Legal Brokers of Overseas Investment in Emerging Economies: Achieving or Undermining Compliance?

In conventional understandings of law and development, corporate lawyers, compliance officers, and other consultants, are understood to spearhead critical processes of internalizing compliance for their clients. By sheer virtue of engaging with the law and legal institutions, such professionals are regarded as promoting the rule of law. This remains so, even if they seek to bend the law’s meaning to conform to clients’ interests and even if their work can and often does exacerbate inequality. Yet, the case of legal professionals in certain emerging markets where corruption and foreign investment are prevalent complicates this understanding.

As we document in our article forthcoming in a special issue on ‘China in Compliance’ in Regulation & Governance, such legal professionals, whom we term ‘legal brokers’ for their dual-facing position between informal and formal rules for business and who convert illicit forms of capital into lawful versions, often face a predicament in conducting compliance work, broadly understood. They contend with a transnational clientele’s need to achieve formal compliance within an emerging market’s nascent regulatory regime, on one hand, and the sobering reality that doing so may, practically speaking, require using informal or even unlawful strategies, on the other hand. Our empirical finding that legal compliance in such jurisdictions is often made possible through corrupt transactions in various forms raises questions for the field of law and development: namely, when, if ever, do corporate lawyers and similar professionals undermine the rule of law through compliance work? And what is the fate of the legal institutions that underlie compliance—institutions which might gradually be rendered ineffectual by this work? 

We conducted long-term and granular qualitative fieldwork in Cambodia from 2019 to 2022, during which time we interviewed a range of legal professionals, as well as officials and investors, about strategies for mitigating legal risk in the investment process. Notably, our fieldwork was conducted against the backdrop of a large influx of investment from Chinese firms entering Cambodia, which coincided with the launch and implementation of China’s Belt and Road Initiative. Indeed, surging Chinese investment has come to drive many sectors of Cambodia’s economy over the last ten to fifteen years, particularly through investment in infrastructure projects, garment manufacturing, tourism, and gambling. China’s status as Cambodia’s largest foreign investor and sponsor of development assistance has made partnership with China a pillar of the Cambodian regime’s foreign and domestic policy. Nevertheless, despite Cambodian officials’ championing of foreign investment-led growth, this spree of Chinese-led investment has not been without controversy, and the influx of foreign capital into communities across Cambodia has caused significant socioeconomic and environmental disruption, spurring concerns about investors’ power relative to local officials.

 In interviewing those who worked to achieve market entry and compliance for such projects in Cambodia, we observed that a commonplace strategy involved providing relevant officials with a private source of revenue—typically, in the form of de minimis or substantial bribes—in exchange for legal status and security. Legal brokers played a critical role in developing and executing these strategies. For instance, our interviewees reported that they directed intermediaries to submit bribes to regulatory officials and the courts; instructed their clients to do the same; effectuated such pay-offs by hiring officials’ family members as ‘consultants’; concealed the ownership structure of investments so that foreign clients could unlawfully retain ownership interests in land; and leaned on personal or financial connections to Cambodian officialdom, including police and security forces, to enforce their corporate interests. For many projects, formal regulatory compliance was ultimately achieved, yet the system’s formal mechanisms operated epiphenomenally, while extra-legal and even illegal mechanisms generated actual momentum for regulatory approval and dispute resolution. All the while, legal brokers’ value centered on their capacity to occupy both formal and informal spaces. Doing so was essential for their role: to transform extra-legal assets into legally cognizable ones.

Our interviewees rationalized their work in several overlapping ways. Some seemingly viewed themselves as reluctant participants in a system over which they had little to no control, portraying aspects of it as extortive and inevitable. As one lawyer stated, ‘When I first got here, I thought I had to change the culture, but you cannot change a widespread culture and environment like this. You have to adapt.’ Over time, some (but not all) legal professionals appeared to develop a hardened skepticism toward institutions of governance, arriving at the belief that the domestic government amounted to nothing more than ‘a racket.’ As another lawyer stated, ‘there are established patterns of corruption, so much so that corruption ceases to have meaning -- or government ceases to have meaning.’

Others framed their work as greasing the wheel of critically needed economic growth. One broker who facilitated inbound investment from China emphasized that when his firm was established a decade prior, ‘a whole family’s aggregated income was $300 per month,’ but that factory-based employment was ‘raising the quality of life’ for tens of thousands. This conversation about legal and economic development was often placed squarely in the context of Cambodia’s emergence over the last thirty years from a historical period of colonization, genocide, agrarian socialism, war, and United Nations oversight. As one interviewee stated: ‘I grew up during a civil war and without electricity. Now look at Phnom Penh with all of these high-rises and countless private schools, to which many people can send their children to receive a good education. All of this opportunity is possible because of foreign direct investment.’ In this vein, many interviewees seemingly subscribed to the thinking that economic development and any increased engagement with the formal legal system would gradually make that system more robust, even if illicit transactions operated, for the time being, as its engine.

We view our findings on legal brokers in Cambodia as having salience for corporate lawyers and analogous professionals operating in developing states and emerging economies, but also beyond, in Global North markets, too. Our findings demonstrate the complexity of securitizing transnational investments in emerging economies. They also reveal that contemporary compliance controls, both internal and external, may be failing to detect noncompliance, particularly the manner in which legal brokers utilize layered networks of intermediaries or consultants to accomplish their goals, while maintaining plausible deniability for themselves or their clients.

On a broader (and more theoretical) level, our case study highlights an obvious point that is nonetheless worth restatement in the particular context of international business: that legal orders are but one of the many hierarchies influencing the content and realization of rights (contractual, property, due process, shareholder, etc). Our study also raises further, more novel questions about which extra-legal orders support and can be synthesized into the legal order, and which necessarily compete with and undermine it.    

Molly Bodurtha is a JD Class of 2023 graduate from Columbia Law School. 

Sokphea Young is a Postdoctoral Research Associate in the University College London’s Anthropology Department.

Matthew S. Erie is an Associate Professor of Modern Chinese Studies in the Oriental Institute, and Associate Research Fellow of the Socio-Legal Studies Centre at the University of Oxford.

The authors’ article, ‘China in Compliance’, can be found here.