Companies have a new resource by which to assess the level of bribery and corruption risk in the countries where they operate—one that promises to be more meaningful to global companies than Transparency International’s widely used Corruption Perception Index.
TRACE International, a non-profit business association, has launched the TRACE Matrix, a bribery risk index specifically tailored to the needs of 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.
For many years, compliance and risk executives have turned to TI’s Corruption Perception Index as a resource to help shape their due diligence efforts in the countries in which they operate. The TI Index ranks countries on a scale of zero (perceived to have high levels of corruption) to 100 (perceived to have little corruption).
German automotive manufacturing company Continental AG, for example, uses the TI Corruption Perception Index as a factor in its third-party due diligence assessments, says Steve Liccione, director of compliance for Continental AG, says. “In my personal opinion, these indices are very useful tools,” he says.
Compliance officers generally agree that a new bribery index is a welcome development. “To fully appreciate the risk of corruption, it is important to consider a wide variety of available information,” says Peter Jaffe, chief ethics and compliance officer at global power company AES Corp. “The [TI Index] is a valuable, established, and well-regarded index, but it’s helpful to have more information through an additional index that takes a somewhat different approach, looking at these issues through a different lens.”
Jaffe says he plans to use both. “TRACE has put a lot of thought into this, and the result is informative,” Jaffe adds. “It gives us another helpful data point but will not completely replace the [TI Index] in our analysis, just as we use multiple sources of electronic data and do not rely solely on one.”
“The [TI Index] is a valuable, established, and well-regarded index, but it’s helpful to have more information through an additional index that takes a somewhat different approach, looking at these issues through a different lens.”
Peter Jaffe, Chief Ethics and Compliance Officer, The AES Corp.
Santhosh Srinivasan, a research coordinator at Transparency International, agrees that the new bribery index is another helpful tool that complements the TI Index. “The TRACE Matrix is a welcome addition to the body of indices and research that attempt to provide an assessment of corruption levels around the world,” he says. “Through this new index, TRACE tries to fill a space of fine-grained corruption risk assessment, specifically as it applies to private sector firms’ interests in using corruption risk assessments for decision making.”
TI vs. TRACE
Though helpful, the disadvantage of TI’s Index from the standpoint of corporate compliance officers is that it draws primarily on data based on overall public perception, with less emphasis on actual bribery incidents, says Alexandra Wrage, president of TRACE. Furthermore, the types of corruption the TI Index measures don’t always relate specifically to companies, she says.
The idea for the TRACE Matrix came about because those in the compliance community kept saying, “‘We need a better way than we have now to assess the risks associated with each market that we’re in,’” Wrage says.
Srinivasan agrees that, in some respects, the TRACE Matrix offers additional information for companies that the CPI does not. “The TRACE Matrix attempts to cover bribery risks in a comprehensive manner and, therefore, is more detailed than the CPI,” he says.
“We do not see the TRACE Matrix conflicting with TI’s CPI,” Srinivasan adds. “In fact, the TRACE Matrix uses several data sources that are also included in the CPI, and there is a high level of correlation between the two indices.”
The resulting 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 analyzed four domains that compliance and legal professionals have identified as being most relevant to companies:
Business interactions with government (or government “touches”);
Anti-bribery laws and enforcement;
Government transparency and civil service; and
Capacity for civil society oversight.
RAND refined the research by including nine sub-domains. When it comes to “business interactions with government,” for example, the report addresses the nature of contact with local governments, expectations of paying bribes, and regulatory burdens.
In analysis of ports in Nigeria, for example, the Maritime Anti-Corruption Network (MACN) determined that 142 signatures were needed to clear cargo in the port of Lagos, Wrage says. “That’s a really good indicator that someone, or perhaps many people, are going to shake you down for a bribe,” she says. “It’s not that countries with a lot of government touches necessarily will have more bribery, but it’s certainly the case that there will be more opportunity.”
The TRACE index also analyzes such factors as the quality and freedom of media under “capacity for civil society oversight.” Taken together, these four domains and sub-domains interact closely with one another.
If a company operates in a country with no domestic enforcement at all of local anti-bribery laws, and no freedom of the press, for example, “you end up with this cocktail of problems,” Wrage explains. “The worst-case scenario is a lot of government ‘touches,’ almost no freedom of press or civil society focused on bribery and corruption issues, no local enforcement, and no transparency into the government.”
TRACE VS. TRANSPARENCY INTERNATIONAL
Below TRACE and Transparency International rate the lowest and highrest ranking risk countries in 2013.
Sources: TRACE; Transparency International.
So compliance officers can then use the findings from the TRACE Matrix either to risk-rank countries based on their overall score, or view each country’s sub-domain scores to tailor their anti-corruption compliance practices further.
Country-by-Country
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 are South Sudan, Sudan, Afghanistan, North Korea, and Somalia.
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, Denmark and New Zealand tied for first place, reflecting low levels of state-sector corruption. Finland, Sweden, and Norway ranked third, fourth, and fifth, respectively.
In both indices, the United States showed low levels of bribery. It ranks 10th overall in the TRACE Matrix, and 19th overall in the TI Index last year.
Moving forward, Wrage says the goal of TRACE is to update the Matrix every other year, since the index pulls from a lot of different sources that do not all update their data annually. “We would end up skewing things if we did it every year,” he says.
As helpful as these bribery indices can be for companies, however, it is still just one element of analysis that goes into a risk-management program. “Nothing substitutes for the personal knowledge of people who are both familiar with the business and the relevant country,” Jaffe says.
“These indices score and rank countries, and that is helpful as an initial indicator, but when making business decisions or allocating resources, it's just as important to understand the nature of the risk,” Jaffe adds. “Is a culture of commercial bribery, procurement fraud, and kickbacks, a culture of government corruption in the awarding of major licenses and contracts, or is it petty bribery that is unrelated to the business the company is operating in the country? Any one of these can drive the score on an index but may pose a very different level of risk to a given company or a given industry.”
No comments yet