicize its standards by putting together information sem-inars, arranging translations, and drafting introductory guidance. As IFRS grew in popularity,it was feared that implementation from one country to another might be inconsistent. Tostreamline the application of the standards, IASC established an interpretations committee,which issues authoritative guidance on interpretation questions arising under IFRS.69 Its inter-pretations are circulated widely for consultation before being finalized, often draw commentsfrom regulators and international bodies such as IOSCO, and must win the support of anincreased majority at IASB.70

Sanctions: Exit from markets. Neither IASB nor any of its individual board members belongdirectly to the regulatory hierarchy of any jurisdiction. Thus, they have no authority to reviewthe implementation of the standards, identify violations, or pursue enforcement. It falls uponthe users of IFRS— companies, financial analysts, and investors—to identify and present devi-ations and adjust their investment decisions accordingly. When adopting the standards, coun-tries do not confer any powers upon IASB or any other international body. In these countries,regulators can pursue violations through their domestic legal orders, but the opportunities todo so vary significantly from jurisdiction to jurisdiction.

IOSCO and Its MMOU: Enforcement Cooperation Among Regulators

In today’s globalized markets, securities fraud may actually be launched from abroad. In1983, securities regulatory authorities from around the world established IOSCO as an infor-mal association to enhance cross-border cooperation.71 IOSCO’s crowning achievement, aswell as the most visible means of member engagement with IOSCO,72 is the Multilateral Mem-orandum of Understanding (MMOU).73 By signing on to the MMOU, regulatory authoritiesagree to assist other signatories in prosecuting securities fraud or other securities law violationsthat involve actions within their borders. Specifically, the requesting authority can ask thehome country authority to collect information that could prove of assistance in an investiga-tion, such as examining witnesses, collecting documents from regulated entities, and generallyutilizing any means available for evidence gathering under home country law.74 In 2011 alone,home country authorities received two thousand requests under the IOSCO MMOU.

Key motivation: Enhance tools to promote regulatory mission and protect turf. National borderspresent a challenge for securities enforcement because they define regulators’ respective juris-dictions and prevent them from reaching fraudulent actions that were launched other coun-tries. To address this problem, regulators from different countries started to enter into bilateral

69 Id., Art. 43.70 At least ten out of sixteen IASB members must agree with the interpretation proposed. IFRS CONSTITUTION,

supra note 45, Art. 43(d).71 See By-Laws of IOSCO, Art. 7, at https://www.iosco.org/library/by_laws/pdf/IOSCO-By-Laws-Section-1-

English.pdf. If a country has not established any administrative bodies but has chosen to delegate this authority toself-regulatory organizations, such as stock exchanges, then these self-regulatory organizations can become eligiblefor membership.

72 See Verdier, supra note 5, at 143.73 See International Organization of Securities Commissions, Multilateral Memorandum of Understanding Con-

cerning Consultation and Cooperation and the Exchange of Information 2012, at http://www.iosco.org/library/pub-docs/pdf/IOSCOPD386.pdf [hereinafter IOSCO MMOU 2012].

74 See id., Art. 9.


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agreements for mutual assistance in collecting evidence, examining witnesses, prosecutingindividuals, or freezing assets. The SEC signed the first such agreement in 1982, with Swit-zerland.75 At first, IOSCO mostly encouraged its members to enter into such memorandumsof understanding with each other and provided recommendations concerning their content.76

As hundreds of such agreements were being signed in the 1990s, IOSCO took charge of theMOU project in order to create a single, uniform set of cooperation principles and mecha-nisms, available directly to all signatories without the need for separate bilateral agreements.

Strategy for drafting and adoption: Regulators adopt standards after consulting with constituents.Over time, IOSCO’s standard-setting process has come to closely resemble rulemaking pro-cedures by domestic regulatory agencies, as it typically involves release of a “consultation”report or draft for comments by the public.77 IOSCO bodies then consider public commentsinternally, determine whether or how to address them, and adopt the final rule. Thus, whileit invites public feedback, IOSCO reserves both the rulemaking initiative and the decisive votefor national regulators.

Until a governance reform in 2012, policy- and standard-development work took place intwo specialized committees, the Technical Committee, which included regulators from theworld’s largest capital markets, and the Emerging Markets Committee. These committeeswould typically create ad hoc subcommittees for topics of interest, such as credit-rating agen-cies and disclosure standards, and prepare a consultation draft to be circulated both inside andoutside IOSCO. Responses to consultation drafts would not be made public but could be pre-sented in summary form in the final proposal. The committee would typically bring final pro-posals to an assembly of all IOSCO members, the Presidents Committee, for endorsement.78

After a governance reform in 2012, IOSCO acquired a single board, designed to include mem-bers from both developed and emerging markets79 and to present a unified voice for IOSCOin international forums. The 2012 reforms did not affect the notice-and-comment process out-lined above.

Membership: Stand-alone regulators distinct from main government. National regulators areeligible to join the MMOU if they have the institutional competence to abide by its require-ments. Typically, MMOU members are securities commissions, but in rare cases other reg-ulators or executive agencies can also take part.80 Applicants go through a screening process andprovide evidence that their home-country laws provide them with the necessary powers to

75 See Karmel & Kelly, supra note 15, at 913 (2009). These memorandums are nonbinding agreements betweenregulators that do not have formal authority to represent their respective states but that agree with one another toadhere to the conduct delineated in the document.

76 See Verdier, supra note 5, at 144.77 For example, in its consultation report on financial benchmarks, which came at the heels of the 2012 LIBOR

scandal, IOSCO received over fifty letters of comment from the public. See Board of the International Organizationof Securities Commissions, Principles for Financial Benchmarks: Consultation Report (2013), at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD409.pdf.

78 See subsection “Membership” (IOSCO) in part II, infra text accompanying notes 80–84.79 Between 2012 and 2014, IOSCO’s board was in transition, with its final structure to be determined in the 2014

Presidents Committee meeting. See Proposal to the Presidents Committee from the Executive Committee Chairman andSecretary General, Agenda Item 3c, Proposal for a New Committee Structure for IOSCO and Potential Amendment tothe IOSCO By-Laws (Mar. 31, 2011), at http://www.iosco.org/library/by_laws/pdf/IOSCO-By-Laws-Appendix-3-English.pdf.

80 For example, Japan’s finance ministry is a member. See infra note 83. For the treatment of multiple member-ships in the data set, see section “Data Set” in part III.


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comply with the MMOU. A group of existing IOSCO members, both from developed andemerging markets, evaluates responses and provides a recommendation as to the application.Based on the results of the screening and the recommendation, a group of chairmen of impor-tant IOSCO committees makes the final decision.81

IOSCO’s membership rules preserve the separation between the administrative agencies thatform its membership and their national governments. IOSCO’s most important standard-making initiatives, including the MMOU, are adopted as resolutions of its Presidents Com-mittee, where all heads of national regulators participate and vote.82 Besides national regula-tors, two categories of bodies can attend the Presidents Committee, albeit without a right tovote. The first category includes supranational or subnational regulators (such as the EuropeanCommission, IMF, and Indian Forward Markets Commission). The second category includesinstitutions that are building blocks of national financial infrastructures and that often havetheir own self-regulatory powers (such as stock exchanges, clearing and settlement agencies,and investor protection funds). However, political bodies (such as treasury departments andministries of finance) and private players (such as investment banks) do not attend the Pres-idents Committee.83 The main channel through which politicians and private market playersprovide feedback to IOSCO has traditionally been the notice-and-comment process outlinedabove.84

Governance: Regulators participate equally as peers. Since IOSCO’s successful operation relieson peer participation, its institutional structure provides many opportunities for cooperationamong national regulators. In the Presidents Committee, IOSCO’s general assembly–likebody, all national regulators that are IOSCO members have one vote each, regardless of nationalmarket size.85 Adopting resolutions requires only a simple majority vote,86 although the normis consensus. Regulators from many countries become involved in standard developmentthrough the IOSCO board (or its predecessor, the Technical Committee), the Emerging Mar-kets Committee, and the specialized subcommittees that they create. Moreover, regional com-mittees for Africa, Asia-Pacific, Europe, and the Americas bring together regulators from theseareas to discuss common issues, monitor the implementation of IOSCO standards at theregional level, and highlight region-specific perspectives for the Presidents Committee.

81 For the duration of this study, this group comprised the chairmen of the Technical Committee, EmergingMarkets Committee, and Executive Committee, a smaller body responsible for IOSCO’s management. After 2012,the group has changed to accommodate the IOSCO board. See International Organization of Securities Commis-sions, Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange ofInformation 2002, App. B (on file with author); IOSCO MMOU 2012, supra note 73, App. B.

82 The Presidents Committee endorsed the MMOU at its 2002 meeting. See International Organization of Secu-rities Commissions, Annual Report 2004, at 18 (2004), at http://www.iosco.org/annual_reports/annual_report_2004/.

83 Because of regulatory authority retained at the ministerial level, Japan is the only country with a ministry thatparticipates as an ordinary member in IOSCO. See International Organization of Securities Commissions, OrdinaryMembers of IOSCO, at https://www.iosco.org/about/?subsection�membership&memid�1.

84 Arguably, the recently revamped Financial Stability Board can be seen as introducing some political consid-erations into IOSCO’s work, but this change does not affect standards examined in this study. See Gadinis, supranote 48, at 157–59.

85 See By-Laws of IOSCO, supra note 71, Art. 27. When a country has more regulators for securities law (suchas the United States, where the SEC and the Commodity Futures Trading Commission are both members), eachregulator gets one vote, but the total vote for regulators from one country cannot exceed three. Id., Art. 28.1.

86 See Id., Art. 36.4.


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Through this interplay of committee work, IOSCO provides a platform for interactions amongnational regulators and creates an international community for them.

Implementation efforts: Improving know-how and technical assistance. IOSCO has establishedknowledge-sharing mechanisms—such as online resources (available to members only) thatcontain FAQs, interpretations, and other assistance—that have received much praise frommembers.87 But its efforts extend beyond providing authoritative guidance to the actual train-ing of regulatory officials by organizing technical assistance programs. Well-resourced regu-lators such as the Australian Securities and Investments Commission, UK Financial ServicesAuthority, and U.S. SEC have long offered training programs to their overseas colleagues tohelp build up practical skills, introduce enforcement and surveillance approaches, and developtheir regulatory philosophies.88 Following this example, IOSCO organized its own training forregulatory officials from MMOU signatories.89 Over time, technical assistance programs havegrown into a key service that IOSCO provides to members,90 which regard them as the mosteffective tool to address the MMOU’s requirements.91

Sanctions: Lack of reciprocal cooperation. By failing to comply with a cooperation requestunder the MMOU, national regulators risk not only reputational damage but also rejection oftheir own requests from others. Such rejection might be especially problematic for regulatorsoverseeing markets where international investors are active, because it would limit those reg-ulators’ ability to reach fraud that originates across borders. IOSCO has set up a monitoringgroup to identify problems with MMOU compliance, including violations by signatories. Thegroup can “name and shame” violators in members-only forums and, in extreme circum-stances, launch a peer review of the violating regulator that can culminate in expelling a mem-ber.92 So far, IOSCO is not known to have utilized this sanction.

