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The Corruption Index: How it Relates to FCPA

FCPA

The Corruption Index: How it Relates to FCPA

The Corruption Perceptions Index (CPI) is an index published annually by Transparency International since 1995, which ranks countries “by their perceived levels of corruption, as determined by “expert assessments”  and opinion surveys.

The CPI currently ranks 176 countries “on a scale from 100 (very clean) to 0 (highly corrupt)”. Denmark and New Zealand are perceived as the least corrupt countries in the world, ranking consistently high among international financial transparency, while the most perceived corrupt country in the world is Somalia, ranking at 9–10 out of 100 since 2017.

The estimated cost of corruption from Transparency International is over One Trillion Dollars or 2% of GDP. This represents an amount larger than most of the world’s economies

The top 10 least corrupt countries in the latest publication are:

-New Zealand

-Denmark

-Finland

-Norway

-Switzerland

-Singapore

-Sweden

-Canada

-Netherlands

-United Kingdom

It should also be noted that the top five on the list have some of the smallest populations on the planet potentially skewing the results as the index is not weighted. Additional smaller countries like Syria,  South Sudan and Somalia are at the bottom of the list (178-180). However, they are considered war tourn countries. Larger population countries like China is ranked 77, and  India is 81

Emerging Markets like Brazil is ranked 96, and Russia is 135. It is estimated that one in four people in Asian and Eastern European Societies have paid what is classified as a bribe multiple times in a  year.  It has also been estimated that law enforcement officers and government officials were most likely to receive a bribe where young people (under the age of 25) were most likely to pay a bribe. However, bribing is not limited to Emerging Markets.  It is estimated that 13%  of European Public Works Projects include the cost of bribing. This includes major infrastructure projects such as airport and rail construction, roads and government hospital or administrative buildings

One could argue that there could be a direct correlation between the number of FCPA Violations and how high a country rank on the Corruption Perception Index (CPI). Upon analysis, there is no such association and therefore the reliance by Chief Compliance Officers on the CPI as published each year by Transparency International comes into question

Upon further investigation of the survey developers – Transparency International (TI)  based in Berlin Germany, it becomes clearer why the survey cannot be relied upon

The Corruption Perceptions Index has received criticism over the years. The main one stems from the difficulty in measuring corruption, which happens behind the scenes. The Corruption Perceptions Index, therefore, needs to rely on the third-party survey which has been criticized as potentially unreliable. Data can vary widely depending on the public perception of a country, the completeness of the surveys and the methodology used. The second issue is that data cannot be compared from year to year because Transparency International uses different methods and samples every year. This makes it difficult to evaluate the result.

Another issue is historically funded since its inception in 1993 by large multinationals – Exxon/ Mobil,  Shell, and Hedge Fund KKR being the most significant donors. One cannot help but question the objectivity of the survey with large private donors.

TI’s  International Board of Directors reacted to this conflict of interest by stripping its US affiliate – Transparency International USA – of its accreditation as the National Chapter in the United States.

TI Headquarters reported that  TI-USA came to be seen in the United States as a corporate front group, funded by multinational corporations given the large donor base.

Secondly, the surveys themselves are conducted by organizations such as Freedom House, which have known biases. In August 2019 whistleblower accounts from seven current and former TI Secretariat staff emerged, describing a “toxic” workplace culture under the current Managing Director, Patricia Moreira. Reported in The Guardian, the misconduct reported ranged from gagging orders in termination agreements to bullying and harassment of critical internal voices.

Although the Corruption Perception Index remains popular with its audience as it is unveiled each year, it becomes more clear after digging deeper into Transparency International why there’s not a more robust correlation between FCPA Violations as identified by the SEC and DOJ and the faltered Corruption Perception Index. In addition, the index is not relied on by any public or private enforcement agency for compliance purposes. If anything it brings to light an unconscious or conscious bias against certain developing countries. One can argue its prejudice.

