It was a busy day on 3 December 2014 for those interested in developments in the field of anti-corruption. Both the OECD and Transparency International published major assessments of corruption risk and activity.
1. TI’s 2014 Corruption Perceptions Index (“CPI”)
TI published its annual CPI, which assesses perceived levels of public sector corruption in 175 countries, ranking those countries (based on a score of 1 to 100, bringing together a wide collection of reputable studies and reports) against each other in a manner that allows one to assess performance over time (by comparison to scores in previous years), as well as between countries. The CPI is one of a number of tools commonly used by businesses in performing corruption risk assessments.
As usual, the Scandinavian countries and New Zealand topped the list of “cleanest” countries, with Denmark sitting at the top of the table. The UK was ranked 14th, while the USA was ranked 17th. Despite China’s very public anti-corruption drive over the last couple of years, their ranking actually dropped significantly compared to last year, with them now sitting in 100th place (they were 80th in 2013). This could be due to a number of factors, including in particular the continuing lack of transparency in public sector decision-making and limited efforts proactively to prevent corruption as opposed to aggressive enforcement of the law. Less surprisingly, perhaps, Somalia and North Korea prop up the bottom of the table. However, it is noteworthy that most countries (69%) and more than half (58%) of the G20 countries, scored below 50 out of 100. Regionally, Sub-Saharan Africa and Eastern Europe & Central Asia performed least well.
A copy of the report can be accessed here. 2. OECD Foreign Bribery Report
On the same day, the OECD published its first Foreign Bribery Report. It focuses on the effectiveness of enforcement of the criminal offence of bribing a foreign public official, being the main requirement of the OECD’s 1997 Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the “Convention”). There are now 41 signatory countries to the Convention. The report considers all 427 foreign bribery cases (263 against individuals and 164 against entities) since the Convention entered into force (on 15 February 1999) which have resulted in a sanction being imposed, whether via conviction of settlement. It does not consider private sector bribery or other financial crime offences and, importantly, it does not consider whether any foreign public official was sanctioned for their involvement in the bribery scheme.
Based on the available data, the main findings of the report are:
- Where it happens: The perception that corruption is a poor or developing world phenomenon is wrong. Almost half the cases studied involved bribery of public officials from countries with “high” or “very high” levels of human development.
- Efforts to prosecute: The number of bribery cases brought around the world has grown substantially since 1999 but has fallen in the past two years after reaching a peak of 78 annually in 2011. However, the average time taken between the criminal act occurring and a concluded outcome is increasing year on year (with a peak of 7.3 years in 2013), with almost half of all cases taking between 5-10 years to reach a conclusion. This may be due to a number of factors, including the increasing complexity of the schemes involved requiring more resource and intensive investigations and also, perhaps, because individuals and companies are becoming less willing to settle cases quickly. However, it raises issues for countries who have short limitation periods for bringing criminal proceedings and the report notes difficulties faced in Italy, in particular, as a result of this issue.
- Effective enforcement is limited: Only 17 of the 41 signatory states to the Convention have successfully concluded a foreign bribery case, with by far the most cases being concluded by the USA, but enforcement has noticeably increased over the years.
Highest risk sectors: Most cases (60%) involve large companies (with more than 250 employees). A fifth (19%) of all cases were in the extractive sector, with 15% in construction, 10% relating to the information and communication sector and 8% to the lifesciences/ human health sector. However, the majority of all cases (57%), regardless of sector, related to bribes paid to obtain public procurement contracts. (The next biggest category (12%) was for clearing customs procedures, with the suggestion that these bribes were likely to be low level facilitation payments.)
- Highest risk interactions: The largest category of foreign public officials who were bribed (27%) is employees of “state-owned enterprises” (based on the definition in the Commentaries to the Convention, which is somewhat narrower than the approach adopted, for example, by the US Department of Justice when pursuing FCPA cases). Such officials also received the largest bribes, comprising 80.11% of the total amount. The next largest categories of official bribed was customs officials (11% - although they received only 1.14% of total bribes, suggesting they were more in the nature of facilitation payments) and health officials (7%).
- How cases concluded: Most cases (69%) were concluded through some form of settlement. Bearing in mind that 128 of the 427 cases were concluded by the US authorities and that most FCPA cases are resolved through some form of settlement, these figures are perhaps not that surprising. (Germany is the next most active country with 26 cases; the UK is joint 4th with 6 cases.)
- How wrongdoing was discovered: A third of cases resulted from self-reporting (and in those cases where companies self-reported they became aware of the issue in different ways, most notably through internal audits (in 31% of cases) or M&A due diligence (28%), but also internal whistleblowers (17%)). Only 13% resulted from investigations initiated by the authorities. External whistleblower reports resulted in only 2% of the cases. Similarly, very few cases emanated out of intelligence gathered from suspicious transaction reports (such as money laundering reporting), with only 6 cases identified as coming out of that intelligence gathering.
- Value of the bribe: On average, bribes equalled 10.9% of the transaction value and 34.5 per cent of the profits on that transaction. The largest bribes paid in a single case were worth $1.4bn. The smallest were valued at just $13.17. However, the data when looked at by industry sector is revealing - bribes in the extractive sector represented 21% of the value of the transaction. In the human health (i.e. lifesciences) sector, the figure was 14% of transaction value. In the information and communication sector it was 5%.
- Who was involved: More than half of the cases (53%) involved senior management awareness or active participation - debunking the idea that bribery is normally committed by rogue employees.
- Prevalence of agents: Intermediaries were likely to be involved in any bribery scheme (i.e. in 75% of cases), whether a formal “agent”, a subsidiary or other corporate vehicle, or even professional advisers (6% of cases involved lawyers as the intermediary in question).
- Sanction levels: Despite the significant fines imposed in many cases, almost half (46%) resulted in sanctions that were worth less than the value of the business won through the bribery. The OECD also noted with some disdain the very limited use of debarment as a sanction, used in only two cases to date.
Please click on the link here to access the full report. Having analysed the data, the OECD made a number of recommendations, to improve performance in future years and to eradicate bribery of foreign officials, including:
- Making information on concluded cases publicly available to the fullest extent possible, including detailed information on cases concluded through settlements.
- The very low numbers of concluded cases emanating from detection by the authorities suggests a need for strengthened detection and reporting mechanisms and greater cross-agency cooperation.
- Improving whistleblower protection mechanisms should be prioritised.
- Given the length of time to conclude cases, some countries need to look at their rules on limitation periods to ensure authorities have adequate time to investigate and prosecute this complex crime.
- The level of involvement of senior management in corporate bribery suggests an ongoing need to enhance corporate anti-bribery measures and to ensure executives lead by example in implementing those programmes.
- The use of intermediaries highlights the vital importance of effective due diligence whenever agents may be used.
- From a risk assessment perspective, the level of development of the country where the transaction will occur is less important than transaction risk, i.e. what the transaction is and how it will be fulfilled.
- As more than half of cases related to public procurement, this highlights the need for greater integrity in public procurement processes, including training the officials involved in procurement and giving them the tools they need to prevent wrongdoing. This also highlights the need for the debarment sanction to be used more effectively.
These two studies add to the growing wealth of information available to help businesses and others to assess corruption risk in different countries, sectors and transaction types. They also assist in publicising the continuing need to be vigilant and for governments to work harder to reduce corruption through transparency of decision-making, sharing of information across agencies and boundaries, strengthening the agencies tasked with policing corruption and the tools available to them, protecting those who report wrongdoing and taking other steps to incentivise the right sorts of behaviour and disincentivise wrongdoing.