FATF and Governments’ Efforts to Fight Money Laundering and Terrorist Financing

Money-laundering activities are harder to trace when funds originate in foreign countries,over whose financial systems domestic authorities lack oversight. A quarter of a century ago,realizing that drug trafficking had grown into a global problem, governments undertook tocooperate more closely so as to block channels of financing for drug production. In 1989, theG-7 ministers93 established FATF, an informal intergovernmental body whose goal is to design

87 See Emerging Markets Committee, International Organization of Securities Commissions, Obstacles to Joiningthe IOSCO MMOU 13–15 (2007), at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD246.pdf.

88 See CHRIS BRUMMER, SOFT LAW AND THE GLOBAL FINANCIAL SYSTEM 52 (2012).89 For example, it has organized training in Kuala Lumpur, Malaysia, in 2007; Santiago, Chile, in 2008; and

Warsaw, Poland, in 2008. See International Organization of Securities Commissions, Past IOSCO Training Pro-grams, at https://www.iosco.org/training/?subsection�iosco_training_programs.

90 See International Organization of Securities Commissions, Annual Report 2011, at 50 (2011), at https://www.iosco.org/annual_reports/2011/; International Organization of Securities Commissions, Annual Report2012, at 22 (2012), at https://www.iosco.org/annual_reports/2012/.

91 See Media Release, International Organization of Securities Commissions, IOSCO to Progress Reform AgendaUnder New Leadership 5 (Apr. 1, 2013), at http://www.csrc.gov.cn/pub/csrc_en/affairs/AffairsIOSCO/.

92 See IOSCO MMOU 2012, supra note 73, Art. 16(b); id., App. B, (III)(e), (f).93 The G-7 countries were not fully satisfied with the 1988 UN Convention Against Illicit Traffic in Narcotic

Drugs, which fell short of establishing an institutional structure to prevent money laundering that actively engagedfinancial institutions. They consequently decided to push their own plan. See Mark Pieth, International StandardsAgainst Money Laundering, in A COMPARATIVE GUIDE TO ANTI–MONEY LAUNDERING 3, 8 (Mark Pieth &Gemma Aiolfi eds., 2004).


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and help implement measures that prevent the channeling of illicit funds into the financial sys-tem.94 FATF is widely considered one of the most successful standard-setting networks ininternational financial regulation.95 As a standard setter, FATF is best known for its 40 Rec-ommendations, which lay out a set of measures national governments can take in order todetect and prevent money laundering more effectively.96 First announced in 1990, the Rec-ommendations have received regular updates over the years. After 2001, FATF substantiallyrevised the Recommendations so as to create specific measures targeting terrorist financing.FATF’s Recommendations have received recognition from various international bodies,including the United Nations, which recommend adoption to their members.97

Key motivation: Achieve broad policy objectives in multiple sectors. While regulators’ powers areconfined within their areas of expertise and their statutory mandates, governments can under-take broad policy-making objectives, reaching across multiple sectors and expanding into pre-viously unregulated terrain. The establishment of a global anti-money-laundering regime is anexample of such a broad initiative. Seeking to fight drug trafficking at a global level, the G-7saw anti-money-laundering laws as part of a wider set of measures that included redesigningand strengthening UN programs, ratifying and implementing the UN convention on illicittraffic in narcotic drugs, and supporting international conferences on the rehabilitation of drugaddicts.98 The anti-money-laundering task force itself was charged with putting forward pro-posals in many different issue areas, such as criminal law reforms, changes in the supervisionof banks and other financial institutions, and measures to enhance assistance between judicialauthorities.99 Although initially intending to dismantle the task force after completing thesetasks, participating governments decided to extend its life, at first for five years and then repeat-edly. This way, they could monitor compliance with the 40 Recommendations and conductmutual evaluations of each other’s progress on all relevant areas, from high-level statutoryreforms down to details of banking supervision.

Strategy for drafting and adoption: Collaboration among government officials from variousdepartments. The drafting of the 40 Recommendations, as well as their subsequent endorse-ment, required the cooperation of government officials from various ministries and from reg-ulatory and other governmental bodies. In order to strengthen the reach of their anti-money-laundering program, the G-7 countries (Canada, France, Germany, Italy, Japan, UnitedKingdom, and United States) invited to the drafting process the governments of eight addi-tional countries (Australia, Austria, Belgium, Luxembourg, Netherlands, Spain, Sweden, andSwitzerland). Starting in 1989, right after the G-7’s call to action, FATF comprised over 130officials from these countries, who worked together for almost a year in order to produce the

94 See Financial Action Task Force, 20 Years of FATF Recommendations 1990–2010, at 4 (2010), at http://is-suu.com/fatf/docs/20_years_of_recommendations/.

95 See BRUMMER, supra note 88, at 20–24.96 See 20 Years of FATF Recommendations 1990–2010, supra note 94, at 4.97 See, e.g., SC Res. 1617 ( July 29, 2005); GA Res. 60/288 (Sept. 20, 2006). But the United Nations has not

required its members to adopt the FATF Recommendations.98 See G-7 Economic Declaration, July 16, 1989, at http://www.g8.utoronto.ca/summit/1989paris/

communique/index.html. The UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Sub-stances, Dec. 20, 1988, 1582 UNTS 164, went into force in 1990.

99 G-7 Economic Declaration, supra note 98.


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40 Recommendations.100 FATF representatives included officials from finance ministries, jus-tice ministries, banking and securities regulators, police forces, and other government depart-ments. To formulate the recommendations, these officials drew from sources as varied as theUnited Nations and the Basel Committee on Banking Regulation. After endorsing FATF’s 40Recommendations, G-7 heads of state and task force members’ finance ministers sought toreinforce efforts to implement the 40 Recommendations on the ground. In 1990, in a secondseries of meetings in Paris over six months, a similar group of over 160 officials agreed to ambi-tious measures such as mutual evaluations and the sanctioning of severe violators.101

Membership: Anyone can join, but few countries have powers. International expansion has beena key FATF goal since its inception. Global anti-money-laundering efforts have evolved intoa two-tiered regime, however, with first-tier members retaining all voting powers and second-tier members having no say in standard formulation. FATF’s membership includes just thirty-four jurisdictions (mostly Western, developed countries) and two regional organizations (theEuropean Commission and Gulf Cooperation Council). In addition, FATF has been instru-mental in setting up other informal networks, known as FATF-style regional bodies (FSRBs),which comprise countries that are not necessarily FATF members. By 2012, FSRBs coveredall key regions in the world. These organizations share FATF’s goal of fighting money laun-dering and terrorist financing, and follow FATF’s 40 Recommendations and its interpretativeguidance.102 They and their members can participate in FATF meetings, provide input, andengage in joint projects with FATF. More importantly, FSRB member countries are also sub-ject to mutual evaluations regarding compliance with FATF standards. When considering arevision of the 40 Recommendations, FSRB members can offer their views but have no vote;FATF is the sole standard setter, and only FATF members vote.

Governance: Diplomats negotiate directly. The drafting and negotiation process describedabove, initially put together ad hoc, is reflected in FATF’s ongoing governance structure, whichhas a strong intergovernmental character. Its main body is its Plenary meeting, which deter-mines FATF’s priorities and work program, approves standards, and elects FATF’s presidentand Steering Group.103 FATF members participate in the Plenary meeting with their nationaldelegations, led by ministers of finance or their representatives, and the meeting is often alsoattended by other national authorities with regulatory powers in financial system supervision,such as securities commissions.104 FATF’s president has a one-year term, typically comes froma different jurisdiction every time, and is supported by an advisory committee, the SteeringGroup. In addition, the Plenary has set up a series of influential working groups that focus on

100 See WILLIAM C. GILMORE, DIRTY MONEY: THE EVOLUTION OF MONEY LAUNDERING COUNTER-MEASURES 80 (1999).

101 See Financial Action Task Force, Annual Report 1990 –1991 (1991), at http://www.fatf-gafi.org/documents/documents/fatfannualreport1990-1991.html.

102 See Financial Action Task Force, High-Level Principles and Objectives for FATF and FATF-Style Regional Bod-ies (FSRBs), at http://www.fatf-gafi.org/topics/fatfgeneral/documents/high-levelprinciplesfortherelationshipbetweenthefatfandthefatf-styleregionalbodies.html.

103 See Financial Action Task Force, Financial Action Task Force Mandate (2012–2020), Art. 20 (2012), at http://www.fatf-gafi.org/topics/fatfgeneral/documents/ministersrenewthemandateofthefinancialactiontaskforceuntil2020.html.

104 See id., Arts. 18, 19.


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specific tasks, such as evaluating member compliance with FATF’s recommendations. To sup-port these tasks, FATF has a secretariat of about twenty staff members, currently housed at theOrganisation for Economic Co-operation and Development.

Implementation efforts: Improving know-how, technical assistance, and monitoring. Similar tothe other standard setters in this study, FATF regularly issues interpretative guidance105 andorganizes technical assistance programs for both FATF and FSRB members.106 But as sover-eign governments interested in securing one another’s compliance, FATF members havemutually agreed to submit their governments’ implementation efforts to periodic monitoringby foreign officials. Not only are FATF’s country reviews detailed, rigorous, and ongoing, butthey provide reviewers with direct access to domestic documents, civil servants, and resourcesin ways that only sovereign governments could agree to provide. More specifically, underFATF’s Mutual Evaluation Process, member states are subject to review by their peers,under ad hoc created groups of officials from other states.107 The process, which is for-malized under a specific set of FATF rules,108 includes visits by the evaluation group tolocal officials, extensive interviews, and assessment of results on the ground. The assess-ment culminates with a Mutual Evaluation Report for each state, which identifies gaps innational legislation regarding money laundering and terrorist financing, and suggestsactions. FATF publishes the main findings of the report, as well as the overall evaluationon its website, so that the public can see if a country is fully or partially compliant, andwhat the main compliance problems are. If a member is found partially compliant, FATFwill follow up to check whether it takes action to remedy compliance gaps. Regular mem-bers of FATF go through the Mutual Evaluation Process every few years.