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Frank is an accomplished Senior Finance Executive and Board Member with more than 25 years of success in the pharmaceutical, medical devices, contract manufacturing, and healthcare industries. Leveraging extensive experience leading manufacturing, operational, and financial strategies across 35 countries.  Frank has also implemented over 30 FCPA Compliance/ Controls Remediation and Certification Programs across 25 countries.

corruption

The Corruption Index: An In-Depth Look at What it Means & How it Relates to FCPA

The Corruption Perceptions Index (CPI) is an index published annually by Transparency International since 1995 which ranks countries “by their perceived levels of corruption, as determined by “expert assessments”  and opinion surveys.

The CPI currently ranks 176 countries “on a scale from 100 (very clean) to 0 (highly corrupt).” Denmark and New Zealand are perceived as the least corrupt countries in the world, ranking consistently high among international financial transparency, while the most perceived corrupt country in the world is Somalia, ranking at 9–10 out of 100 since 2017.

This short video link below provides an overview of the Corruption Perception Index.

One could argue that there could be a direct correlation between the number of FCPA Violations and how high a country ranks on the Corruption Perception Index (CPI).  Upon analysis, there is no such correlation and therefore the reliance by Chief Compliance Officers on the CPI as published each year by Transparency International comes into question

Upon further investigation of the survey developers – Transparency International (TI)  based in Berlin Germany, it becomes clearer why the survey cannot be relied on.

The Corruption Perceptions Index has received criticism over the years. The main one stems from the difficulty in measuring corruption, which by definition happens behind the scenes. The Corruption Perceptions Index, therefore, needs to rely on third-party surveys which have been criticized as potentially unreliable. Data can vary widely depending on the public perception of a country, the completeness of the surveys and the methodology used. The second issue is that data cannot be compared from year to year because Transparency International uses different methodologies and samples every year. This makes it difficult to evaluate the result of the new policies.

Another issue is historically been funded since its inception in 1993 by large multinationals – Exxon/ Mobil,  Shell, and Hedge Fund KKR being the largest donors. One cannot help but question the objectivity of the survey with large private donors. TI’s International Board of Directors reacted to this conflict of interest by stripping its US affiliate – Transparency International USA – of its accreditation as the National Chapter in the United States and it was reported by TI Headquarters that  TI-USA came to be seen in the United States as a corporate front group, funded by multinational corporation given the large donor base.

Secondly, the surveys themselves are conducted by organizations such as Freedom House, which have known biases. In August 2019 whistleblower accounts from seven current and former TI Secretariat staff emerged describing a “toxic” workplace culture under the current Managing Director, Patricia Moreira. Reported in The Guardian, the misconduct reported ranged from gagging orders in termination agreements to bullying and harassment of critical internal voices

Although the Corruption Perception Index remains popular with its audience as it is unveiled each year, it becomes more clear after digging deeper into Transparency International why there \’s not a more robust correlation between FCPA Violations as identified by the SEC and DOJ and the faltered Corruption Perception Index.

FCPA

How You can Certify 100% FCPA Compliance Based on New SEC/DOJ Requirements

Now that the SEC has gotten involved with FCPA along with the DOJ they have interpreted the FPCA statute to mean that a company must maintain a system of internal accounting controls that monitors FCPA Compliance not only internally within the organization, but for all its third parties including customers and  suppliers

With the average Fortune 50 company having over 75,000 suppliers and 300,000 large customers the enforcement is nearly impossible and deemed as “sneaky.”

Even former DOJ Leadership acknowledges the incredible challenge around FCPA Compliance, especially now that the SEC is stepped up its enforcement (See video like below at around the 14:40 mark).

https://youtu.be/xpo9d4CbHG0

However, there is a solution to avoid or mitigate FCPA  fines/actions as well as damaging public press-releases by the DOJ/SEC due to third party violations.  A robust but straightforward certification program can significantly mitigate this risk.

A Certification Program is primarily an attestation or assertion document that is acknowledged or signed by an employee/and all third parties delivered by email, a simple workflow software or even post mail. It is generally language-specific but is translators are not available English only works. The attestation or assertion document is asking an individual/entity/official to certify that they are Understand FCPA, Are FCPA Compliant, and Unaware of any violations.

