Regulatory Territory and General Deterrence Across Borders: Swiss Banks' Territorial Self-Categorizations and Responses to U.S. Extraterritorial Law Enforcement

Regulators increasingly engage in extraterritorial law enforcement, but itsdeterrence effects on organizations remain poorly understood. Based on acase study in the Swiss private wealth management industry, we explore theconditions under which U.S. extraterritorial law enforcement provoked cross-border general deterrence, preventing not only the prosecuted Swiss banksbut also the unprosecuted ones (i.e., the observers of the events) from violat-ing U.S. law when a peer was prosecuted for similar behavior. Our inductiveanalysis led us to integrate deterrence theory with a novel cultural–cognitive,organization-centered perspective on regulatory territory: the spatial scope of aregulator’s jurisdictional authority. This integration suggests that unprosecutedbanks’territorial self-categorization—a form of spatial self-categorization thatleads them to conclude whether they are located inside or outside what theyperceive to be a foreign regulator’s territory—is critical for explaining cross-border general deterrence. Our findings emphasize the significance of theclarity with which the U.S. regulator communicated its regulatory territory andhow different types (which we call locals and cosmopolitans) of organizations’taken-for-granted categorization schemes influenced their rational choices and instrumental actions. We contribute to scholarship on organizations’ legal envi- ronment and to organizational research on categories.