Sanctions: Potential sanctions against violators’ industry. Private players have no access to statesanctioning mechanisms, and regulators can utilize only those sanctions specifically prescribedin their founding statutory framework. By contrast, the ministries and government officialsthat participate in FATF have the full array of state enforcement measures at their disposal. Tostart, FATF members that do not implement FATF recommendations effectively, as indicatedin their country reports, risk losing their membership.109 That loss could endanger a state’s par-ticipation in other international forums that include government representatives, such as theFinancial Stability Board. FATF’s sanctions reach not only FATF members but also countriesthat are members of its regional bodies or that even have no relationship to FATF but thatFATF suspects of harboring money launderers. FATF has a blacklist of high-risk and nonco-operative jurisdictions, and calls upon its members to severely restrict, and even prohibit fully,transactions with financial institutions from blacklisted jurisdictions. Given that FATF mem-bers control access to the most important financial markets, shutting out entire countries from

105 For example, see FATF’s guidance on the meaning of politically exposed persons, a term used in Recommen-dations 12 and 22. Financial Action Task Force, FATF Guidance: Politically Exposed Persons (Recommendations 12and 22) (2013), at http://www.fatf-gafi.org/documents/documents/peps-r12-r22.html.

106 See Financial Action Task Force, Annual Report 2011–2012, at 34 (2012), at http://www.fatf-gafi.org/documents/documents/fatfannualreport2011-2012.html.

107 For an overview of the Mutual Evaluation Process and Report and information about the recent round ofreviews, see id. at 20–23.

108 See Financial Action Task Force, AML/CFT Evaluations and Assessments: Handbook for Countries and Assessors(2009), at http://www.fatf-gafi.org/topics/mutualevaluations/documents/handbookforcountriesandassessors-amlcftevaluationsandassessments.html.

109 See BRUMMER, supra note 88, at 154.


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the global financial system imposes great pressure on violators’ governments. In 2000–01,when FATF called for measures against Nauru and Ukraine, their governments submitted tothis pressure, launched reforms in their domestic systems, and succeeded in having FATF’s callfor measures withdrawn within five years.110 More recently, in 2011, the Caribbean regionalbody, CTATF, called for measures against Dominica in 2011. Just two years later, after thatcountry enacted legislation that set its financial system on a path to reform, CFATF lifted thecall for measures.111 Currently, CFATF has a call for measures against Belize and Guyana. Bycontrast, countries like Iran and North Korea have been on FATF’s blacklist for years withoutinitiating any reforms.

III. THE SPREAD OF INTERNATIONAL FINANCIAL STANDARDS: DATA AND PATTERNS

Data Set

The data set begins in 1980 and ends in 2012. The 191 jurisdictions, except for Hong Kongand Macao, are all sovereign states that enjoy significant independence in financial regulatoryissues and provide separate data to bodies such as the Organisation for Economic Co-operationand Development and the World Bank.112

This article’s data set explores three different dependent variables, corresponding to theadoption of each set of standards. With regard to IFRS, a country is considered to have adoptedthe standards when it requires or allows its domestic publicly traded companies to use the stan-dards for its quarterly financial statements and other reporting obligations under national secu-rities laws. Countries that allow only foreign companies to list their stock using IFRS are notcounted separately. The United States is the only country with a significant stock exchange tohave allowed foreign issuers to use IFRS.113 Because a partial adoption excludes domestic com-panies from IFRS compliance, it does not generate as much interest in IFRS from investors,regulators, and courts as a full adoption would have generated. Thus, while foreign companiesare not formally required to reconcile their IFRS statements with U.S. GAAP, they must stillconvince investors about the quality of their financial statements.114 Data regarding countryadoption and implementation of IFRS are based on several sources, including the adoptifrs.orgwebsite, local laws, materials produced by large accounting firms (most importantly, Deloitteand PwC), and other news and online sources.115 Countries are recorded as having adopted

110 See id. at 152.111 See Financial Action Task Force, High-Risk and Non-cooperative Jurisdictions: CFATF Decides to Call for

Counter Measures Against Belize and Guyana (May 30, 2014), at http://www.fatf-gafi.org/topics/high-riskandnon-cooperativejurisdictions/documents/cfatf-ps-nov2013.html.

112 It was not possible to include Canadian provinces separately, however, because data were available only forCanada as a whole.

113 See Securities and Exchange Commission, Acceptance from Foreign Private Issuers of Financial StatementsPrepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S. GAAP,73 Fed. Reg. 986 ( Jan. 4, 2008).

114 IFRS were seen as potentially watering down the protection that U.S. GAAP afforded investors. See WilliamW. Bratton, Heedless Globalism: The SEC’s Roadmap to Accounting Convergence, 79 U. CIN. L. REV. 471 (2010).

115 Some countries, such as Cyprus and Egypt, had announced compliance with the International AccountingStandards (IFRS’s predecessors) in the 1980s, when the standards did not yet amount to a separate, self-standingset of principles but were complementary to national standards. These early announcements are disregarded, as theydo not amount to full adoption; both Cyprus and Egypt reintroduced the full set of IFRS at a later date.


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IFRS starting on the date on which they actually require domestic companies to comply. Typ-ically, governments announce the decision to switch one to three years earlier, to allow com-panies to prepare.

Countries join the IOSCO MMOUwhenthenational securities regulator executes it.Uponexe-cution, a regulator can receive or submit requests for cooperation from other regulatory authorities,and thus the execution date is akin to implementation. Execution dates were provided directly bythe IOSCOsecretariat. Incountrieswithmultiple securities regulators, suchas JapanandtheUnitedStates, multiple authorities are eligible to participate in IOSCO and to execute the MMOU. For ajurisdiction’s joiningdate, thedata set records thedateonwhichthefirst eligibleauthority fromthatcountry joinedtheMMOU.Infederal states, suchasCanada, inwhichsecurities regulationbelongsto the jurisdictionof theprovinces, the joiningdate is theearliestdateonwhicha securities regulatorfrom that federal state joined the MMOU.

Participation in FATF’s anti-money-laundering network occurs either through joining eitherFATF itself or one of its FSRBs. In terms of implementing FATF Recommendations domestically,the difference between core FATF and FSRB membership is minimal, as all members are subjectto mutual evaluation. Thus, the data set records the adoption date as the one on which a countryjoined either FATF or an FSRB. Some countries participate in both FATF itself and an FSRB (oreven multiple FSRBs), in which case the earliest joining date is recorded.

By 1990, all the key institutional structures for IASC, IOSCO, and FATF were in place.However, each network expanded along a very different path, as will be apparent from the sec-tions below, with the pace and geographic patterns of adopting the standards varying signif-icantly from one network to another.

Adoption over Time

Figure 1 indicates how many countries had adopted each set of standards by the specifiedtimes. Although at different pace, adoption was gradual in all three cases, with the exceptionof some important moments when each set of standards saw increased adoption activity, as dis-cussed below. With regard to IFRS, Figure 1 suggests that adoption was very slow at first andaccelerated only after market participants had voluntarily used IFRS for many years. Through-out the 1990s, many companies headquartered outside the United States used IFRS-basedfinancial disclosures in private offerings of stock—that is, in largely unregulated offerings con-ducted under exemptions from securities laws that would result in no stock exchange listing.The first jurisdictions to formally permit or require the use of IFRS for stock exchange listings,such as the Czech Republic, Kuwait, and Mongolia, had only small financial markets. On theirown, the national accounting rules of these countries would have little hope of attracting inter-national investors’ attention. By the end of the 1990s, seventeen jurisdictions had adoptedIFRS. In 2000, the spotlight of global regulatory attention turned to accounting, as Enron andWorldCom collapsed under the weight of fraudulent off-balance-sheet transactions. Enron-type accounting misconduct was also behind the demise of the Italian giant Parmalat and theNetherlands-based Royal Ahold. Between 2001 and 2005, IFRS spread to sixty-three jurisdic-tions (in total), including the then twenty-five EU member states. In particular, 2005 appearsin Figure 1 as the year in which many countries actually implemented IFRS, although the leg-islative or regulatory measures were passed earlier, given the one- to three- year window that


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governments allow companies to prepare for IFRS implementation. The popularity of IFRShas continued to grow gradually through 2012.

Jurisdictions instrumental in establishing FATF also adopted its recommendations, leadingto a faster pace of adoption in the early 1990s, as Figure 1 shows. The Asian financial crisis of1997 illustrated the volatility of global financial flows and the role of regulation in creating sta-ble, robust financial systems. Many Asian countries adopted FATF’s recommendations in thatyear and established a FATF-style regional body that continued to accept members in lateryears. Also in 1997, European countries created another FATF-style regional body, Moneyval.Sponsored by the Council of Europe, a 47-member international organization, Moneyvalincluded all European countries that were not core FATF members.

Although IOSCO was established in the mid-1980s, it did not launch its MMOU until2002. From the beginning, MMOU signatories included the regulators of important marketssuch as France, Germany, the United Kingdom, and the United States. MMOU membershipcontinues to grow at a steady pace, but it still remains at levels far below those of FATF or IFRS.

Geographic Reach

Figures 2, 3, and 4 map the spread of IFRS, the IOSCO MMOU, and FATF around theworld. While all three sets of standards show some geographic clustering, the patterns of clus-tering are distinct for each set. More specifically, Figure 2 shows that countries adopting IFRSare widely scattered around the world. As noted above, early adopters are countries with smallfinancial markets, like Egypt, Kuwait, Mongolia, and Peru. Outside the EU, IFRS’s popularity

FIGURE 1. Cumulative adoption of FATF, IFRS, and IOSCO over time (by 2012).


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within regions grows gradually, with some countries adopting first and their neighbors joininglater.

Figure 3, which presents the spread of the IOSCO MMOU, offers a stark contrast to theIFRS map. The IOSCO MMOU encompasses the biggest and most-developed financial mar-kets. It quickly expanded in both Europe and North America, as well as in important marketsin Asia and South America. In the developing world, the IOSCO MMOU is especially popularamong a specific subset of jurisdictions: important emerging economies, such as Brazil, China,and India. The IOSCO MMOU is not popular, however, among smaller developing econo-mies.

While IOSCO and IFRS expansion patterns show that the standards are more popular insome regions than in others, the FATF map, in Figure 4, presents a much stronger clusteringpattern: countries in a particular region move to join FATF at exactly the same time. Successiveblocks of neighboring countries join FATF and FATF-style regional bodies simultaneously,with only a few countries left in each region to follow at a later date. This pattern indicates thatFATF expands through a well-orchestrated effort that involves the creation of regional insti-tutions.

