More countries saw their scores worsen in Transparency International’s 2016 Corruption Perceptions Index than improve, a strong indication that companies are facing heightened corruption risk around the world.
First launched in 1995, TI’s Corruption Perceptions Index (CPI) has served as a reliable benchmark for compliance and risk officers to gauge corruption risk on a regional level, and where to focus their due diligence and auditing efforts in the countries in which they operate. The CPI ranks countries on a scale of zero (perceived to be highly corrupt) to 100 (perceived to be very clean).
“The index is a great red-flag indicator for anybody who is interested in investing in, or doing business with, a certain country or another business in a certain country,” says Finn Heinrich, research director at TI. “It gives you a sense of the extent of a corruption problem.”
The CPI is meant to be a “great start for companies to get a sense of how a country ranks” and how a country’s perceived level of corruption shifts over time, Heinrich says. Using the CPI as a guide, companies can then dig deeper to understand what corruption risks may lurk in their specific industry and within their business interactions.
Of the 176 countries and territories ranked in the 2016 CPI, released Jan. 25, 69 percent scored below 50, indicating that governments in these countries are failing to tackle corruption, according to TI. Several more countries did not score much better than 50.
For the tenth consecutive year, Somalia continues to cling to the bottom rung, with an overall score of ten. Other low-scoring countries were South Sudan, (11), North Korea (12), and Syria (13). Characteristics shared by these worst-scoring countries include widespread “impunity for corruption, poor governance, and weak institutions,” TI stated.
Jurisdictions in the Middle East and Africa, in particular—such as Iraq, Libya, Sudan, Yemen, and Syria—are “inflicted with political instability, war, internal conflicts, and terrorism, stressing the fact that war and conflict fuel corruption and in particular political corruption,” Kinda Hattar, TI’s regional coordinator for Maghreb, said in a blog post.
Countries that scored low are “plagued by untrustworthy and badly functioning public institutions like the police and judiciary,” TI stated. “Even where anti-corruption laws are on the books, in practice they’re often skirted or ignored.”
Compliance and risk professionals should keep in mind that individuals in countries perceived to have high levels of corruption “frequently face situations of bribery and extortion, rely on basic services that have been undermined by the misappropriation of funds, and confront official indifference when seeking redress from authorities that are on the take,” TI noted. Furthermore, massive corruption schemes—such as Petrobras and Odebrecht in Brazil—thrive in such environments.
Many Middle Eastern countries also saw the sharpest drop in scores in the 2016 CPI. Qatar, while still managing to score above average, slipped the most, dropping 10 scores to a rank of 31. “The FIFA scandals, the investigations into the decision to host the World Cup in 2022 in Qatar, and reports of human rights abuses for migrant workers have clearly affected the perception of the country,” TI Chair José Ugaz said in a statement.
“The index is a great red-flag indicator for anybody who is interested in investing in, or doing business with, a certain country or another business in a certain country. It gives you a sense of the extent of a corruption problem.”
Finn Heinrich, Research Director, TI
Among countries that scored well, Denmark took the top spot for the third year running. New Zealand also shared the top spot this year. Each country had a score of 90, closely followed by Finland (89), Sweden (88), Switzerland (86), and Norway (85).
Characteristics shared by top-performing countries include “higher degrees of press freedom, access to information about public expenditure, stronger standards of integrity for public officials, and independent judicial systems,” TI stated.
Compliance and risk professionals should keep in mind, however, that no one country ranked in the 2016 CPI received a perfect score, and even high-scoring countries can still pose corruption risk. For example, they are “not immune to closed-door deals, conflicts of interest, illicit finance, and patchy law enforcement that can distort public policy and exacerbate corruption at home and abroad,” TI warned.
CPI vs. TRACE Matrix
Compliance and risk professionals can gain a wealth of valuable insight when analyzing the 2016 CPI in combination with the 2016 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.
First published in 2014, the TRACE Matrix ranks countries on a scale of 1 to 100, with a higher score indicating a higher risk of business-related bribery. To arrive at each country’s score, the matrix analyzed the following four “domains” most likely to increase the demand for—and tolerance of—public-sector bribes:
Domain 1: Business interactions with government;
Domain 2: Anti-bribery laws and enforcement of those laws;
Domain 3: Government transparency and civil service (e.g., whether government budgets are publicly available); and
Domain 4: Capacity for civil society oversight (the extent of freedom of the press and social development).
