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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.

A Foreign Corrupt Practices Act Case Study

httpv://youtu.be/S4BUpVkpsic

Randall Gausman, former CFO of Arkansas-based Rae Systems Inc., talks with Kirk O. Hanson, executive director of the Markkula Center for Applied Ethics, about the steps he took when he became aware of FCPA violations in a joint venture with China. Arkansas-based RAE Systems is a manufacturer and global distributor of wireless, gas and radiation detection instruments.