Countries Adopting Multiple Standards

While all three standards discussed in this study address securities regulation concerns, theirpopularity among countries varies significantly, as Figure 1 above has shown. Table 2 belowexplores whether some countries are more likely to adopt two or all three standards, perhapsbecause they are more connected to international financial regulation templates, or becausethey pay more attention to money laundering, enforcement cooperation, or financial disclo-sure.

As this table shows, high-income countries are overwhelmingly likely to adopt all three stan-dards discussed in this study. These high participation rates demonstrate how important inter-national soft law has become for domestic financial regulation in these countries. Many mid-dle-income countries, including important emerging markets such as Brazil and China, have

TABLE 2.MULTIPLE STANDARDS’ ADOPTION (BY 2012)

Standards AdoptedIncome Groups

High Middle Low Total

None 0 6 18 24FATF only 0 8 27 35IFRS only 0 1 3 4IOSCO only 0 0 0 0FATF & IFRS 1 28 27 56FATF & IOSCO 2 9 3 14IFRS & IOSCO 0 0 1 1All 3 28 22 7 57Total 31 74 86 191

Note: The data follow the World Bank’s classification of countries into low income (gross national income (GNI)per capita of less than $1045 in 2013), middle income (GNI per capita between $1045 and $12,746 in 2013), andhigh income (GNI per capita over $12,746 in 2013).


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also adopted all three standards discussed here, as have key regional financial centers such asHong Kong and Singapore. But some important middle-income countries, like Russia, havenot joined the IOSCO MMOU, and others, like India, have not adopted IFRS, although theyhave joined FATF and the IOSCO MMOU. Among low-income countries, very few haveadopted all three standards. In fact, the majority of low-income countries have either adoptednone of the three standards or have joined only FATF.

IV. ANALYSIS AND FINDINGS

Analytical Design

This part employs statistical methods to explore the adoption of international standards bycountries around the world.116 Prior empirical studies of the spread of international financialstandards—which are very few117—fail to take into account the many different ways in whichone country’s decision to adopt the standards alters the calculus for other countries consideringadoption. For example, the United States’ decision to adopt an international standard mightinfluence a country that has strong ties with the United States but might not resonate as muchwith a country less closely connected with the United States. The theoretical section above hasidentified three types of potentially relevant connections between countries: competition,institutional capacity, and political power. This study’s key empirical contribution is that itexamines these country-to-country influences quantitatively, as explained below.

To capture how each country is influenced by other countries’ choices, this study developsmeasures known as spatial lags.118 The following examples explain the intuition behind spatiallags. To start with a simple case, imagine a world with just three neighboring countries: A, B,and C. Our hypothesis is that A and B influence their neighbor, country C, in adopting inter-national financial standards; that is, C is more likely to adopt the standards if A and B also adoptthem. For further simplicity, let’s assume that A and B influence their neighbor equally—forexample, because they are equally populous, developed, and so on. Imagine that A has adopteda financial standard, whereas B has not; A’s choice is coded as 1, and B’s choice as 0. In this case,a spatial lag seeking to reflect the potential influence of C’s neighbors on C would be the averageof the choices of A and B, and would take the value 0.5. After thus calculating the spatial lag,the next step involves empirically testing the hypothesis that the spatial lag represents—thatis, that A and B influence C in adopting the standard and that they do so to equal degrees. Forthat purpose, the spatial lag is used as an additional independent variable—along with otherindependent variables of interest, such as C’s gross domestic product, the size of its stock mar-ket, and so on—in a regression predicting the likelihood of C adopting the standard. In effect,the regression analysis assesses whether neighbors’ influence, as represented in the spatial lag,increases the chances that C adopts the standards, and estimates the magnitude of that influ-ence.

116 To help improve readability for the non-expert reader, the text presents the intuitions underlying key con-cepts. More technical information is included in the footnotes, especially for readers interested in the statistical tech-niques.

117 See supra note 11.118 For readers interested in reading more about spatial lags, see generally LUC ANSELIN, SPATIAL ECONOMET-

RICS: METHODS AND MODELS (1988).


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Next, let’s consider a more complicated scenario. Imagine that our world also includes coun-tries D and E, which are C’s trade competitors. We would like to explore the hypothesis thatC is heavily influenced not by its neighbors but by its trade competitors. A spatial lag seekingto capture the effect of competition on C would reflect the choices of D and E, but not thoseof A and B. Imagine further that countries C and D are both manufacturing countries in tightcompetition with one another, whereas country E is a predominantly agricultural country witha smaller manufacturing sector. Assume that the correlation between the products that C andD export is 1, and that the correlation between the products that C and E export is 0.5. In thisexample, D’s influence over C is twice as strong as E’s.119 As a result, the spatial lag–seekingto reflect, in this instance, the potential influence of C’s competitors on C–would take the value0.67 if only D adopts that standard, 0.33 if only E adopts, and 1 if they both adopt.120 Again,to test the hypothesis behind the competitors’ influence spatial lag, we would use it as an addi-tional independent variable in a regression, along with other independent variables of interest,predicting the likelihood that C adopts the standard in question. In this manner, different spa-tial lags can explore relationships based on various types of connections between countries fordifferent standards. The analysis below develops spatial lags reflecting the three connectionmechanisms identified in the theory—competition, institutional similarity, and power rela-tionships—and their varying influence on different countries for each standard of interest.

The degrees of influence between two countries often change from year to year—for exam-ple, because one country increases its exports in a competitive market. To take account ofchanging country-to-country dynamics, the spatial lags in this study vary over time, taking adifferent value for each country in each year. In addition, it may take one or more years for onecountry to take note of other countries’ choices and their effects. To reflect this gap in time,the spatial lags’ values for each year are typically based on foreign countries’ adoption choicesin the immediately prior year or even in the more distant past.121 The section immediatelybelow (“Main Independent Variables”) provides more details on construction of the spatiallags used in this study.

A country’s decision to adopt (or forgo adopting) an international standard does not dependonly on other countries’ choices but could also be shaped by various domestic factors, such as

119 To calculate these weights, this study relied on export data for each country in each year in sixty differentproduct categories. For more details, see subsection “Competition” in part IV.

120 In this study, all spatial lags range from 0 to 1, where 1 indicates that all countries potentially influencing Cin the manner explored by the spatial lag have adopted the standard. This assignment of values is standard in spatiallags exploring country-to-country influences, and results from a conventional practice in spatial econometricsknown as row standardization. For a discussion of this practice, see KATERINA LINOS, THE DEMOCRATIC FOUN-DATIONS OF POLICY DIFFUSION 90 n.66 (2013).

121 Construction of the spatial lag begins with a matrix whose elements represent the degree of connectednessbetween any two countries in the sample, on the basis of the characteristic in question, be it export profiles, levelsof government effectiveness, or military alliances. The matrix varies over time because the relevant connectionschange over time. By convention, the diagonal values—that is, a country’s relationship to itself—are set to 0. Inaddition, the matrix is row-standardized, so that countries with many neighbors and countries with few neighborsget proportional weights. This matrix is then multiplied by a vector of country-year observations that takes the valueof 1 if a connected country has adopted the standard in question, and 0 if it has not. This vector is then lagged byone or more years, meaning that neighbors’ policies in the prior year (or earlier years) are inputted. This lag reflectsthe time that it takes for one country’s policies to influence those of others.


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its wealth or the size of its stock market, and international factors, such as a country’s partic-ipation in an IMF program. Thus, the analysis below also includes many such variables as con-trols.122 Those variables are also discussed in the following section.

In the section after that (“Findings”), the effect of these variables is analyzed using a meth-odology known as survival analysis or duration analysis, which investigates the length of timeuntil some event occurs (in this case, the adoption of particular standards). Thus, the regres-sions below estimate the probability that a country will adopt an international financial stan-dard in a particular year since its promulgation and explores how this probability changes overtime. Countries enter the data set in the year that each international standard is promulgatedor, if a country becomes independent later, in that later year. Countries exit the data set whenthey adopt the international standard in question or when the observation period ends (in the year2012),whichever comes earlier.Theobservationperiod isdifferent for each international standard,as they were established at different times.123 To analyze these data, the regressions below are basedon the Cox proportional hazards model, which is widely used in survival analysis.124

Main Independent Variables

This part uses spatial lags to test the three key hypotheses proposed in the theory section, partI above. In particular, it is hypothesized that the factors driving the spread of international stan-dards include the choices of competitor countries, the choices of countries with similar insti-tutional capabilities, and the choices of powerful countries.

Competition. On the first hypothesis, standards created by private market networks are morelikely to spread among countries whose national industries are in competition with each other.To capture competition among countries, the first spatial lag’s weights are based on the sim-ilarity of countries’ export profiles, in line with approaches previously used in the literature.125

Countries that export similar products are more likely to be in direct competition with oneanother: their industries clamor for the same markets; they appeal to similar sources of funding,such as industry-specialized institutional investors and private equity funds; and they are cov-ered by similar outlets in the press and for investor information. For these reasons, regulatorychanges that provide an edge to a country’s national industry are likely to be felt more stronglyamong its export competitors. Alternative ways of conceptualizing competition are discussedbelow in the section below on robustness checks.

Countries with similarly effective governments. On the second hypothesis, standards created bynational regulators spread more readily among countries with similarly effective regulatory structures.Whenregulators consider joiningaregulatorynetworkandadopting its standards, theyare likely to take

122 The models estimated take the following form: Yit � � � �Xit�1 � �Wy*t�1 � �it. Yit is a binary variable,indicating whether country i has adopted an international standard in year t or not. X is a vector of conditions thataffect country i’s decision, Wy* is a vector of spatial lags and � is the error term.

123 In the regressions presented in Table 3 below, one of the reasons that each standard has a different samplesize is that the time frame for each standard is different. For a more detailed discussion, see infra note 135.

124 The Cox model is popular because it is especially flexible and does not require the researcher to make strongassumptions about the pace at which countries adopt international standards. The Cox model does require theresearcher, however, to ensure that a key test is satisfied: the proportionality of hazards assumption. See infra note134. For more details on these statistical models, see generally DAVID G. KLEINBAUM, SURVIVAL ANALYSIS: ASELF-LEARNING TEXT (3d ed. 2011).

125 See Zachary Elkins, Andrew T. Guzman & Beth A. Simmons, Competing for Capital: The Diffusion of BilateralInvestment Treaties, 1960–2000, 60 INT’L ORG. 811 (2006).


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into account not only competitive factors but also the institutional capacities of other participants in thenetwork. In this way, they can ensure that their counterparts have the requisite powers to adopt andimplement the standards, therebyhonoringanypromisesmadeat thedrafting stage.Asa result, thenet-work will screen out regulators whose priorities are determined not by their commitment to their reg-ulatorymissionas suchbutbyoppressive, corrupt,orotherwiseunreliablepolitical superiors.Accordingto this theory, highly effective regulators committed to the rule of law are more likely to join a networkwhose other participants also share such a commitment, whereas regulators from corrupt, authoritariangovernments are unlikely to join.

