Anti-graft reform lifts Asia, tempered by political risk

As Jason Deegan’s post for the FCPA Blog recently reminded us, Transparency International’s Corruption Perceptions Index (CPI) rarely points to major changes from year to year. However, a closer analysis of ratings since 2012 – the year when TI adopted its current methodology for the CPI – may be more revealing.

In the Asia-Pacific region, there is a cluster of jurisdictions whose ratings changed by a statistically insignificant two points or less on the CPI 100-point scale (where 100 stands for the highest levels of transparency). These include: Singapore (85 compared with 87 in 2012), Hong Kong (76 compared with 77 in 2012); Japan (73 compared with 74) China (41, up from 39 in 2012); Thailand (36 compared with 37 in 2012); and the Philippines (34, the same rating in both years).

A closer analysis of the countries where there have been changes of three or more points in the CPI ratings suggests two broad patterns. First, two of the countries with the highest ratings show a decline. This applies even to New Zealand, which was at the top of the CPI chart in both years, but whose rating declined from 90 to a still highly creditable 87. More poignantly, Australia’s rating fell from 85 points to 77. In part this may reflect a record of fierce political infighting in recent years that has contributed to inconsistency in policy implementation. Reforms to the Australian Criminal Code on the model of the UK Bribery Act that we highlighted more than two years ago have yet to make it to the statute book.

Second, and on a more positive note, there is a group of seven countries that have shown significant improvements. These notably include Myanmar (up 14 points from 15 to 29); Vietnam (up six points from 31 to 37); Indonesia (up eight points from 32 to 40); and India (up five points from 36 to 41). A key success factor in anti-corruption reform is the political will to drive through institutional change. It would seem that in these countries, political will and practical implementation measures, such as the digitalization of routine government procedures, are having positive impacts on national governance.

However, this hopeful observation requires immediate qualification in several respects. Myanmar’s progress is welcome but in 2012 it started from a low base, and the same is true of Vietnam and Indonesia. Moreover, as my colleague Harrison Cheng has reminded us, companies need to be careful not to let down their guards even in apparently more mature and therefore “safer” Asian jurisdictions such as Malaysia and South Korea.

The second qualification is that political will ebbs and flows. Particularly at the lower end of the CPI scale, even the countries that have made substantive governance gains are still vulnerable to political crises, politically driven anti-corruption enforcement, and changes in government priorities. Examples of what to look out for include:

• In Myanmar, the National League for Democracy administration is still pursuing its economic reform program. However, the pace of change has slowed and the Financial Action Task Force (FATF) on February 22 put the country on its gray list because of shortcomings in its anti-money laundering strategy. The drive for further progress will be overshadowed by the continuing Rohingya crisis and the run-up to the November 2020 general elections.
• In Indonesia, legislation passed in September 2019 curtailed the powers of the highly regarded Corruption Eradication Commission (KPK). President Joko “Jokowi” Widodo is broadly supportive of the KPK. However, he is constrained by the need to keep together a complex alliance of politicians who wish to contain it.
• In India, legislative achievements in recent years include amendments to the Prevention of Corruption Act, including a requirement modeled on the UK Bribery Act for companies to implement “adequate procedures” to prevent corruption. However, implementation remains weak.

These developments serve as a reminder that companies need to factor in political risk into their compliance programs, particularly when operating in the Asian countries at the lower end of the CPI scale. At a minimum, this means screening potential partners who may be politically exposed persons (PEPs). It also means taking account of the political exposures that apply to certain industries. For example, questionable land titles are a potential concern across businesses in Myanmar, but especially in construction. Similarly, no commercial sector in Indonesia is immune from potential political interference, but the natural resource sectors are more exposed than most.

Political savvy will therefore continue to be a crucial differentiator on all these markets as part of – not a replacement for – well-designed compliance programs. International companies will be better placed to resist political pressures, including demands for illicit favors, to the extent that they can demonstrate that they have consistent integrity policies, and live by them.