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Harry Cassin
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Richard L. Cassin
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Thomas Fox
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TI’s Corruption Perceptions Index plays role in SEC risk warnings

FCPA investigations and enforcement actions can deeply damage companies of all sizes. Issuers — those filing periodic reports to the SEC — warn investors constantly about the risks that corruption can cause.

One way companies put the risk into perspective is to use Transparency International’s Corruption Perceptions Index. The CPI (instantly recognizable by its heat map) doesn’t measure actual corruption in a country — there’s no practical or accurate way to do that. Instead it measures how corrupt the country is perceived to be. Some companies then use that measurement to assign relative risk ratings to operations in that country.

Over the past three years, about 120 SEC filings by around two dozen different companies have contained references to the CPI. Most of the references are in risk warnings.

For example, Utah-based Varex Imaging Corporation, which makes X-ray systems for medical and security applications, said this in several recent SEC filings:

Transparency International’s 2015 Corruption Perceptions Index measured the degree to which public sector corruption is perceived to exist in 168 countries/territories around the world and found that two-thirds of the countries in the index, including many that Varex considers to be high-growth areas for Varex’s products, such as China and India, scored below 50 on a scale from 100 (very clean) to 0 (highly corrupt). Varex currently operates in many countries where the public sector is perceived as being more or highly corrupt.

From the oil and gas services sector, Baker Hughes included a reference to the CPI in a Form 10-K filed this year. It said,

We conduct business in more than 80 countries, including approximately 15 of the countries having the lowest scores in the Transparency International’s Corruption Perception Index survey for 2016, which indicates high levels of corruption. 

Financial powerhouse Carlyle Group said this in an SEC filing in February this year:

[O]ur funds invest throughout jurisdictions that have material perceptions of corruption according to international rating standards (such as “Transparency International’s Corruption Perceptions Index”) such as China, India, Indonesia, Latin America, MENA and Sub-Saharan Africa. Similarly, our funds invest in companies in the U.S. and other jurisdictions with low perceived corruption but whose business may be conducted in other high-risk jurisdictions.

Again from the financial segment, KKR used similar language:

 . . . our funds invest throughout jurisdictions that have material perceptions of corruption according to international rating standards (such as Transparency International and Corruption Perceptions Index) such as China, India, Indonesia, Latin America, the Middle East and Africa. Due diligence on investment opportunities in these jurisdictions is frequently more complicated because consistent and uniform commercial practices in such locations may not have developed. Bribery, fraud, accounting irregularities and corrupt practices can be especially difficult to detect in such locations.

We’ve published posts critical of the Corruption Perceptions Index. Some think the CPI is mere opinion and not fact, and that it unfairly creates an expectation of corruption in certain countries. There could be some validity to the criticisms.

But as others have said, until there’s something better than the Corruption Perceptions Index, it’s a useful tool. A look at some SEC filings confirms it.


Richard L. Cassin is the publisher and editor of the FCPA Blog.

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