To explore this argument, this study turns to established measures of government effective-ness, adherence to the rule of law, and perceptions of corruption in a country.126 The respectivespatial lag reflects the degree of similarity in government effectiveness between existing mem-bers of the network and potential entrants. One might argue that, as long as a potential entrantis not corrupt or otherwise dysfunctional, it might still be welcome in the network, even if itsrulemaking and enforcement capacities are not otherwise similar to its in-network peers. Yet,the more similar a potential entrant is to existing network members, the more straightforwardcooperation will be: standards will more easily translate into domestic law; familiar enforce-ment structures will already be in place; and judicial review mechanisms will already be avail-able. In this sense, out-of-network regulators with institutional powers and tools similar tothose of their in-network peers face lower costs and hurdles when considering whether to join.

Power relationships. On the third hypothesis, standards created by ministry executives spreadin a manner that reflects the power of the network’s founders. Existing network members canrecruit new ones by utilizing traditional means of pressure in international relations, such asthose involving economic sanctions, conditions for economic aid, or naming and shamingbefore key international organizations like the United Nations. But governments can also usevarious other political and economic levers, including hard-to-detect threats. To quantify thesechannels’ combined effect, this study turns to a marker shown by earlier research to reflectmany of these means of pressure: military alliances. Although military alliances are typicallyused to examine war and peace, prior studies have shown that alliances are also a major deter-minant of foreign aid patterns127 and trade flows.128 More recent work suggests that securityalliances also influence choices of exchange-rate regimes129 as well as bilateral investment

126 These data are provided by the World Governance Indicators (WGI) project of the World Bank group. TheWGI project has been criticized for relying heavily on surveys of firms, experts, and officials regarding their per-ceptions of governance, rather than metrics of governance on the ground. See, e.g., Marcus J. Kurtz & AndrewSchrank, Growth and Governance: Models, Measures, and Mechanisms, 69 J. POL. 538, 539 (2007). For a responseto these criticisms by the WGI project, see Daniel Kaufmann, Aart Kraay & Massimo Mastruzzi, Growth and Gov-ernance: A Reply, 69 J. POL. 555 (2007). These criticisms could affect the results in this study to the extent thatnetwork members, when screening new applicants, were better able than the WGI project to discern the quality ofgovernance in an applicant country. However, because, for each country/year, the spatial lag aggregates and weighsgovernance measures for all other countries, only very large and systematic deviations between network members’screening and the WGI index could substantially affect on the findings.

127 See Peter J. Schraeder, Steven W. Hook & Bruce Taylor, Clarifying the Foreign Aid Puzzle: A Comparison ofAmerican, Japanese, French, and Swedish Aid Flows, 50 WORLD POL. 294 (1998).

128 See Edward D. Mansfield & Rachel Bronson, Alliances, Preferential Trading Arrangements, and InternationalTrade, 91 AM. POL. SCI. REV. 94 (1997); Joanne Gowa & Edward D. Mansfield, Power Politics and InternationalTrade, 87 AM. POL. SCI. REV. 408 (1993); Andrew G. Long & Brett Ashley Leeds, Trading for Security: MilitaryAlliances and Economic Arrangements, 43 J. PEACE RES. 433 (2006).

129 See Quan Li, The Effect of Security Alliances on Exchange-Rate Regime Choices, 29 INT’L INTERACTIONS 29,159 (2003).


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among companies from high-income and low-income countries.130 These studies suggest thatthe political power used to establish alliances in the national security sphere goes hand in handwith many choices that governments make in the economic sphere. Moreover, military-alli-ance data are readily available for a large number of countries over time.

Apart from capturing well the political power relationships at issue, military-alliance datahave the added benefit of being causally prior and exogenous to the dependent variable studiedhere. That is, military alliances themselves are relative stable and are unlikely to change becausean ally chose to join or not join one of the networks examined here. By contrast, foreign aidflows, as well as trade and investment patterns, change more frequently and could change inresponse to a country’s decision to join or not join a network, making interpretation harder.For example, it is possible that trade connections could lead to the adoption of particular stan-dards or that, conversely, the adoption of those standards could lead to greater trade connec-tions. Accordingly, models in Table 3 (see the following section) include a spatial lag examiningwhether countries whose allies have already adopted the standards are also likely to join. As analternative to using military alliances as a means of identifying state-to-state power relation-ships, the section on robustness checks explores such relationships by looking at how oftencountries vote in the same direction in the UN General Assembly.

Other variables. In addition to these three spatial lags, the models presented below includea series of other factors that might affect a country’s decision to adopt a set of standards. Theseadditional variables do not directly influence the primary theoretical claims developed in thisarticle but are included as controls. Many of these measures vary over time, although sometime-invariant controls are also included in order to capture differences across countries. Acountry’s gross domestic product per capita, the size of its national capital market, and the sizeof its banking sector are key determinants of the political economy of financial regulation. Forexample, in countries with strong capital markets, the financial industry might seek out higher-quality regulatory standards. Or in countries with a strong banking sector, represented here bytotal domestic credit to private parties, the financial industry may extract private informationfrom companies without needing to rely on disclosure regulation. Domestic institutions, suchas a democratic regime, may also affect networks’ ability to have their standards adopted asdomestic law.131 Of particular importance are the institutional arrangements insulating finan-cial regulators from political influences, since regulators’ ability to undertake their own initia-tives is an important background feature of the hypotheses in this study, particularly withregard to regulator networks. As central banks are the only financial regulators whose indepen-dence from politicians has been studied for a relatively wide cross-section of countries overtime, this study uses data on central bank independence as a proxy for the institutional positionof financial regulators more generally.132 Several studies have shown that the shape of somecountries’ current regulatory frameworks can be traced back to their legal origins in common

130 See Quan Li & Tatiana Vashchilko, Dyadic Military Conflict, Security Alliances, and Bilateral FDI Flows, 41J. INT’L BUS. STUD. 765 (2010).

131 See Witold Jerzy Henisz, Political Institutions and Policy Volatility, 16 ECON. & POL. 1 (2004).132 One of the most extensive studies to date includes an analysis of mostly European regulators. See Fabrizio

Gilardi, The Formal Independence of Regulators: A Comparison of 17 Countries and 7 Sectors, 11 SWISS POL. SCI. REV.139, 139–40 (2005).


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law.133 Since these countries might be more willing to adopt standards that strengthen secu-rities disclosure regimes and that aim to reduce market distortions, the models below includea variable reflecting whether a country has a common law legal origin or not. Finally, averageyears of education are used to indicate the quality of the workforce in each country.

International factors might also affect the likelihood that a country would adopt the stan-dards. Countries whose local industries are more open to international markets, indicated bylevels of foreign direct investment, might be more likely to incorporate international standardsand to participate in cooperation networks. More directly, since international organizationssuch as the IMF and World Bank have included all three networks and their standards in thescope of country reports, the models include a variable for participation in IMF programs. Asdiscussed above in the section “Adoption over Time” in part III, the models below include vari-ables that take into account two regional events likely to affect countries’ policies toward thestandards: membership in the EU and exposure to the Asian crisis of 1997.

Findings

Table 3 presents regression results exploring the likelihood that a country will adopt theIFRS, IOSCO MMOU, and FATF Recommendations at a certain time. The table reports haz-ard ratios: a hazard ratio above 1 indicates that a variable increases the likelihood of adoption;a hazard ratio below 1 indicates that a variable decreases likelihood of adoption.134 Because thesize of the increase or decrease in likelihood of adoption is hard to interpret directly, the mainfindings are graphed in Figures 5 to 7 below.

For each standard, the analysis is repeated twice, and results are presented in Table 3. In thefirst set (Models 1, 2, and 3), the independent variables are the three spatial lags (export com-petitors, countries with similar governmental effectiveness, and military alliances) as well as fewkey domestic and international variables available for many countries and years, so as to main-tain as large a sample size as possible. In the second set (models 4, 5, and 6), the analysis includesthe three spatial lags and the full set of domestic and international variables outlined above.However, data on these additional variables are not available for all countries or all years in thisstudy, and as a result the sample size in models 4, 5, and 6 is smaller.135 In both sets of results,

133 See Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, What Works in Securities Laws, 61 J. FIN.1 (2006); Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, The Law and Economicsof Self-Dealing, 88 J. FIN. ECON. 430 (2008).

134 I employed the residual-based test of the proportional hazards assumption to ensure that the Cox model isappropriate for these data; I found that the model as a whole and the main independent variables are robust andproportional in their effects in each set of standards analyzed below.

135 As discussed above in the immediately preceding section, “Main Independent Variables,” the sample size foreach set of three models also reflects the different times at which countries enter and exit the data set. Each of thestandards became available for adoption at a different time. For IFRS, which evolved gradually, the sample beginsin 1980, a year before a professional accountants’ association formally recommended voluntary adoption to itsmembers. See information pertaining to the Institute of Certified Public Accountants of Cyprus, a private profes-sional association. International Federation of Accountants, Assessment of the Regulatory and Standard-SettingFramework: The Institute of Certified Public Accountants of Cyprus 6 (question 44(b)), at http://www.adoptifrs.org/uploads/Cyprus/international%20federation%20of%20accountants.pdf (information submitted as part of Inter-national Federation of Accounts compliance program). This recommendation indicates that from that timeonward, standards had reached a form that countries could have adopted them if they so desired. For IOSCO, thesample begins in 2002, when the MMOU was executed and became available to countries. Similarly, for FATF,the sample begins in 1990, when the 40 Recommendations were first introduced. The number of observations inTable 3 reflects this timing.


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the empirical patterns that emerge are generally in line with the predictions of the theory pro-posed above.

In the case of IFRS (models 1 and 4), the export competitors’ spatial lag is statistically sig-nificant, suggesting that the likelihood of a country adopting the standards is higher if its com-petitors adopt them first. For most adopters, IFRS represents a more thorough, rigorous, anddetailed reporting system than national accounting standards—and with every additional mar-ket joining IFRS, institutional investors have one more reason to invest in understanding it.

