The recovery of state losses prior to the criminal investigation stage in corruption cases raises legal questions concerning its effect on the continuation of criminal proceedings. Article 4 of the Indonesian Corruption Eradication Law stipulates that the recovery of state financial or economic losses does not extinguish the offender’s criminal liability but may only be considered a mitigating factor. This provision must be examined alongside the Circular Letter of the Deputy Attorney General for Special Crimes Number B-765/F/Fd.1/04/2018, which allows the Prosecutor’s Office, during the preliminary inquiry stage, to reconsider the continuation of legal proceedings where the state losses have been proactively and fully recovered. This study examines the legal nature of state loss recovery in corruption offences and its legal status prior to the commencement of a formal criminal investigation. It aims to formulate legal boundaries between asset recovery, the protection of the community’s social rights, and criminal accountability. This study employs normative legal research using statutory, conceptual, and case approaches. Legal materials are analysed prescriptively by examining the Indonesian Corruption Eradication Law, state treasury legislation, and internal prosecutorial policies. The findings demonstrate that state loss recovery constitutes an integral part of corruption eradication, serving both to restore state assets and to safeguard the social rights of communities harmed by corrupt conduct. The novelty of this study lies in constructing a restorative justice-based model of prosecutorial discretion applicable prior to the criminal investigation stage. Full and voluntary recovery may be considered when determining whether proceedings should continue, provided that the amount of loss has been verified by a competent authority, the relevant parties have acted cooperatively, the public interest is adequately protected, and sufficient preliminary evidence of the elements of corruption has not been established. Once a formal investigation has commenced and the elements of the offence have been established, recovery may only serve as a mitigating factor and cannot extinguish criminal liability. This model harmonises Article 4 of the Indonesian Corruption Eradication Law with limited, proportional, and recovery-oriented prosecutorial discretion. It prevents state loss recovery from becoming a means of evading punishment while promoting the effective restoration of state finances for development and public welfare.