Transparency International (TI) recently released its annual Corruption Perceptions Index (CPI) (available here), spurring a flurry of fanfare in the press about various countries' shifts up and down in the rankings. But it is unclear how much of this attention is warranted. As TI repeatedly acknowledges, the CPI only measures perceptions of corruption, not corruption itself. Further, changes in TI's perceived corruption scores can be misleading--even to the extent they mirror actual corruption--as adjustments in TI's methodology from year to year may move countries up or down the ranking despite no real change in how that country is viewed.
Yet TI's CPI remains the benchmark indicator of corruption worldwide. Warranted or not, the rankings attain real significance as companies and compliance professionals alike often calibrate risk assessment to the CPI. Even more importantly, the Justice Department has acknowledged TI's importance in identifying areas of corruption. To mitigate or avoid the risk of committing, or being accused of committing, violations of the Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act 2010, and other nations' anti-corruption laws, companies must therefore pay attention to perceived and actual corruption risks present in the nations where they do business. The release of TI's updated rankings serves as a reminder to companies and executives of the need to be vigilant in compliance efforts, particularly where corruption is seen as on the rise.
The Trouble with TI
To assess and rank countries from least to most corrupt, TI accumulates data from numerous assessments and opinion surveys carried out by independent institutions. The data from these sources is standardized and combined, so that each country receives a score between 0 and 10, ranging from most to least corrupt. Each country's CPI score is intended to capture the perceived level of public sector corruption in that country.
Changing scores, however, do not necessarily reflect changing perceptions, let alone genuine changes in corruption levels. TI admits that both it and the sources upon which it relies frequently adjust their methodology. Indeed, even the countries included in the CPI tend to vary from year to year--ranging in number from 41 in 1995 to a peak of 180 in recent years. TI therefore cautions: "Given it's methodology, the CPI is not a tool that is suitable for trend analysis or for monitoring changes in the perceived levels of corruption over time for all countries. Year to year changes in a country/territory's score can result from a change in the perceptions of a country's performance, a change in the ranking provided by original sources or changes in the methodology resulting from efforts to improve the index."
Despite this caveat, TI does acknowledge shifts in perceived levels of corruption in individual countries under certain circumstances. Specifically, it recognizes improvement or deterioration where (a) one or more of the same data sources are used to score the country in consecutive years, (b) the change in CPI score is at least 0.3 points, and (c) more than half of the data sources evaluating the country confirm the direction of the change.
Corruption's Rising Tide?
According to TI, corruption is on the rise in key areas of the developed world--including the United States. By TI's standard, perceived levels of corruption increased between 2009 and 2010 in seven countries, including the United States, the Czech Republic, Greece, Hungary, and Italy. Notably, the United States fell out of the top 20 "least-corrupt" nations for the first time since TI launched the CPI. Its score of 7.1, down from 7.5 a year ago, is its lowest ever. Ironically, this decline follows on the heels of an October 15, 2010 Organization for Economic Co-Operation and Development ("OECD") report, available here, commending the United States for its anti-corruption enforcement efforts. While the Department of Justice (DOJ), Federal Bureau of Investigation (FBI), and Securities and Exchange Commission (SEC) have focused on combating corruption abroad, corruption is seemingly on the rise in their own backyard.
Further, although its drop was not precipitous enough to be recognized by TI, Russia's slip in the rankings has garnered significant media attention. In 2009, Russia ranked 146th out of 180 with a score of 2.2--already placing it solidly in the bottom quarter of the list. This year Russia dropped to the 154th spot with a ranking of 2.1, despite President Dmitry Medvedev's implementation of a national anti-corruption program last April. Although the U.S. State Department praised Medvedev for making anti-corruption efforts one of the priorities of his administration, his efforts have apparently not yet yielded recognizable results. In fact, Russia is by far the lowest rated European country, and it scores well below its fellow BRIC nations--Brazil (3.7), China (3.5), and India (3.3) all remained relatively stagnant in the middle of the pack, at 69th, 78th, and 87th on the list, respectively. Moreover, according to local news reports, the average amount paid as a bribe in Russia has increased by almost 33% since 2009. Given this challenging landscape, and with the upcoming Sochi 2014 Olympic Games, companies competing for and conducting business in Russia must be particularly careful to ensure that they have robust ethics and compliance programs in place.