TABLE 3.VARIATIONS IN THE SPREAD OF INTERNATIONAL FINANCIAL STANDARDS

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6IFRS IOSCO FATF IFRS IOSCO FATF

Spatial lagsExport competitors 1.07*** 1.21 1.01 1.09* 1.13 0.99

(0.02) (0.17) (0.02) (0.05) (0.18) (0.03)Similar governmental

effectiveness1.01 1.03** 1.02* 1.03 1.05** 1.00

(0.01) (0.02) (0.01) (0.02) (0.02) (0.01)Military alliances 1.00 1.00 1.01** 1.01 1.01 1.02***

(0.01) (0.01) (0.00) (0.01) (0.01) (0.00)Domestic factors

GDP per capita (1-yearlag)

1.00* 1.00* 1.00 1.00** 1.00 1.00(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)

Market capitalization(log, 1-year lag)

0.85*** 1.33*** 1.01 0.85** 1.26** 0.91(0.05) (0.09) (0.05) (0.06) (0.11) (0.05)

Democratic regime 0.88 0.64 0.59* 1.99 0.42* 1.26(0.46) (0.26) (0.18) (1.59) (0.21) (0.79)

Common law 1.41 1.99** 1.56* 1.44 2.17** 2.38***(0.36) (0.64) (0.37) (0.46) (0.90) (0.75)

Central bankindependence

1.00 0.99 1.03**(0.01) (0.01) (0.01)

Domestic credit toprivate parties

1.00 0.99 1.01**(0.00) (0.00) (0.00)

Average years ofeducation

1.01 0.98 0.98(0.09) (0.10) (0.09)

International factorsEU membership 2.96*** 3.50** 0.70 2.69*** 1.45 0.65

(0.82) (2.00) (0.32) (0.83) (0.46) (0.26)Exposed to Asian crisis 0.89 0.95 1.75 1.28 0.58 1.38

(0.92) (1.01) (0.64) (1.28) (0.63) (0.70)Net FDI as percentage of

GDP (1-year lag)0.99 1.01 1.01

(0.01) (0.01) (0.01)Participation in IMF

program0.53 0.22* 1.35

(0.28) (0.17) (0.61)Observations 1331 678 567 937 433 344

FDI, foreign direct investment; GDP, gross domestic product; IMF, International Monetary Fund.* p � 0.1. ** p � 0.05. *** p � 0.01.Note: The Cox proportional hazards model is used to estimate how quickly a country will adopt three sets of finan-

cial standards (IFRS, IOSCO, and FATF). The first three columns present the results with the particular variableslisted at left; the next three columns present the results with additional variables added to the calculations. Stan-dard errors are clustered by country. Because interpreting the size of the coefficients in duration models is dif-ficult, the main results are graphed in Figures 5–7.



Although these arguments are important for every country that is considering whether to join,the arguments are likely to be especially convincing for a policy maker whose national industryis in direct competition with the national industries of prior adopters. Of course, countriescould try to outdo their competitors by developing a new set of standards, perhaps more inves-tor friendly than IFRS. But even in that case, international investors would have to educatethemselves in national accounting standards, a cost they might not be willing to incur, par-ticularly for smaller markets. By adopting IFRS for their national companies, countries canlower investors’ transaction costs. Indeed, results on the market capitalization variable indicatethat the smaller the national market, the more likely a country is to adopt IFRS. Because theEU decided to join IFRS as a block, rather than leaving that decision to member states, thestudy includes an EU membership variable. Results are similar when the EU variable isexcluded and also when EU countries are excluded from the data set altogether, as explainedbelow in “Robustness Checks.”

In the IOSCO MMOU analysis, the regression results (models 2 and 5) are also consistentwith the theoretical predictions of this study, as the similar governmental effectiveness spatiallag is statistically significant. These results indicate that countries are more likely to join if theirinstitutional capacities are similar to those of prior members. Indeed, highly effective regulatorsare more likely to want to work with other highly effectively regulators, which can commitcredibly to domestic reforms and are able to offer reciprocal assistance in cross-border fraudwhen requested. This effect suggests that the powers provided to regulators by domestic lawsand by the domestic institutional environment in which they operate have more importantconsequences for these regulators’ international standing than previously thought. Thisdynamic is also in line with the hazard ratios for market capitalization: while small markets aremore likely to adopt IFRS, big markets are significantly more likely to join the IOSCOMMOU. Big markets are more likely to have robust and effective regulators. Moreover, a com-mon-law origin suggests a greater likelihood of joining the IOSCO MMOU, in line with the-ories that associate common law with an emphasis on securities enforcement.

As far as FATF is concerned, the regression results (models 3 and 6) present a substantiallydifferent spread pattern, in which state power is the key driver behind countries’ decisions tojoin. The military alliances spatial lag is highly significant, indicating the role that power rela-tionships play in expanding the network. This finding is in line with other observations high-lighted above, such as the strong regional clustering in FATF’s geographic expansion patternsillustrated in the map in Figure 4, which also points to well-orchestrated government nego-tiations at the regional level. Other domestic political economy factors that increase a country’slikelihood of joining FATF include an independent central bank and a large banking industry(as a percentage of gross domestic product). Countries with strong regulators and robust banksare more likely to participate in global anti-money-laundering efforts, which could directlyaffect connections between their domestic financial systems and global markets. The common-law variable is also highly predictive of FATF adoption, reflecting partly the common-lawemphasis on enforcement in financial regulation and partly the early creation of a FATF-styleregional body in the Caribbean, which includes many former British colonies. Overall, theFATF expansion patterns suggest that governments made anti-money-laundering and anti-terrorist financial laws a priority and that they worked hard to promote those laws around theworld.



What do the hazard ratios presented in Table 3 mean in practice? How much does the like-lihood of adoption change in response to other countries’ choices? Figures 5, 6, and 7 graph-ically represent the results of models 4, 5, and 6 in Table 3. These figures plot fitted survivalcurves, which indicate the probability that a country with particular characteristics will not haveadopted the standards at each point in time.

Figure 5 shows the influence of competitors’ choices on the adoption of IFRS. The top,solid line represents a country that has relatively few competitors that have adopted IFRS,and that thus experiences only weak competitive influence to adopt IFRS. More specif-ically, the strength of this country’s connection to competitors, as calculated in order toconstruct the spatial lag, ranks at the bottom twentieth percentile of connection strengthsfor all countries in the data set. The bottom, dotted line represents a country that has rel-atively many competitors that have already adopted IFRS, and that is thus subject to stron-ger influence to adopt IFRS itself. The strength of this second country’s connection tocompetitors ranks at the top eightieth percentile of connection strengths for all coun-tries.136 The effects of competitors’ choices were sizable once countries started allowingor requiring companies to use IFRS standards. For the first ten years after IFRS were pro-mulgated, these standards were incomplete and could not supplant national accountingstandards. Ten years after that, however, the probability that a country whose competitorshad adopted IFRS standards would also do so was almost 0.3, versus approximately 0.1for a country with few competitors that had adopted those standards. The gap grows fur-ther in later years.

136 These fitted survivor curves are based on Model 4 in Table 3; all other variables are held at their means.

FIGURE 5. How competitors’ choices influence IFRS adoption.


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Figure 6 shows how the probability that a country will adopt the IOSCO MMOU depends onthechoicesofgovernments thatare similar in their effectiveness.Again, each line indicates theprob-ability that a country will not have adopted the MMOU at each particular time. The top line rep-resents a country that falls at the bottom twentieth percentile of countries with similar levels of gov-ernmental effectiveness that have adopted the IOSCO MMOU. The bottom line represents acountry that falls at the top eightieth percentile of countries that have similar levels of governmentaleffectiveness and that have adopted the MMOU.137 The effects of similarly effective governments’choices are sizable throughout the period we observe. Ten years after the promulgation of theIOSCO MMOU, a country with many similarly effective states adopting the MMOU had a prob-ability of 0.9 of also doing so, whereas the probability was 0.7 for a country with few similarly effec-tive states adopting those standards.

Figure 7 shows how the probability that a country will join FATF depends on the choices of itsallies. The curves indicate the probability that a country with particular characteristics will not havejoined FATF at each point in time. The top line represents a country with relatively few allies thathave joined FATF and that ranks, in particular, at the bottom twentieth percentile for the militaryalliances variable, and the bottom line represents a country with relatively many allies that havejoined FATF and that ranks, in particular, at the top eightieth percentile for that variable.138 Theeffects of allies’ choices are sizable. For example, ten years after FATF was promulgated, the prob-ability that a country whose allies had joined FATF would also do so was almost 0.9, whereas theprobability was roughly 0.5 for a country with few allies that had adopted those standards.

137 These fitted survivor curves are based on Model 5 in Table 3; all other variables are held at their means.138 These fitted survivor curves are based on Model 6 in Table 3; all other variables are held at their means.

FIGURE 6. How choices of countries with similar government effectiveness influence decisions to join theIOSCO MMOU.


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Robustness Checks

With regard to the spread of IFRS, the EU’s decision to join as a block may be seen as a piv-otal moment. In addition to having large domestic industries that export products globally, EUmember states have well-run bureaucracies and significant power in the international arena.Thus, the models presented in Table 3 include the EU countries because of their gravitationalpull, both independently and collectively, for other countries considering whether to join thestandards. Results remain basically unchanged when EU member states are excluded from thedata set—which alleviates concerns that the EU’s decision might be the key determinantbehind the spread of IFRS. In addition, results do not change significantly in models that donot include EU membership as an independent variable.

To further explore competition as a motivation for adopting international standards, thisstudy examines alternative measures of capturing competitiveness besides similarity in exportprofiles. One alternative measure traces the regulatory framework of the ten fastest-growingstock exchanges in the world, and finds that when one of these jurisdictions switches to IFRS,the likelihood that other countries will adopt them increases. Another alternative measure isbased on cross-listings data for fifty countries, and finds that when countries with many com-panies cross-listing in foreign exchanges adopt IFRS, other countries are more likely to adoptthose standards.139 Both alternative measures are consistent with theories of competition inholding that countries tie themselves to higher-quality regulation in order to increase their

139 For the connection between cross-listings and competitiveness, see Committee on Capital Markets Regula-tion, The Competitive Position of the U.S. Public Equity Market (2007), at http://capmktsreg.org/app/uploads/2014/12/The_Competitive_Position_of_the_US_Public_Equity_Market.pdf.

FIGURE 7. How allies’ choices influence FATF adoption.


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companies’ appeal for investors.140 Neither measure has any effect on countries’ decisions tojoin the IOSCO MMOU or FATF.

International law scholars have discussed at length the many ways in which state powershapes legal principles. While military alliances provide a direct indication of a state’s power,one might query whether even a powerful country would be willing to put pressure on alliesto reform their securities laws. To find additional indications of the influence that powerfulcountries’ policy choices have on other countries, this study uses measures estimating the affin-ity between two countries based on how often these countries vote in the same direction in theUN General Assembly. Because these votes concern a broad array of topics mostly unrelatedto finance, they may better reflect the influence of a powerful country over others in a givenyear. Under this hypothesis, when a country adopts particular standards, countries connectedwith a high affinity score are more likely to follow suit if power considerations drive the adop-tion of standards. By contrast, high affinity scores would not reflect any effect on standardadoption if countries make decisions based on competitiveness, regulatory capacity, or otherreasons. Regression analysis not reported here shows that countries with high affinity scores toprior adopters are more likely to join FATF, supporting the view that state power plays animportant role in countries’ adoption decisions. In line with the predictions of the theoryabove, high affinity scores have no effect for IFRS or the IOSCO MMOU.

