On November 1, 2011, Transparency International (“TI”) released its 2011 Bribe Payers Index (“BPI”), which ranks the countries whose companies are most likely to engage in bribery when doing business abroad. The BPI can serve as an important tool for companies in their efforts to avoid violations of the United States Foreign Corrupt Practices Act (“FCPA”).
TI is a global organization dedicated to fighting against corruption. To that end, TI publishes various surveys and indices regarding the levels of transparency and corruption in countries around the world. In addition to the BPI, the TI publishes the well known Corruption Perception Index (“CPI”), which ranks countries by their perceived level of government corruption, as well as other tools meant to measure corruption, transparency and governance in countries around the globe.
While the CPI ranks governments by their willingness to take bribes, the BPI ranks countries by their home companies' willingness to pay bribes. Though they use different methodologies and are meant to measure different sides of corruption, the BPI and CPI correlate strongly to each other, showing the relationship between the two sides of corruption in each country.
Purpose, Methodology and Results of the Bribe Payers Index Survey
The BPI was first published in 1999 and includes two measurements: (1) the likelihood that companies based in 28 countries around the world engage in bribery when doing business in other countries (the “Country Rankings”) and (2) the likelihood of such bribery occurring in particular business sectors (the “Sectoral Rankings”).
The Country Rankings
The Country Rankings aspect of the BPI ranks “28 of the world's largest economies according to the likelihood of firms from these countries to bribe when doing business abroad.” Put another way, the Country Rankings focus on the “supply side” of international bribery, or bribes paid by the private sector in the countries covered.
Russia and China received the lowest scores of the 28 countries surveyed, indicating that business executives perceive Russian and Chinese companies to be the most likely to engage in bribery when doing business abroad. The countries with the lowest BPIs on the list, and thus whose companies are perceived to be most likely to pay bribes when doing business abroad, and their corresponding BPIs are as follows:
28. Russia (6.1)
27. China (6.5)
26. Mexico (7.0)
25. Indonesia (7.1)
23. United Arab Emirates (7.3) (tie)
23. Argentina (7.3) (tie)
The Netherlands and Switzerland tied with the highest score, showing that the respondents perceived companies based in those countries to be the least likely to pay bribes when transacting business abroad. The countries with the five highest scores and their corresponding BPIs are as follows:
1. Netherlands (8.8) (tie)
1. Switzerland (8.8) (tie)
3. Belgium (8.7)
4. Germany (8.6) (tie)
4. Japan (8.6) (tie)
United States companies ranked as the 10th least likely to pay bribes when doing business abroad with a BPI of 8.1. Some of the United States' most important trading partners not included in the top or bottom five (reported above) ranked as follows:
6. Canada (8.5)
8. United Kingdom (8.3)
11. France (8.0)
13. South Korea (7.9)
19. Taiwan (7.5)
The Sectoral Rankings
The Sectoral Rankings measure the likelihood of companies to bribe when doing business abroad in 19 particular business sectors. Of those sectors, the Sectoral Rankings found that bribery was most likely to occur in the following sectors:
19. Public works contracts and construction (5.3)
17. Utilities (6.1) (tie)
17. Real estate, property, legal and business services (6.1) (tie)
16. Oil and gas (6.2)
15. Mining (6.3)
The finding that bribery is perceived to be most prevalent in the public works contracts and construction sphere is not new. The large size of the contracts, unique nature of each project, and large number of players involved in each project renders the sector vulnerable to bribery. Such characteristics make it easier to hide and inflate additional expenditures and make the tracing of payments more difficult.
The Sectoral Rankings also evaluated how often the following three different types of bribery occurred in each sector: (1) bribery of low-ranking public officials (e.g., to speed up administrative processes or facilitate the granting of licenses) (“Petty Public Corruption”); (2) improper contributions to high-ranking public officials and politicians to achieve influence (“Grand Public Corruption”); and (3) bribery between private companies (“Private Corruption”). Again, answers were given on a five-point scale and converted to a 10-point scale.
