In an annual non-event, Transparency International (TI) released its so-called Corruption Perceptions Index (CPI) (see here). The CPI scores 180 countries and territories by their perceived levels of public sector corruption, according to experts and business people. 100 is very clean and 0 is highly corrupt. Similar to prior years, TI states: “this year’s CPI paints a grim picture of the state of corruption worldwide. While most countries have made little to no progress in tackling corruption in nearly a decade, more than two-thirds of countries score below 50.”
The CPI generates a lot of media coverage and is a popular tool for business organizations in ranking risk (and thus prioritizing compliance). However, for the reasons highlighted in this post compliance professionals should take the CPI with a grain of salt.
Moreover, as discussed at the end of this post, in this year’s CPI, TI truly embarrassed itself and lost any credibility it once had in the global anti-corruption community.
For starters, just because compliance professionals should take the CPI with a grain of salt, does not mean that the CPI (or other similar rankings) should be ignored.
Indeed, in a rare appellate court decision in the FCPA space, the Second Circuit in the Bourke case listed circumstances which provided “ample evidence” to support Bourke’s trial conviction on a conscious avoidance theory under the FCPA’s third-party payment provisions and specifically stated that “Bourke was aware of how pervasive corruption was in Azerbaijan generally.”
Nevertheless, query whether the CPI is a reliable or meaningful measure of the specific risks specific business organizations face when competing in the global marketplace for the following reasons.
For starters, what is the utility of comparing the occurrence of something happening (or in the CPI’s case the perception that something is happening) in countries with less than 10 million people (for instance Denmark or Finland) compared to countries with more than 100 million, 200 million or 300 million people?
The CPI is merely a survey, and a survey of perceptions at that. This is not a dig on the CPI itself, after all how does measure an issue like bribery and corruption (particularly since there is no universal definition of these terms). To its credit, TI itself recognizes the limitations of the CPI. As stated by TI in prior CPI’s “there is no meaningful way to assess absolute levels of corruption in countries or territories on the basis of hard empirical data.” Moreover, TI rightly acknowledged in prior CPIs that the CPI does not tell the full story of corruption in a country because it “is limited in scope, capturing perceptions of the extent of corruption in the public sector from the perspective of business people and country experts.”
The CPI is composed of distinctions without differences. Each country in the CPI is assigned a numerical score between 100 (the best score) and 0 (the worst score). Sure there is a meaningful distinction between New Zealand and Denmark (88) and South Sudan and Somalia (12), but you probably did not need the CPI to inform you of this (see here). However, as a practical matter is there a meaningful distinction between a score of 39 (Ecuador and Colombia) and 32 (Niger)? Hardly, but these scores result in a substantial difference in the CPI rankings (Ecuador and Colombia – 92nd and Niger – 123rd).
The CPI is country specific, not province or region specific. We all recognize that certain states in the U.S., indeed certain cities within those states, have higher levels of actual or perceived corruption and the same is true in foreign countries. However, the CPI score is only on a country basis and is not province or region specific. In short, bribery and corruption is often localized and thus the CPI can both induce complacency (i.e. the business is fine because the country’s overall score is fine, even though a specific region in which the company operates may have higher levels of actual or perceived corruption) as well as result in needless worry (i.e. while the country overall has higher levels of actual or perceived corruption, the specific region in which the company operates may have substantially less).
At its core, FCPA risk is the function of specific business actors (employees and agents) coming into contact with specific foreign officials, in the context of specific foreign business conditions. None of these factors are adequately captured by the CPI. Indeed, one can easily imagine a scenario where because of the industry, because of the product or service, and because of the go-to-market strategy, Denmark presents more of a risk than Somalia.
The CPI perpetuates stereotypes. No surprise that New Zealand is, as it always has been, near the top of the CPI list and that Libya is, as it always has been, near the bottom of the list. Yet to state the obvious, there are millions of hard-working, honest and ethical people in Libya. On the flip side, there are some dishonest and unethical people in New Zealand.
In short, I enjoy maps and thus each time this year look at the CPI map. However, for the reasons stated above compliance professional should take the CPI with a grain of salt.
FCPA risk is best minimized through a risk assessment unique to a business organization in which the following questions provide a good starting point.
- Who are the company’s customers or potential customers in each country? Is the customer a government (whether federal, state, or local) department, agency or instrumentality? Does a government department, agency, or instrumentality, or individual associated with such units, have an ownership or equity interest in the customer?
- How does the company do business and/or interact with customers or potential customers in the country? Does the company use third parties in the foreign countries?
- How does the company’s product enter and exit the country? Does the company use the services of a customs broker or freight forwarder?
- What licenses, permits, or certifications does the company need to do business in the country? As to each license, permit or certification, how does the company obtain such approvals?
- Is the company subject to other unique forms of government regulation in the country? What other points of contact does the company have with foreign government in the country (such as tax and immigration authorities)?
Finally, in this years CPI, TI truly embarrassed itself. According to TI, “with a score of 67, the US reaches its lowest score on the CPI since 2012.” The main reason according to TI: “the [Trump] administration’s attack on the Foreign Corrupt Practices Act.”
What is TI’s support for this dramatic statement?
A brief 2019 comment by White House Economic Advisor Larry Kudlow that the Trump administration was “looking” at making changes to the FCPA. (See here).
As discussed in this 2019 post about the Kudlow comment, FCPA reform is a topic nearly as old as the FCPA itself and both Republican and Democratic administrations have, from time to time, looked at – or indeed enacted – FCPA reform. Indeed, one obvious conclusion from the 2010 and 2011 FCPA reform hearings on Capitol Hill was bipartisian support for certain aspects of FCPA reform. (See here).
By converting Kudlow’s statement that the Trump administration may be “looking” at changes to the FCPA into an “attack on the FCPA,” TI has truly embarrassed itself and has lost any credibility it once had in the global anti-corruption community.
Further relevant, is that the TI report lacks any mention that FCPA enforcement during the Trump administration was above recent historical averages (and significantly so as to individual criminal prosecutions) or that FCPA enforcement in 2019, and then again in 2020, set records in terms of the overall settlement amounts.
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