Applying the Theory in Other Networks and Standards

Besides the three networks studied above, there are many areas of the law in which gov-ernments have chosen to incorporate into their domestic laws nonbinding standards for-mulated by international bodies. Table 4 presents an overview of the various areas in whichgovernments have endorsed nonbinding international standards as domestic law, and italso notes the composition of the regulatory network that produced the standards.Although the table includes only the most studied networks, they cover a wide variety ofissue areas and fit neatly within the three types—private, regulator, ministry— discussedin this article. Examining the predictions of the theory presented here for the networksincluded in Table 4 would require additional data collection and analysis, which is beyondthe scope of this study.

V. CONCLUSION AND IMPLICATIONS

This study provides a step-by-step analysis of the mechanisms of network standard set-ting, starting with network participants and their domestic powers to pass new laws or reg-ulations. Earlier work had investigated the factors that shape network participants’ pref-erences, such as ideological commitments, interest group pressures, and subject-matterparticularities. Nevertheless, the mechanisms through which these preferences get trans-formed into legal rules and then spread around the world had remained largely unexplored.These mechanisms illustrate the role of law in nurturing specific strategies for expansion,

140 See John J. Coffee, The Future as History: The Prospects for Global Convergence in Corporate Governance andIts Implications, 93 NW. U. L. REV. 641 (1999); John J. Coffee, Racing Towards the Top? The Impact of Cross-listingsand Stock Market Competition on International Corporate Governance, 102 COLUM. L. REV. 1757 (2002); ReneStulz, Globalization, Corporate Finance, and the Cost of Capital, 26 J. APPLIED CORP. FIN. 3 (1999).


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in building governance profiles that become networks’ calling cards, and ultimately in net-works’ appeal to different countries.

Given that these institutional mechanisms promote certain actors and facilitate certaininteractions, sometimes at the expense of others, they should play a central part in normativeevaluations of networks and their standards. These normative considerations are explored fromtwo separate angles in this concluding part. First, networks raise concerns for democratic legit-imacy, as underlined by scholars worried about the delegation of lawmaking to unelected inter-national bodies. As discussed below, the accountability calculus is different for each network,and thus calls for a different remedy. Second, each network type is evaluated as a vehicle forinternational policy coordination.

Network Types and Democratic Accountability

Reconciling international governance with principles of domestic democracy has long raisedconcerns, not only among academics but also among the public at large. Many consider inter-national decision makers to be even more remote from the “will of the citizens” than domestic,

TABLE 4.INTERNATIONAL STANDARDS IN VARIOUS AREAS

Issue Area Private Regulator Ministry

Trade and productspecifications

International StandardsOrganization (ISO)

International Medical DeviceRegulators Forum(IMDRF)

Environment and energy International Network forEnvironmentalCompliance andEnforcement (INECE)

Nuclear SuppliersGroup (NSG)

Weapons Missile TechnologyControl Regime(MTCR)

Human rights International CoordinatingCommittee of NationalInstitutions for thePromotion and Protectionof Human Rights (ICC)

Internet Internet Corporation forAssigned Names andNumbers (ICANN)

Antitrust International CompetitionNetwork (ICN)

Finance InternationalAccounting StandardsBoard (IASB)

International Swaps andDerivativesAssociation (ISDA)

Basel Committee on BankingSupervision (BCBS)

International Association ofInsurance Supervisors(IAIS)

International Organization ofSecurities Commissions(IOSCO)

Financial ActionTask Force(FATF)



elected representatives.141 Moreover, as international regimes grow more integrated, they canlay down uniform policies and curtail the discretion of domestic, democratically elected gov-ernments.142 This worry is especially pronounced in less powerful countries that may havetrouble getting their voices heard in international venues, not to mention influencing out-comes. Moreover, international bodies are thought to expand the executive’s powers to the det-riment of the legislature since executive officials and agencies are more likely to take part ininternational negotiations.143 The tension between domestic democracy and internationalgovernance is further heightened insofar as participants in international bodies are them-selves unelected officials. Some scholars have forcefully critiqued the organizationaldynamic in which judges, police officers, central bankers, and other officials from diversecountries socialize with one another, develop shared perspectives, and then impose themon unsuspecting electorates, which are given little opportunity to participate in or controlthis process.144

Fears about democratic accountability may lessen when international standards enter thedomestic realm through the legislative process, as is the case with many of the standards in thisstudy. Contrary to the conventional wisdom that domestic legislatures have no say over inter-national bureaucracies, recent research suggests that the U.S. Congress has very actively mon-itored World Bank activities.145 Others argue that domestic policy makers use foreign modelsnot to trump domestic electorates but to win them over. Skeptical voters are comforted whenmany other governments have also adopted the same laws; they are reassured that the proposalis not a radical experiment designed to enrich politicians’ cronies but a mainstream, tried-and-true policy.146

Besides electoral accountability, other democratic values may be at risk. Fundamental rightscritical to the functioning of liberal democracies can be subverted through international del-egation. For example, asset freezes imposed, pursuant to UN Security Council resolutions, onsuspected financers of terrorism can conflict with fundamental rights such as due process andthe enjoyment of property.147 And some scholars argue that well-organized private groups,

141 See Jed Rubenfeld, Unilateralism and Constitutionalism, 79 N.Y.U. L. REV. 1971, 2017–18 (2004).142 See Eric Stein, International Organizations and Democracy: No Love at First Sight, 95 AJIL 489, 491 (2001).143 See Jose E. Alvarez, International Organizations Then and Now, 100 AJIL 324, 333 (2006).144 See, e.g., Kenneth Anderson, Book Review: Squaring the Circle? Reconciling Sovereignty and Global Governance

Through Global Government Networks, 118 HARV. L. REV. 1255, 1301–10 (2005) (reviewing ANNE-MARIESLAUGHTER, A NEW WORLD ORDER (2004)). Kenneth Anderson’s critique, among others, focuses most force-fully on judicial networks. More generally, the debate on the use of foreign law in domestic courts is extensive. See,e.g., Rosalind Dixon & Eric Posner, The Limits of Constitutional Convergence, 11 CHI. J. INT’L L. 399 (2011); DanielFarber, The Supreme Court, the Law of Nations, and Citations of Foreign Law: The Lessons of History, 95 CAL. L. REV.1335 (2007); Tom Ginsburg, Svitlana Chernykh & Zachary Elkins, Commitment and Diffusion, 2008 U. ILL. L.REV. 201 (2008); Vicki Jackson, Constitutional Comparisons: Convergence, Resistance, Engagement, 119 HARV. L.REV. 109 (2005); Gerald L. Neuman, The Uses of International Law in Constitutional Interpretation, 98 AJIL 82(2004).

145 See Kristina Daugirdas, Congress Underestimated: The Case of the World Bank, 107 AJIL 517, 518 (2013).146 See Katerina Linos, Diffusion Through Democracy, 55 AM. J. POL. SCI. 678 (2011); KATERINA LINOS, THE

DEMOCRATIC FOUNDATIONS OF POLICY DIFFUSION: HOW HEALTH, FAMILY AND EMPLOYMENT LAWSSPREAD ACROSS COUNTRIES (2013).

147 See, e.g., Joined Cases C-584/10 P, C-593/10 P & C-595/10 P, Comm’n v. Kadi (Eur. Ct. Justice, July 18,2013).


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such as large transnational firms, can more effectively promote their own interests at the globallevel and thus may exert disproportionate influence in international policy making.148

Others have argued, however, that international cooperation can help disadvantaged groupsto find support from abroad. For example, domestic courts’ resolve to stand up for the rightsof unpopular minorities may strengthen when they interact with similarly minded foreigncourts.149 Likewise, domestic consumers may be better able to fight special interest groups andtrade protectionism if international forums facilitate alliances with foreign exporters.150

The arguments outlined above are animated by central questions concerning the democraticlegitimacy of international lawmaking: Which groups are better represented in internationalbodies? What are the connections between network participants and domestic electorates? Andwhat are the powers of networks toward citizens on the ground.151 These questions are, indeed,also at the heart of this article’s analysis of network participants and their institutional capac-ities, and the distinctions between private, regulator, and ministry networks suggest that dif-ferent networks may exhibit different concerns from the perspective of democratic legitimacy.The following remarks build upon recent work by scholars in the Global Administrative LawProject, who identify diverse institutional mechanisms for accountability and suggest ways toimprove legitimacy.152

Private networks. As noted in the analysis of networks presented above, private networkshave no electoral links with the public, nor are they subject to supervision by any other electedor otherwise accountable officials. Since the only constituency directly engaging in standardsetting is a particular private industry, the standards reflect primarily industry preferences.Moreover, the staff and funding necessary to operate such a network is more likely to comefrom bigger, better-resourced, international firms, which may prefer rules that disadvantagetheir smaller, domestic competitors. Responding to concerns that parts of the industry mighthave disproportionate influence over its rules, the IASB has recently made efforts to distancethe work of its decision-making bodies from the influence of the private firms that fund thenetwork. For example, IASB now requires its key staff to resign from industry positions duringtheir IASB tenure; it has limited the contributions of the Big Four audit firms to its budget;and its fund-raising efforts have expanded to include other firms in IFRS countries. To furtherbroaden inputs into their standards, private networks could allow more diverse constituents toparticipate in the standard-setting process; for example, they could invite consultation fromconsumer or investor associations that have no connections to governments.

While wider consultation can broaden the perspectives of private networks, self-regulatorymechanisms work best in areas in which the goals of private industry are generally in line those

148 See Paul B. Stephan, Accountability and International Lawmaking: Rules, Rents, and Legitimacy, 17 NW.J. INT’L L. & BUS. 681, 699 (1996–97).

149 See Eyal Benvenisti, Reclaiming Democracy: The Strategic Uses of Foreign and International Law by NationalCourts, 102 AJIL 241 (2008). Daniela Caruso similarly argues that private law can help legitimize transnationalbodies through its depoliticization and neutrality. Daniela Caruso, Private Law and State-Making in an Era of Glo-balization, 39 N.Y.U. J. INT’L L. & POL. 1, 71–74 (2006).