The survey found that Grand Public Corruption was the most common of the three types of bribery surveyed, leading the pack in 17 of the 19 sectors examined. Not surprisingly, such bribery was perceived as the most common form of bribery in the five sectors in which corruption in general was seen as most prevalent (see above). Petty Public Corruption was found to be almost as common as Grand Public Corruption across the 19 sectors and Private Corruption was found to be almost as high as both forms of public corruption.
Relationship of the Bribe Payers Index to the Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act Generally
The FCPA provides for civil and criminal penalties for bribing foreign officials for the purpose of securing an improper advantage in order to obtain or retain business. In addition to civil penalties, an FCPA violation can lead to prison time for individuals and large fines, disgorgement of profits, imposition of monitors, loss of export licenses and suspension from doing business with the U.S. government for companies.
The FCPA prohibits corrupt payments through third parties, such as consultants, sales agents, resellers, joint venture partners and distributors, provided that the defendant company knew or should have known of the third party's intent to make a corrupt payment.
Additionally, merger and acquisition activity can create FCPA risks for the acquiring company. Knowledge of an FCPA violation committed by the target company prior to or after a merger or acquisition can be inferred if the circumstances of the violation were relatively evident and the acquiring company failed to undertake sufficient due diligence to uncover the fraud. Pre-merger or acquisition due diligence is therefore critical in assessing the FCPA risks associated with a merger or acquisition.
The Bribe Payers Index and Foreign Corrupt Practices Act Compliance
Companies should be mindful of the BPI in their FCPA compliance efforts. As noted above, U.S. companies can run afoul of the FCPA by reason of corrupt conduct of their business partners or merger/acquisition targets based in foreign countries provided that the company knew or should have known of the corruption. As a result, the U.S. government expects companies to undertake due diligence on such third parties before dealing with them to identify not only instances of corruption, but also their propensity to engage in corruption. Such due diligence should include, among other things, searching for the names of relevant persons and entities on U.S. government watch lists, researching media sources in both the U.S. and the third party's home jurisdiction to identify any negative press concerning the third party and interviewing relevant persons to gauge the third party's reputation in the business community, particularly with respect to potential corruption.
While companies should conduct a certain level of FCPA due diligence on every third party, the effort should be proportional to the FCPA risks posed by the particular transaction. The presence of certain risk factors such as the third party's home country and/or business sector may call for heightened due diligence. If a company ignores such risk factors and conducts the same minimum level of due diligence that it would perform on a less risky third party, and an FCPA violation by the third party is subsequently uncovered, the government may take the position that the company consciously disregarded the risk and thus violated the FCPA.
When thinking about engaging a third party to act on its behalf in a foreign country or merging with or acquiring such a third party, a company should consult the BPI to get a sense of how companies in that foreign country are perceived in terms of the risk of bribery and corruption and frame their due diligence plan accordingly. By way of example, a company should ensure to conduct the maximum level of due diligence on third parties in Russia and China because companies in those countries are perceived to be the most likely to engage in bribery and thus will pose the greatest risk of an FCPA violation. With respect to business sectors, companies should be particularly cautious when engaging or merging with or acquiring foreign companies in the public works and construction sector, as those companies are thought of as the most likely to engage in bribery.
Another aspect of the BPI that is important to FCPA compliance is its finding that Grand Public Corruption is the most common form of bribery across the 19 business sectors examined. Because this is the form of bribery that implicates the FCPA, this finding strengthens the relationship between the BPI and the FCPA. Thus, to further assess the FCPA risks posed by third parties, companies should refer to the specific part of the BPI survey measuring the likelihood of Grand Public Corruption in the third party's particular business sector. It is worth noting that Grand Public Corruption was deemed the most common form of bribery in the five business sectors perceived as the most corrupt in general, further highlighting the importance of conducting heightened FCPA due diligence when dealing with third parties in those sectors.
The BPI can serve as an important tool in a company's FCPA due diligence program for third parties based in foreign countries such as consultants, sales agents, resellers, joint venture partners, distributors and merger/acquisition targets. Knowing at the outset the perceived likelihood that such third parties will engage in corruption can help companies devise appropriate due diligence plans and thereby reduce the risk of violating the FCPA in the event that such a third party engages in corrupt conduct.