Anti-corruption compliance guides released by prosecutors from the United States and Britain discuss the importance of assessing country risk to avoid corporate liability for bribery. Unfortunately, judging country risk is a challenge because no valid quantitative measure of national corruption exists.
Organizations like Transparency International (“TI”) have developed statistical proxies — such as the Corruption Perceptions Index (“CPI”) — that some lawyers advise clients to use as a measure of corruption. My article Perception is Not Reality: The FCPA, Brazil, and the Mismeasurement of Corruption argues that the CPI is probably biased in ways that make it inappropriate to rely on when assessing country risk.
The heart of my argument is that the aggregation of lots of opinions is still no more than opinion itself. Citizens of some countries may be more inclined to form the opinion that their politicians are corrupt or feel freer to express such sentiments. Businesspeople and other experts may have their own cultural biases that systematically skew opinions about the comparative corruption of nations. As detailed in my article, a growing body of statistical research criticizes tools like the CPI. Even some of TI’s own researchers have admitted that it is not a valid tool for cross-national comparisons of corruption.
Unfortunately, the legal profession has not taken note of the limitations of the CPI. Many lawyers advise their clients to consult the CPI without mentioning its limitations. Admittedly, the CPI has some facile appeal — since the perception that North Korea is a more corrupt business environment than Sweden probably has some basis in reality. However, there is also good reason to suspect that there may be some disjuncture between corruption perceptions and reality. Perceptual biases that influence corruption perception may be particularly salient when thinking about Brazil, among other countries. Furthermore, statistical proxies for corruption that are less popular among lawyers contradict the perception of Brazil as a nation with extremely high corruption.
This issue is especially troubling since much scholarly criticism of the FCPA has argued that it may produce economic distortion — driving investment away from countries where the risk of corruption is thought to be high. This is unfair to these countries, which tend to be poorer.
My research also suggests that lawyers who promote the use of the CPI by their clients may create an unjustified fear of otherwise attractive business opportunities in developing countries like Brazil. My research suggests that when lawyers are called upon to help corporations calibrate anti-corruption compliance programs to the risks faced in different nations — they should not advise credulous use of tools like the CPI.
Diligent cross-national risk evaluation requires attorneys and businesspeople to understand the limitations of tools like the CPI and to critically compare such data to other kinds of corruption statistics. A qualitative analysis of the challenges that may be posed by different national legal systems and cultures is also likely to be appropriate.
I hope that my research contributes to the ongoing dialogue about the economic effects of the FCPA and that my article may be useful to lawyers seeking to understand the risks their clients encounter when doing business abroad.
___________
Stuart Vincent Campbell (pictured above) expects to graduate with honors from the University of Minnesota Law School in May 2013. He is professionally proficient in both Portuguese and Spanish and has studied at Pontificia Universidade Católica in São Paulo, Brazil. He is currently clerking at the Washington County Attorney’s Office in Stillwater, Minnesota where his work focuses on white-collar crime and civil disputes. The views expressed in this article are those of the author alone and should not be attributed to any organization with which he is affiliated.
2 Comments
While the author argues in his article that "No existing measure for corruption is suitable for scaling country risk in the creation of anti-corruption compliance programs," I would argue that regulators expect and require assessment of corruption risk based on a number of factors, the most regularly employed of which is likely the CPI. Practitioners likely are aware of some alternatives, such as the World Bank's Governance Index, which does not appear to be mentioned in the article. Ultimately, however, it appears irresponsible to remove a tool, no matter how flawed, from the compliance toolbox without providing any kind of concrete, feasible solution in an area that scares the socks off of corporations trying to do the right thing.
Yes, I would agree with this, although I believe, having lived and worked in over 30 countries, that the reality aligns reasonably closely with perceptions in most cases.
I think on the ground due diligence and going through a number of procedures, such as a low level administrative issue such as a work permit, or connecting a telephone line, will quickly identify whether the country under consideration deserves the ranking it has.
I believe the main flaw in the perception based index is that it relies on the education of the respondents in understanding what constitutes bribery and corruption, and what the various sub classifications of those are. For example, is nepotism corruption? And what is nepotism? And how is it recognized when it happens?
A second challenge is that corruption is not uniformly defined. There are definitions that only cover those officials in public positions, but doesn't corruption not also cover private sector cases? This appears to have been recognized in some jurisdictions such as Singapore but not in others. A quick look around the world will identify these sometimes marked differences.
A third factor that needs to be recognized is the way the press reports corruption cases. In many cases the word 'Corruption' is not used at all even though the cases reported are about corruption. For the average citizen the absence of any corruption labels, or the mis application of terminology, can leave a much different perception than reality.
A good case in point may well be New Zealand, where personal networks and relationships are quite influential in the decisions to appoint officials in quite a number of recent high level cases. The cases are not reported as corruption and in some cases as fraud, where I believe they should be considered corruption based on the generally accepted definition of corruption. Maybe that is part of the explanation why New Zealand ranks very well on the CPI. Respondents possibly don't recognize the issue.
Ferdinand
Comments are closed for this article!