Compliance and risk officers may want to reassess their anti-corruption compliance programs and due diligence efforts, following last week’s release of Transparency International’s annual Corruption Perception Index.
For many years, compliance and risk officers have used TI’s Corruption Perceptions Index (CPI) as a reliable benchmark to help determine where they face a heightened risk for violating foreign anti-corruption laws, and where to focus their due diligence and auditing efforts in the countries in which they operate.
“It cannot and should not, and we would never suggest, that it replace much more in-depth due diligence and understanding of the risks around corruption and the development of comprehensive anti-corruption programs,” says Ben Elers, program director at TI. “It’s really just a very basic starting point, but an absolutely essential one.”
TE Connectivity, a global provider of engineered electronic components for consumer and commercial electronics, uses the index, for example, as just one of many resources when onboarding a third-party business partner, says Christine Stickler, chief compliance officer at TE Connectivity. “The entire process, including the level of due diligence required, depends on the risk assessment,” she says.
“The risk assessment is based, in part, on the Corruption Perception Index to the country in which the business partner is located and/or provides services to or on behalf of TE Connectivity, as well as information provided by the business partner, and the TE employee who sponsors the business partner,” Stickler explains.
In another example, Halliburton uses the TI Index "as a baseline corruption barometer and as an initial measure of possible corruption trends in the geographies where we work," says Jeff Spalding, chief ethics and compliance officer at Halliburton. "It is an important piece of data, but not the only one we use to tailor our compliance program to our specific business activities."
The TI Index is incorporated into Halliburton’s compliance activities in a variety of ways. "We use the color-coded maps in instructor-led corruption training as a means of soliciting participant feedback, and they have proved to be great conversation starters that are very well received by our employees," Spalding adds. "Additionally, some of our internal control committees consider the TI Index as one of several factors for identifying for countries we consider 'high risk.' It serves as a useful tool in helping to guide our overall risk assessment process."
The shortcoming of the CPI from the standpoint of compliance and risk officers is that it draws primarily on data based on overall public perception, with less emphasis on actual bribery incidents. That said, valuable insight can be gained when analyzing the CPI side-by-side with the TRACE Matrix, a bribery risk index specifically tailored to companies.
Developed in collaboration with research firm RAND, the TRACE Matrix not only ranks each country based specifically on business-related bribery risk, but also describes specific risk factors unique to each country, so that compliance departments can tailor their limited budgets and resources accordingly.
The TRACE Matrix ranks countries on a scale of 1 to 100, with a higher score indicating a higher risk of business-related bribery, and a low score indicating a lower risk of business-related bribery. To arrive at each country’s score, the matrix analyzes four domains that compliance and legal professionals have identified as top risk indicators:
“Fundamentally, corruption undermines the level playing field and the stability that businesses seek. This is the key message that we hear over and over again from the business community.”
Ben Elers, Program Director, TI
The level of business interactions with government, including the “expectation of paying bribes,” and the level of “regulatory burden”
The existence (or non-existence) of anti-bribery laws and the transparency of enforcement
Government transparency, including the public availability of government budgets
Capacity for civil society oversight, including the extent of state-owned media and access to media
Below is an analysis of the 2015 CPI, weighed against specific country-by-country bribery risks revealed by the TRACE Matrix to help compliance and risk officers tailor their anti-corruption practices further and help companies further inform their audit procedures country-by-country.
Overall, the results from this year’s CPI hold both good news and bad news on the anti-corruption front: More countries saw their anti-corruption scores improve, rather than decline—but corruption, overall, is still rife globally.
Of the 168 countries ranked in this year’s CPI, 114 scored below 50 on a scale from 0 (perceived to be highly corrupt) to 100 (perceived to be very clean). Several other countries did not score much better than 50. The lowest scores are concentrated in Africa, Asia, Latin America, South America, and the Middle East.
“Fundamentally, corruption undermines the level playing field and the stability that businesses seek. This is the key message that we hear over and over again from the business community,” says Elers. If you have a weak rule of law, which is affected by corruption, “it creates massive uncertainty,” he says.
Below TRACE and Transparency International rate the lowest and highest ranking risk countries. TRACE rankings are based on 2014 data; Transparency International rankings are based on 2015 data.
Sources: Trace; Transparency International
Because of the different methodologies used, some country rankings in the TRACE Matrix differ significantly from the rankings in TI’s Index. Overall, the five countries that posed the highest risk of bribery in the TRACE Matrix are Nigeria (97), Angola (94), Yemen (94), Uzbekistan (92), and Cambodia (89). In comparison, the five countries that posed the highest risk of bribery in the TI Index were Somalia (8), North Korea (8), Afghanistan (11), Sudan (12), and South Sudan (15).
In the CPI, Brazil, Libya, Spain, and Turkey are just a few countries that fared worse than last year. Brazil slipped the most, falling five points and dropping seven places to a rank of 76. Turkey slipped for a second year in a row from 53rd place in 2013 to 64th place in 2014 to 66th place in 2015. Spain fell one spot from 37th place in 2014 to 36th in 2015.
Elers says the decline in these countries’ rankings are due, in part, to massive corruption scandals, such as the corruption probe surrounding Brazil’s state-owned oil company Petrobras, which began to unfold in 2014, when allegations surfaced that Petrobras awarded inflated contracts to construction and engineering companies, which then funneled kickbacks to Petrobras executives and politicians.
To put this scandal in its proper context, consider that Brazil is facing grave economic challenges across the board, including a recession so deep that it (among other things, including a campaign contribution scandal) threatens the job of embattled President Dilma Rousseff.
In the TRACE Matrix, Brazil received an overall bribery score of 69. In particular, it scored highest (77) for business interactions with government, and lowest (42) for civil society oversight, reflecting, in part, quality and freedom of the media. According to TRACE, “a strong, independent media that is free from government influence can help check corrupt practices by scrutinizing public and private actors alike.”
The remaining BRIC nations—Russia, India, and China—did not rank well in either index. In the CPI, Russia ranked 119th, with a low score of 29; India ranked 76th, with a low score of 38; and China ranked 83rd, with a score of 37.
In the TRACE Matrix, India received a high overall bribery risk of 80, while China scored 66, and the Russian Federation scored 65. China scored especially poor concerning quality and freedom of media, whereas both India and Russia’s highest risk areas concern the number of government touch points.
The top five countries that posed the lowest risk of bribery in the TRACE Matrix are Ireland, Canada, New Zealand, Hong Kong, and Sweden. In the TI Index, the top five countries were Denmark, Finland, Sweden, New Zealand, and the Netherlands, reflecting low levels of state-sector corruption.
In both indices, the United States showed low levels of bribery. It ranked 10th overall in the TRACE Matrix and 16th overall in the 2015 TI Index.
Compliance and risk officers should pay particular attention to new markets that are just now opening for business, such as Cuba and Iran, which both pose high corruption risk. Cuba ranked 56th with a score of 47, while Iran ranked worse at 130 with a score of 27. Companies looking to do business in these countries need to proceed with caution, with a keen eye toward not only identifying corruption-related risks, but also observing sanctions laws that may still be in play.
Around the world, countries continue to launch anti-corruption campaigns with great ambition, “but they need to be sustained over a long period of time,” says Elers. “They need to be adequately resourced, supported by businesses, which is very important, and anti-corruption agencies really need to be given independence to be able to function properly.”
As helpful as the CPI and TRACE bribery indices are for companies, they are just one element of analysis that goes into a risk-management program. Nothing substitutes having compliance professionals on the ground, interacting with locals who know the unique risks and cultural nuances of each country in which the company operates.