150 See Robert O. Keohane, Stephen Macedo & Andrew Moravcsik, Democracy-Enhancing Multilateralism, 63INT’L ORG. 1, 2 (2009).

151 Grainne De Burca makes a similar remark in Developing Democracy Beyond the State, 46 COLUM. J.TRANSNAT’L L. 221, 224 (2008).

152 See Richard B. Stewart, Remedying Disregard in Global Regulatory Governance: Accountability, Participation,and Responsiveness, 108 AJIL 211, 213 (2014).


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of society more broadly, as domestic law commentators have argued. In adopting internationalaccounting standards, policy makers have been able to replace comparatively lax domesticregimes with a more demanding international one. That private networks spread on the basisof competitiveness considerations is, by and large, a positive message for those who see inter-national standards as a way of boosting the quality of global regulation and, consequently, thesoundness of the global marketplace. It should be noted, however, that the competitivenessmechanism identified in this study presumes only that policy makers perceive their competitorsas gaining an advantage by adopting the standards, and does not explore whether such advan-tage is actually conferred.

Regulator networks. Concerns about accountability take a different shape in regulator net-works. Formally, regulators’ mission consists in looking out for greater societal interests. Inde-pendent regulators are further shielded from electoral pressures in order to be able to applytechnical analysis neutrally and to pursue long-term goals. In practice, however, regulators areoften accused of pursuing technocratic orthodoxies with little concern for greater societalimplications, and of showing too much deference to private market actors. On such a view,regulatory officials concentrate their attention on their particular sector of interest, interactmostly with industry players, and, over time, come to share the industry’s views and to trustits conduct. In order to break regulators’ narrow focus and increase regulators’ responsivenessto a wider set of concerns, prominent scholars have advocated for increasing political oversightover independent agencies.153

Both the fears and the policy response discussed above are apparent in the reaction to the2008 financial crisis.154 Although domestic regulators bore the brunt of the criticisms, sometransnational networks, such as the Basel Committee, were also charged with drafting stan-dards that failed to anticipate, and that might even have exacerbated, banks’ risk taking. Inmany countries around the world, the domestic regulatory response to the financial crisisincluded granting new powers not to independent agencies but to elected politicians, so as toincrease the political responsiveness of key decisions, such as bank bailouts.155 A similarrealignment of influence in favor of political decision makers is also taking place at the inter-national level. G-20 countries, directly or through their participation in the Financial StabilityBoard (FSB), are setting agendas and requesting regulator networks to develop initiatives onspecific issues or to reconsider their rules in light of different objectives.156 FSB, as discussedbelow, provides a channel through which elected officials can provide guidelines for regulatornetworks’ standard setting, thus bringing these networks closer in line with voter preferences.

Ministry networks. While private and regulator networks do not have any direct connectionswith the voting public, ministry networks comprise elected officials, who should be moreresponsive to citizens’ preferences. Representatives of the executive branch can shape the stan-dards during international negotiations, and in most countries legislators can vote on whetheror not to adopt particular international standards as domestic legislation. While majoritarian-ism may thus be safeguarded, the dominance of the executive in this overall process might give

153 See supra note 38 (references cited).154 See Gadinis, supra note 40.155 Id.156 See Gadinis, supra note 48.


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rise to a different set of concerns for domestic democracy principles. From a separation-of-powers standpoint, the executive may be able to promote its own agenda at the expense of thelegislature, particularly in presidential systems.157 From an individual rights standpoint, theexecutive may disregard the interests of those citizens who cannot affect the electoral outcomeor who stand to suffer disproportionate losses once policies are implemented.158 Particularlybecause ministry officials can mobilize (in one way or another) multiple domestic departments,including the police and other enforcement agents, the international standards promoted bydomestic ministries can affect citizens directly. Notably, however, the international standardsstudied in this article are adopted through the domestic legislative process and have the stand-ing of domestic laws. Consequently, since any actions implementing the standards are actionsof domestic authorities and not of international organizations, the standards and their imple-mentation must comply with safeguards protecting citizens in their domestic legal orders, andare subject to the full review powers of domestic courts.

Network Types as Vehicles for International Policy Coordination

Regardless of how well various networks score on the democratic accountability scale, theirportrayal would not be complete without assessing their achievements and pitfalls in creatinginternational policy coordination. The theory and evidence presented above illustrate the dis-tinct pathways through which private, regulator, and ministry network standards achieve rec-ognition and spread around the world. These pathways suggest that the different standards’normative evaluation might vary in terms of domestic societal consequences, speed of devel-opment and adoption, and distributional divides between wealthy and emerging nations.These differences are explored below.

Private networks. While private networks’ standards may closely track consumer needs, themarket-based, bottom-up developments of standards by private networks may require a longertime frame, particularly in comparison to regulator or ministry networks. Since private net-works need to win market approval before gaining policy makers’ attention, multiple steps arerequired in order to develop shared international standards and then to have them adopteddomestically. Moreover, the outcome is less certain. For example, persuading multiple nationallegislatures might require more time, especially compared to international negotiations inwhich government representatives are sitting around the same table. Thus, private networksmay not be well suited to address regulatory problems that require immediate attention.

Although this bottom-up drafting process of private networks may take longer, it may helpto address fears that the standards put the priorities of developed markets ahead of those ofemerging markets. Private networks’ governance arrangements, membership, and draftingprocesses are designed to safeguard and promote their a-political and a-national character. Inthe example studied above, IFRS, small and peripheral markets were early adopters, launchinga global initiative that eventually gained the acceptance of highly influential jurisdictions, such

157 See Paul B. Stephan, International Governance and American Democracy, 1 CHI. J. INT’L L. 237, 238 (2000).Daniel Esty accepts what he terms “the inevitable lack of democratic underpinnings” as states move decision makingto the international level, but looks at other justifications such as expertise and procedural legitimacy. Daniel C.Esty, Good Governance at the Supranational Scale: Globalizing Administrative Law, 115 YALE L.J. 1490, 1490(2006); see id. at 1495–97.

158 See Alvarez, supra note 143, at 341; Grainne De Burca, The European Court of Justice and the InternationalOrder After Kadi, 51 HARV. INT’L L.J. 1, 2 (2010).


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as the EU. Even so, results show that larger markets might resist private standards for longer;the United States has yet to fully endorse IFRS. It can consequently take a while before adoptersof private networks enjoy the benefits of belonging to an extensive network of countries withuniform standards.

Regulator networks. Cooperation among national regulators seems like a necessary responseto markets that are becoming increasingly intertwined in a global scale. It is hard to imaginehow else it would be possible to tackle cross-border fraud or to address the needs of globallyactive firms. By identifying reciprocity between domestic regulators as the key driver for theirnetworks’ expansion, this study explains why these networks are one of the great success storiesof transnational governance: they allow regulators to use their domestic powers as currency inorder to gain the cooperation of their foreign counterparts. Because of the reciprocal characterof the arrangement, each national regulator maintains its autonomous decision making andcontrol over actions in its jurisdiction, thus alleviating concerns over ceding sovereignty.

This same mechanism, however, incorporates a significant weakness. For regulators to beable to offer reciprocity to their foreign counterparts, they need qualified staff, substantialresources, and a political environment that supports the regulator’s mission and that does notinterfere with its implementation. These conditions are more likely to arise in developed mar-kets, which are better placed to participate in regulator networks than emerging ones. This sit-uation presents a significant challenge for regulator networks, as building new institutions fromthe ground up is a difficult and lengthy process, leaving the network exposed to concerns aboutits reach and efficacy in the interim. To address this challenge, regulator networks have put inplace technical assistance programs for transferring know-how to, and educating officials from,emerging countries, but such efforts cannot fully address the gap in different countries’ domes-tic resources.

Ministry networks. Compared to private and regulator networks, ministry networks haverecruited higher numbers of jurisdictions at a quicker pace. Backed by the political support ofpowerful countries, ministry networks appear more likely to deliver on their proponents’ aspi-rations of universality and boldness. It is perhaps unsurprising that the most ambitious planfor reforming the international financial system following the 2008 crisis involved the estab-lishment of the Financial Stability Board, a network with a strong ministry component. FSBis an umbrella organization that brings together existing networks of ministry executives,national regulators, and private professionals, under the leadership of a plenary with represen-tatives from all participants. In contrast to earlier attempts to coordinate international financialregulation, FSB has a direct connection to the central government apparatus; it reports backto the G-20, and ministers of finance participate in it directly. This article’s theory suggests thatministry participation will allow FSB to develop policies across regulatory areas or outside themandate of national regulators, and to set broad policy objectives.

FSB’s record so far confirms these theoretical predictions. For issues that private networkshave successfully handled in the past or that fall within the mandate of national regulators, FSBis content to set broad objectives and, except for occasional prodding, to let those networkshandle the implementation. For example, the introduction of leverage ratios in capital-ade-quacy standards was left to the Basel Committee, a network of independent central bankers,and greater cooperation in international accounting was left to direct talks between FASB (theU.S. standard setter) and IASB. But when issues fall outside the scope of regulators’ powers,or require coordinated action by many different government departments, FSB takes on the



issue itself, boosted by the participation of ministry executives in its ranks. Two major FSB ini-tiatives illustrate this division of labor: the regulatory framework for global systemically impor-tant financial institutions, and the standards for over-the-counter derivatives. Both these ini-tiatives involve regulatory problems that no single national regulator had the power to managedomestically.

That said, ministry networks are far from perfect. Top-ranking ministry executives are polit-ical operatives who might lack the expertise necessary to deal with highly technical issues.Because their priorities depend on current political developments, which can be volatile, theirfocus on the issue at hand might weaken as national publics lose interest. Moreover, a network’smain backers may be keen to attract numerous new members, but they may prove reluctantto share their decision-making power. These networks are more likely to reflect global hier-archies rather than to operate on principles of equal participation. To address these concerns,the networks must provide at least some opportunity to noncore countries to voice disagree-ments and concerns.

In analyzing the distinct trajectories that networks develop in order to take advantage of thedomestic lawmaking capacities of their participants, this article offers a new lens into this bur-geoning global phenomenon. It identifies network characteristics that are independent of sub-ject-matter particularities and that help explain why we have seen three distinct types of net-works. It helps to build a systematic approach to network standard setting, and to movediscussions from general expressions of praise and concern to the articulation of the specificadvantages and problems of each network. As networks multiply, evolve, and combine intomore complicated organizations, much is still to be learned. Yet, understanding their originsand dynamics is surely a good place to start.



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THREEPATHWAYSTOGLOBALSTANDARDS: … · THREEPATHWAYSTOGLOBALSTANDARDS: PRIVATE,REGULATOR,ANDMINISTRYNETWORKS By Stavros Gadinis* The proliferation of international standards has …