Because of the different methodologies used, some country rankings in the TRACE Matrix differ significantly from the rankings in TI’s Index. Overall, the countries that pose the highest risk of business-related bribery in the 2016 TRACE Matrix were Nigeria (97), Angola (96), Yemen (93), Guinea (92), Cambodia (89), Myanmar (92), and South Sudan (90).
Somalia, the lowest-scoring country in the 2016 CPI, ranked 147 out of 199 countries in the TRACE Matrix. According to TRACE, Somalia received its highest score of 80—indicating a higher risk of business bribery—for poor government and civil services transparency. Its second highest score of 72 in Domain 3 was due to its “moderate quality of anti-bribery laws and a very low quality of anti-bribery enforcement.”
Below are the rankings for the top 5 and lowest 5 countries in terms of corruption from Transparency International’s Corruption Perception Index.
Among other low-scoring countries in the CPI, particularly in the Middle East and Africa, South Sudan, Syria, and Yemen were all rated as posing “very high” business-related bribery risk in the TRACE Matrix. Yemen, in particular, scored poorly in all four domains.
Specifically, the country received scores of 100 in Domain 2 and Domain 4 for having “very low quality” anti-bribery laws and enforcement, as well as for having a “very low degree” of media freedom and a “low degree” of social development. It also received scores of 86 and 85, respectively in Domain 1 and Domain 3 based on a “low degree of government interaction, very high expectation of bribes, and a high regulatory burden” as well as for having “moderate” governmental transparency and “very poor” civil-service transparency.
Both South Sudan and Syria received their highest scores in Domain 1 based on “a very high degree of government interaction, high expectation of bribes, and a high regulatory burden,” with scores of 96 and 94, respectively. Both countries also scored high in Domain 3 for “poor” transparency in the areas of government and civil service.
Posing a “high” level of business-related bribery risk and an overall risk score of 66, North Korea received its highest risk score of 66 in Domain 3 and Domain 4 for “moderate” governmental transparency and “poor” civil-service transparency and for having a “low degree of media freedom/quality and a moderate degree of social development.” It received a score of 61 in Domain 1 for a “moderate” degree of government interaction, risk of bribery, and regulatory burden.
Compliance and risk professionals may also want to pay particular attention to newly opened markets, such as Cuba, which ranked 60th with a score of 87 in the CPI. In the TRACE Matrix, it received an overall bribery risk score of 65.
According to TRACE, Cuba ranked highest in Domain 1, with a score of 65, based on a “high” degree of government interaction and for its “moderate” degree of bribery risk and regulatory burden. It received its second highest score of 63 in Domain 3 based on “moderate” governmental and civil-service transparency.
BRIC nations and Mexico. In the 2016 CPI, Brazil, China, and India each ranked 79th, with a score of 40—all improving slightly over last year’s scores. Russia, however, ranked 131st with a poor score of 29. Mexico did not fare much better, ranking at 123rd with a score of 30.
In the TRACE Matrix, India ranked 178th overall, while Brazil ranked 167th. Both India and Brazil received high business-related bribery risk scores of 86 and 91, respectively, in Domain 1 for their high degrees of government interaction, moderate expectation of bribes, and high regulatory burdens.
China, meanwhile, ranked 130th with a score of 66. It received its highest score of 77 in Domain 4 based on a “very low degree” of media freedom. Ranking 94th overall, the Russian Federation received its highest—but still moderate—risk score of 63 in Domain 1 based on a “low degree of government interaction, moderate regulatory burden, and a high expectation of bribes.”
Ranking 103rd, Mexico scored moderately across the board in the TRACE Matrix, with an overall risk score of 59. Its highest risk score of 63 was due to “moderate” levels of governmental transparency and “poor” civil-service transparency.
High-scoring countries. The top five countries in the TRACE Matrix were Sweden, New Zealand, Estonia, Hong Kong, and Norway. Some these same countries—New Zealand, Sweden, Norway—earned top spots in the 2016 CPI, as well.
In the 2016 TRACE Matrix, Canada ranked 12th, whereas the United Kingdom ranked 15th, and the United States ranked 20th. In the 2016 CPI, in comparison, Canada ranked 9th overall, the United Kingdom ranking 10th, and the United States ranked 18th.
Although it’s been said time and again, it’s worth repeating: Indices like the CPI, TRACE Matrix, and similar research tools are just one element of analysis that go into a comprehensive anti-corruption compliance 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.