You might be asking yourself that there is no way that all of my hundreds of thousands of suppliers/customers/colleagues will comply, and we will have with exposure? 

In the case of colleagues, its a more straightforward answer as the certification process should be mandatory using internal email or workflow tools driven from the top of the organization. In the case of third parties where there is less control, the recommendation is to send the certification communication (via email/post) up to three times in  90 days.  If there is no response, this is OK!

The key to this entire process is a robust documentation and controls process over the certifications – this includes the third parties that have not responded despite three attempts.

Essential elements to an FCPA  Certification process are:

-How the Certification is written ensuring that there is an emphasis on full disclosure and awareness and understanding of the FCPA Statute and any potential violations

-Process for Disseminating to third parties and internal employees

-Tracking and reporting

-Frequency

It is proven that a robust Certification Program implemented in advance of a certification program has lead to reduced penalties and even eliminated penalties as well as damaging Public Relations from the announcement of an SEC/DOJ Investigation.

A robust FCPA certification program may be the most significant cost avoidance and reputation damaging you can implement within your organization.

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For more information and learning more please contact Ation Advisory Group  (www.ationadvisory.com) or at (917) 821-2147.

FCPA

FCPA Can Provide a Favorable Competitive Edge for Your Business

FCPA can be used as a useful business development tool when dealing with government officials and customers in international markets by conducting a valuable training awareness program or seminar.

 In 1977 FCPA Regulations were implanted in response to revelations of widespread bribery of foreign officials by U.S. companies. The US Regulation was intended to halt those corrupt practices, create a level playing field for honest businesses, and restore public confidence in the integrity of the marketplace. More recently, the Securities Exchange Commission has joined the Department of Justice is expanding the scope of what an FCPA violation means with vague, broad guidelines.

If one thinks US Multinationals are confused by the new regulation in nature and scope, one can only imagine the confusion of customers, vendors, government officials, and other stakeholders within over 80 International markets.

In many markets, the word “bribe” in business is not a negative reactionary term but respected and expected. In fact, in most emerging markets across Asia, Latin America, The Middle East, or Eastern Europe require this.  If some form of a gift, payment, or consideration is not part of the agreement, it is considered rude and disrespectful, and business negotiation will stall.

Emerging Markets are even finding themselves in a position where they are reluctant to do business with US Multinationals for not respecting local customs and norms and not understanding the FCPA Regulation itself due to the complexity. US Multinationals under FCPA jurisdiction are losing billions of dollars in business opportunities within these markets since their “hands are tied” when it comes to ensuring strict FCPA Compliance. All of which has led to a significant loss in revenue.

However, there is a solution with a win-win for all parties, including the SEC and DOJ.

A robust  FCPA/ Compliance and Controls Training Program delivered by US Companies to Emerging Markets customers, vendors, government officials,  and other third parties to help third party markets better understand US Regulations and has led to a measurable increase in local sales/revenue.

Locally, language adapted, simple, effectively delivered (and maybe even “fun”) training programs using case study interactive examples in a classroom setting provided to local clients/customers/government officials/vendors provides an essential need of US FCPA and Compliance and Controls Requirements.

Private and Public Sector examples show that across Emerging Markets a robust, custom-developed FCPA Training Program, in the local language with interactive case studies  successfully delivered in a hotel or meeting room including modest meals and beverages,  will lead to increased sales/revenue and cost avoidance  in the areas of  Government Tender revenue, ease of custom clearings,  and accelerated regulatory approvals of product or services.

The bottom line benefits are:

-FCPA Regulators appreciate the training and awareness of programs delivered throughout Emerging Markets avoiding subsequent fines and actions

-In-country clients/third parties and government officials enjoy learning about FCPA and how it might differ from their local country norms around bribing

-US Multi-Nationals could significantly increase revenue within emerging markets while complying with FCPA Regulations.

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If you would like to find out more, please contact Frank Orlowski, Founder Ation Advisory Group at 917-821-2147.