The 2022 Corruption Perceptions Index: Helpful in Calibrating Risk? 3 Deep Thoughts… And Some Follow Up!
Some of us are old enough to remember Jack Handey. Well, Dear Reader, I’m not as funny as Saturday Night Live…but I have fewer commercials.
Every year, Transparency International publishes the Corruption Perception Index (“CPI”), an exercise in measuring relative levels of perceived public sector corruption. Of course, there are other indices of corruption, e.g., TRACE’s Bribery Matrix, the Index of Public Integrity (IPI), or the World Bank’s Worldwide Governance Indicators. However, the CPI has a certain prestige in the ABAC compliance industry, so its annual updates are presumed to be important.
What can we learn? 3 Deep Thoughts (and some follow up):
- The United States is not considered a lodestone for transparency and fair dealing. As a result, US companies may find themselves being subjected to relatively more rigorous due diligence and KYC procedures.
According to the CPI, global confidence in US institutions and systemic strength collapsed with the election of Donald Trump, evidenced by the US’s fall from the CPI top 20 rankings after 2018.
So…you might have assumed that a change in the executive branch would herald a change in scores? Nope: the 2022 score (24) remains virtually unchanged from its worst-ever score in 2020 (25).
While by no means a “failed state”, the United States falls well below the CPI’s top 10th percentile for transparency and the rule of law. Why care?
Two points:
- I’m shocked that you ask, you [false patriot / bad corporate citizen].
- Companies often use the CPI as an objective risk measurement device to risk-rate counterparties. To beat the proverbial dead equine (from prior posts): due to automatic risk rating formulae, US-based companies may now face increased scrutiny.
2. Scoring stagnation undermines the credibility of the CPI as a fair and objective metric.
Despite Borgen, Denmark remains at the top of the CPI, along with Finland and New Zealand. At the bottom of the list are states suffering critical internal armed strife: Yemen, Somalia, and South Sudan.
These countries never seem to change. In fact, year after year, most countries remain unchanged: over 2/3 of 2022 scores remain unchanged from the prior year.
Two questions:
- Does this reflect lack of effort at eradicating corruption, or merely the extremely difficult task of improving a long-standing bad reputation?
- Does the virtual immobility of country ratings undermine the utility of the CPI as an objective metric for measuring risk?
3. Countries in the middle of the CPI should invest in systemic improvements to promote local businesses.
While we can question the accuracy or utility of the CPI, companies – and compliance commentators- routinely do not. (On any decent FCPA checklist, a red flag is raised if the business transaction takes place in a nation known for corruption.) And how would a company know that a nation is “known for corruption?” Presto, bingo, the CPI!
This is why companies spend less time and money on due diligence of Danish companies than of those of South Sudan. Companies from lower-ranking countries are also routinely subjected to significantly more post-engagement due diligence scrutiny (and sometimes even invasive audits). All of this is in part directly derived from CPI scores.
At this point, please take a blue pill with me: a hypothetical South Sudan invests significantly in anti-corruption and transparency initiatives and increases ratings related to stability and the rule of law. As a result, South Sudanese companies are more highly rated (by CPI standards), are engaged without reservation more often, and spend less time and resources with third party due diligence and audit efforts.
Two questions:
- Is there any interest at a national level in systemic improvements to improve scoring?
- How could we – as corporations and citizens – responsibly incent that?
Final thoughts: despite its imperfections in measurement, utility, and credibility, the compliance world needs some objective standards and metrics. Indeed, corporate America has been asking the DOJ for decades to provide specific minimum standards that presume good faith efforts to comply with the law. The CPI is one of the few objective numerical metrics that companies can input into risk-rating formulae and will continue to be used for the foreseeable future.
Need help calibrating your third party risk? The Wallenstein Law Firm collectively has (gasp) many decades of experience in this regard. Among other things, we build and help run effective due diligence systems. Call us today!