Mexico's fall from 89th to 98th also was just under the threshold TI sets for measurable deterioration from year-to-year, but its decline is particularly disturbing as it falls on the heels of the country's even larger drop between 2008 and 2009. Mexico's CPI score declined from 3.6 to 3.1 over the last two years, corresponding to a 26-spot plummet in the rankings.
Stepping Up Enforcement
Not surprisingly, many recent FCPA enforcement actions target conduct in countries with ascending levels of perceived corruption, underscoring the need for companies conducting business in these countries to be increasingly vigilant. As reported in Gibson Dunn's 2010 Mid-Year FCPA Update, available here, among the major investigations resolved by the DOJ and SEC in the first half of 2010 were those involving Daimler AG and BAE Systems, each resulting in criminal fines, penalties, and disgorgement of profits totaling hundreds of millions of dollars. Both investigations implicated allegedly corrupt conduct in countries with decreased CPI scores, including Russia, Greece, Hungary, and the Czech Republic.
Recent disclosures also suggest that the focus on these countries and others with perceived increases in corruption is unlikely to subside. For example:
- Russia: Earlier this month, the DOJ and SEC resolved an investigation of Panalpina World Transport (Holdings) Ltd. involving allegations that Panalpina and its subsidiaries paid thousands of bribes, including numerous improper payments to government officials in Russia.
- Czech Republic: Czech anti-corruption police have reportedly initiated an investigation into whether Steyr, a subsidiary of General Dynamics Europe, paid bribes in connection with the sale of Pandur military vehicles.
- Mexico: In September, ABB, Inc., a U.S. subsidiary of ABB Ltd., pled guilty to charges that it violated the anti-bribery provisions of the FCPA by paying $1.9 million in bribes to officials at Comisíon Federal de Electricidad, a state-owned utility company, in exchange for contracts totaling more than $81 million in revenue. A recently resolved investigation of Pride International Inc. also included allegations that Pride had agreed to bribe a Mexican customs official to avoid paying duties and penalties.
Against the Tide: Areas of Improvement
As the scores and rankings of countries in North America and Europe have fallen, countries in other parts of the world have shown improvement. TI lists Kuwait and Qatar, for example, as Middle Eastern countries that made gains between 2009 and 2010. Indeed Qatar took the United States' place in the top 20. Chile also leapfrogged the United States, and is knocking at the door of the top 20 at 21st. TI also recognized improvements in other countries in the Americas, including Ecuador, Jamaica, and Haiti, as well as Bhutan, Gambia, and the Former Yugoslav Republic of Macedonia.
Improvements within the context of the CPI are relative, and the countries making the biggest gains often have the farthest to go. Many countries with improved perception scores still find themselves on the bottom half of TI's list. Change, therefore, should provide only marginal comfort to companies doing business in these countries. And although the TI CPI is widely accepted, the rankings should not obscure actual corruption risks present even in countries that have relatively low levels of perceived corruption and correspondingly high positions on the list. Nearly three-quarters of the countries on TI's list have CPI scores less than 5.0, placing them on the more corrupt side of the spectrum.
As Assistant Attorney General Lanny Breuer stated in a recent speech, "the [Justice] Department's enforcement of the FCPA is aggressive, and it's on the rise." Criminal fines and penalties have climbed from around $11 million in 2004 to well over $1 billion this year already. With increased global coordination in the enforcement of anti-corruption laws, companies must be aware of the corruption "hotspots" around the world. Accurate or not, the 2010 TI CPI plays a key role in defining the current perception of those risks and thereby provides a starting point for companies to assess and build global anti-corruption compliance programs.